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Risk, uncertainty, and the dynamics of inequality

Kenneth Kasa () and Xiaowen Lei ()

Journal of Monetary Economics, 2018, vol. 94, issue C, 60-78

Abstract: 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)
Date: 2018
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Working Paper: Risk, Uncertainty, and the Dynamics of Inequality (2017) Downloads
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DOI: 10.1016/j.jmoneco.2017.11.008

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