Capital Return Jumps and Wealth Distribution

Jess Benhabib, Wei Cui and Jianjun Miao

No 29544, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: The distributions of wealth in the US and many other countries are strikingly concentrated on the top and skewed to the right. To explain the income and wealth inequality, we provide a tractable heterogeneous-agent model with incomplete markets in continuous time. We separate illiquid capital assets from liquid bond assets and introduce capital return jump risks. Under recursive utility, we derive optimal consumption and wealth in closed form and show that the stationary wealth distribution has an exponential right tail. Our calibrated model can match the income and wealth distributions in the US data including the extreme right tail. We also study the effect of taxes on the distribution of wealth.

JEL-codes: C61 D83 E21 E22 E31 (search for similar items in EconPapers)
Date: 2021-12
New Economics Papers: this item is included in nep-dge, nep-fdg, nep-mac and nep-upt
Note: EFG
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