DP1187 Accumulation and the Extent of Inequality

Author(s): Giuseppe Bertola
Publication Date: May 1995
Keyword(s): Factor-Income Distribution, Savings, Uninsurable Risk
JEL(s): D31, E2
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=1187

This paper considers an economy where inequality originates from exogenous `talent' or `market luck' shocks and is transmitted over time by the same saving decisions that determine the aggregate rate of accumulation. The resulting interactions between factor- and personal-income distribution are studied in the light of existing analytic results from the precautionary-savings literature, and by numerical solution experiments. Aggregate savings are an increasing function of non-accumulated income variability, as individuals try to self-insure by accumulating wealth. In dynamic general equilibrium, however, non-accumulated income flows (`wages') depend endogenously on aggregate wealth accumulation. The level and/or the anticipated growth rate of wages affect microeconomic saving decisions so as to induce remarkable stability of long-run accumulated wealth distributions across parameter sets.