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Distribution of wealth and incomplete markets: Theory and empirical evidence

Davide Fiaschi () and Matteo Marsili

Journal of Economic Behavior & Organization, 2012, vol. 81, issue 1, 243-267

Abstract: This paper analyses the equilibrium distribution of wealth in an economy where firms’ productivities are subject to idiosyncratic shocks, returns on factors are determined in competitive markets, households have linear consumption functions and government imposes taxes on capital and labour incomes and equally redistributes the collected resources to households. The equilibrium distribution of wealth is explicitly calculated and its shape crucially depends on market incompleteness. With incomplete markets it follows a Paretian law in the top tail and the Pareto exponent depends on the saving rate, on the net return on capital, on the growth rate of population, and on portfolio diversification. The characteristics of the labour market crucially affects the bottom tail, but not the upper tail of the distribution of wealth in the case of completely decentralized labour market. The analysis also suggests a positive relationship between growth and wealth inequality. The theoretical predictions find a corroboration in the empirical evidence of United States in the period 1989–2004.

Keywords: Wealth distribution; Incomplete markets; Earnings distribution; Capital income taxation; Productivity shocks; Portfolio diversification; Nonparametric estimation (search for similar items in EconPapers)
JEL-codes: D1 D31 D33 N30 (search for similar items in EconPapers)
Date: 2012
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Working Paper: Distribution of Wealth and Incomplete Markets: Theory and Empirical Evidence (2009) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jeborg:v:81:y:2012:i:1:p:243-267

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Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

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