Exploring transitional and asymptotic impacts of subsistence consumption on wealth inequality in an AK growth model

Hongsilp Sriket

Economics Bulletin, 2024, vol. 44, issue 3, 1214 - 1223

Abstract: This study analytically examines an AK model with heterogeneous agents - differentiated by their rates of time preference and intertemporal elasticity of substitution - to explore how the introduction of a subsistence level of consumption can mitigate wealth inequality during the transitional dynamics toward an asymptotic balanced growth path. The mechanism driving this result is that subsistence consumption induces a time-varying intertemporal elasticity of substitution, which alters individuals' lifetime consumption allocation decisions. Specifically, it encourages all agents to favor current consumption, with the wealth-dominating agent being the most affected. As a result, wealth distribution becomes more egalitarian during the transition. However, this more equitable distribution does not persist in the long run, as the impact of subsistence needs diminishes once wealth reaches sufficiently high levels.

Keywords: Economic Growth; AK Model; Wealth Distribution; Subsistence Consumption; Heterogeneous Agents (search for similar items in EconPapers)
JEL-codes: D3 O4 (search for similar items in EconPapers)
Date: 2024-09-30
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