Risk, uncertainty, and the dynamics of inequality
Kenneth Kasa () and
Xiaowen Lei ()
Journal of Monetary Economics, 2018, vol. 94, issue C, 60-78
The dynamics of wealth inequality are studied in a continuous-time Blanchard/Yaari model. Investment returns are idiosyncratic and subject to Knightian uncertainty. In response, agents formulate robust portfolio policies. These policies are nonhomothetic; wealthy agents invest a higher fraction of their wealth in uncertain assets yielding higher mean returns. This produces a feedback mechanism that amplifies inequality. It also produces an accelerated rate of convergence, which helps resolve a puzzle recently identified by Gabaix et al. (2016). An empirically plausible increase in uncertainty can account for about half of the recent increase in top wealth shares.
Keywords: Inequality; Robustness (search for similar items in EconPapers)
JEL-codes: D31 D81 (search for similar items in EconPapers)
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Working Paper: Risk, Uncertainty, and the Dynamics of Inequality (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:94:y:2018:i:c:p:60-78
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