Income Distribution
Accumulation and inequality

In Discussion Paper No. 1187, Research Fellow Giuseppe Bertola 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. In this economy, individuals receive two types of income flows. Labour income, resulting from a common wage rate and heterogeneous labour endowments, is completely exogenous to the model. Capital income, conversely, is dynamically endogenous to individual decisions to consume less (or more) than current income flows: an individual's wealth results from the accumulation of savings, which are rewarded by a common and constant interest rate, and undertaken so as to maximize utility from consumption over an infinite horizon.

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.

Accumulation and the Extent of Inequality
Giuseppe Bertola

Discussion Paper No. 1187, May 1995 (IM)