Discussion paper

DP11743 The Historical Evolution of the Wealth Distribution: A Quantitative-Theoretic Investigation

This paper employs the benchmark heterogeneous-agent model used in macroeconomics to examine
drivers of the rise in wealth inequality in the U.S. over the last thirty years. Several plausible candidates
are formulated, calibrated to data, and examined through the lens of the model. There is one main
finding: by far the most important driver is the significant drop in tax progressivity that started in
the late 1970s, intensified during the Reagan years, and then subsequently flattened out, with only a
minor bounce back. The sharp observed increases in earnings inequality, the falling labor share over
the recent decades, and potential mechanisms underlying changes in the gap between the interest rate
and the growth rate (Piketty’s r − g story) all fall far short of accounting for the data.

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Citation

Smith, T and J Hubmer (2017), ‘DP11743 The Historical Evolution of the Wealth Distribution: A Quantitative-Theoretic Investigation‘, CEPR Discussion Paper No. 11743. CEPR Press, Paris & London. https://cepr.org/publications/dp11743