Relative capital accumulation with heterogeneous individuals

Laura Marsiliani and Thomas Renstroem
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Laura Marsiliani: Durham Business School
Thomas Renstroem: Durham Business School

No 2009_06, Department of Economics Working Papers from Durham University, Department of Economics

Abstract: The purpose of this paper is to show how differences in individuals’ labour productivities cause differences in their accumulation of capital, and thereby analysing the evolution of the income distribution. There are three cases of interest: (i) the high productive accumulate relatively more capital [growing inequality], (ii) no individual accumulates relatively more capital [neutrality], (iii) the low productive accumulate relatively more [diminishing inequality]. Which of these cases is generated depends on the price dynamics (the growth rate of wages and the level of the interest rate relative to the rate of time preference), together with the preferences for consumption. The exact conditions for the price dynamics to generate (i), (ii) and (iii) are derived. Furthermore, since the price dynamics is endogenous in general equilibrium, we find the conditions for preferences and technology that determine relative capital accumulation. We find (in general equilibrium) that growing economies typically cause the high productive to accumulate more capital than the low productive if preferences are Decreasing Absolute Risk Aversion, and shrinking economies cause the less productive to accumulate more (i.e. decumulate less). The relations are reversed for Constant and Increasing Relative Risk Aversion. The final part of the paper analyses the effects of capital taxation on the income distribution.

Keywords: Consumer heterogeneity; income distribution dynamics; relative capital accumulation; taxation. (search for similar items in EconPapers)
JEL-codes: D31 D33 D91 E25 E62 H31 (search for similar items in EconPapers)
Date: 2009-12-01
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