To Bequeath, or Not to Bequeath? On Labour Income Risk and Top Wealth Concentration

Marco Sorge

The B.E. Journal of Theoretical Economics, 2024, vol. 24, issue 2, 759-779

Abstract: Recent theoretical advances suggest that capital income risk, rather than earnings uncertainty, is the key determinant of fat-tailed behavior of stationary wealth distributions. I provide novel insights into this issue by studying an incomplete market model with general time and state separable preferences, where parental altruism and unobservable idiosyncratic shocks engender non-linear bequest rules. I analytically pin down conditions on the preference structure and other model’s primitives under which optimal bequest behavior hinders intergenerational wealth transmission for any degree of capital income risk, causing the dynamics of wealth to converge to a unique (stationary) distribution with thin tails. These results imply, in particular, that (i) the stochastic properties of labour income risk (as shaped by, e.g. fiscal policies) may play a role in defining the structure of the upper tail of the limiting distribution of wealth, and that (ii) matching empirically documented fat tails with choice theoretic frameworks of wealth dynamics requires joint restrictions on preferences and calibrated earnings processes to be met.

Keywords: wealth distributions; incomplete markets; earnings uncertainty; capital income risk; labour income taxation (search for similar items in EconPapers)
JEL-codes: D31 H20 (search for similar items in EconPapers)
Date: 2024
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DOI: 10.1515/bejte-2024-0061

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