Wealth Inequality and Asset Prices

Matthieu Gomez

The Review of Economic Studies, 2025, vol. 92, issue 6, 3924-3967

Abstract: Wealthy households disproportionately invest in equity, causing equity returns to generate large and persistent fluctuations in top wealth inequality. Motivated by this observation, I study the joint dynamics of asset prices and wealth inequality in a model where a subset of agents (entrepreneurs) hold levered positions on the economy. In the model, as in the data, the wealth distribution is stochastic and it exhibits a Pareto tail, with a tail index that depends on the logarithmic average return of top households. The model features a feedback loop between asset prices and wealth inequality, which amplifies the effect of aggregate shocks on the economy. The model, calibrated to the U.S. data, can account for a substantial portion of the fluctuations in asset prices and top wealth shares over the 20th century.

Keywords: Inequality; Tail index; Business cycles (search for similar items in EconPapers)
Date: 2025
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