How important is discount rate heterogeneity for wealth inequality?

Hendricks, Lutz

doi:10.1016/j.jedc.2006.10.002

Cited by 78 publications

(65 citation statements)

References 30 publications

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“…We choose the annual time discount rate, = 0:03, the preference parameter for bequests, = 15, the coe¢ cient of relative risk aversion, = 3, the annual risk-free interest rate, r = 1:8%, 26 the annual average return on the risky asset, = 8:8%, which implies that the risk premium of the risky asset is r = 7%, and the volatility of return of the risky asset, = 0:26. 27 As in 25 Of course, we need to check whether the kernel given in Proposition 5 satis…es some boundary conditions of f (x) at x . See the discussion of boundary conditions in Section 4.…”

Section: The Calibrated Economymentioning

confidence: 99%

Age, Luck, and Inheritance

Benhabib¹,

Zhu²

2008

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We introduce the investment risk into a heterogeneous agents model and present a mechanism to analytically generate a double Pareto distribution of wealth. We replicate the distribution of the U.S. wealth and especially the three prominent features: a high Gini coe¢ cient, skewness to the right, and Pareto tails. We disentangle the contribution of inheritance, age and stochastic rates of capital return to wealth inequality, in particular to the Gini coe¢ cient. Finally, we investigate the e¤ects of the …scal and redistributive policies on wealth inequality and social welfare.We would like to thank

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Section: The Calibrated Economymentioning

confidence: 99%

Age, Luck, and Inheritance

Benhabib¹,

Zhu²

2008

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“…Preference heterogeneity has also become a salient issue in mainstream macroeconomics. For instance, Krusell and Smith, Jr. (1998), Coen-Pirani (2004), De Nardi (2004, Guvenen (2006), Hendricks (2007), and Cozzi (2011) have argued that individual variation in preferences is necessary for calibrated macroeconomic models with incomplete markets to reproduce the large wealth inequality observed in the data.…”

Section: Introductionmentioning

confidence: 99%

Culture, Entrepreneurship, and Growth

Doepke¹,

Zilibotti²

2013

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. www.econstor.eu We discuss the two-way link between culture and economic growth. We present a model of endogenous technical change where growth is driven by the innovative activity of entrepreneurs. Entrepreneurship is risky and requires investments that affect the steepness of the lifetime consumption profile. As a consequence, the occupational choice of entrepreneurship hinges on risk tolerance and patience. Parents expecting their children to become entrepreneurs have an incentive to instill these two values in their children. Cultural transmission is Beckerian, i.e., parents are driven by the desire to maximize their children's happiness. We also consider, in an extension, a paternalistic motive for preference transmission. The growth rate of the economy depends on the fraction of the population choosing an entrepreneurial career. How many entrepreneurs there are in a society hinges, in turn, on parental investments in children's patience and risk tolerance. There can be multiple balanced-growth paths, where in faster-growing countries more people exhibit an "entrepreneurial spirit." We discuss applications of models of endogenous preferences to the analysis of socio-economic transformations, such as the British Industrial Revolution. We also discuss empirical studies documenting the importance of culture and preference heterogeneity for economic growth. Terms of use: Documents in D I S C U S S I O N P A P E R S E R I E SJEL Classification: J20, O10, O40

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“…22 In Krueger, Mitman and Perri (2016), we argue that it is the latter feature (the wealth holdings of the wealth-poor) that is responsible for the finding that in our benchmark model the decline in aggregate consumption in the Great Recession is significantly more pronounced than in the original Krusell and Smith (1998) model, which in turn approximates the aggregate consumption dynamics in a representative agent model quite closely. …”

Section: Wealth Inequality In the Benchmark Economymentioning

confidence: 50%

“…20 In our benchmark model instead, dispersion in wealth is driven by uninsurable (because of incomplete markets) idiosyncratic unemployment and income shocks and preference heterogeneity, as already proposed by Krusell and Smith (1998), and further analysed by Hendricks (2007) and Carroll et al (2015). These features interact with a rudimentary life cycle structure and a publicly provided unemployment insurance system.…”

Section: Wealth Inequality In the Benchmark Economymentioning

confidence: 93%

“…The problem relative to the data is two-fold: households at the top of the wealth distribution are not nearly wealthy enough, and households at the bottom of the distribution hold significantly too much wealth in the model, relative to SCF or PSID micro data. 22 As a summary measure, whereas the wealth Gini in the data is close to 0.8 in the working age-population, it is only 0.35 in 21 Recall that in the data, we restrict attention to households with at least one member of working age.…”

Section: Wealth Inequality In the Benchmark Economymentioning

confidence: 96%

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On the Distribution of the Welfare Losses of Large Recessions

Krueger¹,

Mitman²,

Perri³

2016

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How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession?How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one's job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8%for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.

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How important is discount rate heterogeneity for wealth inequality?

Cited by 78 publications

References 30 publications

Age, Luck, and Inheritance

Age, Luck, and Inheritance

Culture, Entrepreneurship, and Growth

On the Distribution of the Welfare Losses of Large Recessions

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