Stochastic Earnings Growth and Equilibrium Wealth Distributions

Thomas Sargent, Neng Wang and Jinqiang Yang

No 28473, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The cross-section distribution of U.S. wealth is more skewed than the distribution of labor earnings. Stachurski and Toda (2019) explain how plain vanilla Bewley-Aiyagari-Huggett (BAH) models with infinitely lived agents can't generate that pattern because an equilibrium risk-free rate is lower than the time rate of preference and each person's wealth process is stationary. We provide two modifications of a BAH model that generate this pattern: (1) overlapping generations of agents who have low wealth at birth and pass through N life-stage transitions of stochastic lengths, and (2) labor-earnings processes that exhibit stochastic growth. With only a few parameters such a model can well approximate mappings from the Lorenz curve and Gini coefficient for cross-sections of labor earnings to their counterparts for cross sections of wealth. Three forces amplify inequality in wealth relative to inequality in labor-earnings: stochastic life-stage transitions; a precautionary savings motive for high wage earners that is especially strong after they receive positive permanent earnings shocks; and an energetic life-cycle saving motive for agents who have low wealth at birth. An equilibrium risk-free interest rate that exceeds a time preference rate fosters a fat-tailed wealth distribution.

JEL-codes: D14 D31 E21 (search for similar items in EconPapers)
Date: 2021-03
New Economics Papers: this item is included in nep-dge, nep-gro, nep-lab, nep-ltv, nep-mac and nep-ore
Note: AP EFG ME
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