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A Becker–Tomes model with investment risk

Shenghao Zhu ()
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Shenghao Zhu: University of International Business and Economics

Economic Theory, 2019, vol. 67, issue 4, No 7, 981 pages

Abstract: Abstract Recent studies find that sufficiently volatile idiosyncratic investment risk plays an important role in generating wealth inequality. I introduce idiosyncratic investment risk into the Becker and Tomes (J Polit Econ 87:1153–1189, 1979) model and find an explicit expression of the stationary wealth distribution in this simple model. This explicit expression brings us new insights of how bequest motives and estate taxes influence wealth distributions. I find that inheritance increases wealth inequality in models with idiosyncratic investment risk through exaggerating labor earnings uncertainty, while inheritance decreases wealth inequality in the Becker and Tomes (1979) model through mitigating labor earnings uncertainty. This causes estate taxes to have different impacts on wealth inequality in my model and the Becker and Tomes (1979) model.

Keywords: Investment risk; Estate taxes; Bequest motives; Wealth inequality; The Becker–Tomes model (search for similar items in EconPapers)
JEL-codes: D31 H20 (search for similar items in EconPapers)
Date: 2019
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DOI: 10.1007/s00199-018-1103-2

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