Neng Wang

An Equilibrium Model of Wealth Distribution

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Abstract:
I present an explicitly solved equilibrium model for the distribution of wealth and income in an incomplete-markets economy. I first propose a self-insurance model with an inter-temporally dependent preference [Uzawa, H. 1968. Time preference, the consumption function, and optimal asset holdings. In: Wolfe, J.N. (Ed.), Value, Capital, and Growth: Papers in Honour of Sir John Hicks. Edinburgh University Press, Edinburgh, pp. 485–504]. I then derive an analytical consumption rule which captures stochastic precautionary saving motive and generates stationary wealth accumulation. Finally, I provide a complete characterization for the equilibrium cross-sectional distribution of wealth and income in closed form by developing a recursive formulation for the moments of the distribution of wealth and income. Using this recursive formulation, I show that income persistence and the degree of wealth mean reversion are the main determinants of wealth-income correlation and relative dispersions of wealth to income, such as skewness and kurtosis ratios between wealth and income.

Source: Journal of Monetary Economics
Exact Citation:
Wang, Neng. "An Equilibrium Model of Wealth Distribution." Journal of Monetary Economics 54, no. 7 (2007): 1882-1904.
Volume: 54
Number: 7
Pages: 1882-1904
Date: 2007