Life Cycle Models, Heterogeneity of Initial Assets, and Wealth Inequality

Abstract

Life cycle general equilibrium models with heterogeneous agents have a very hard time reproducing the American wealth distribution. A common assumption made in this literature is that all young adults enter the economy with no initial assets. In this article, we relax this assumption -not supported by the data -and evaluate the ability of an otherwise standard life cycle model to account for the U.S. wealth inequality. The new feature of the model is that agents enter the economy with assets drawn from an initial distribution of assets, which is estimated using a non-parametric method applied to data from the Survey of Consumer Finances.We found that heterogeneity with respect to initial wealth is key for this class of models to replicate the data. According to our results, American inequality can be explained almost entirely by the fact that some individuals are lucky enough to be born into wealth, while others are born with few or no assets. * We would like to thank Carlos E. da Costa, Todd Schoellman, Cezar Santos, Felipe Iachan, and Romeu Gomes Filho for their comments. Ferreira acknowledges the financial support of CNPq/INCT and FAPERJ; Gomes, the financial support of CAPES.

The contribution of smallholders' livelihood activities on income inequality and poverty: Case study from rural Tanzania

“…Another common way to deal with negative incomes is to set them to zero. Many researchers (Burkhauser & Simon, 2010;de Battisti et al, 2019;Feng et al, 2006;Ferreira & Gomes, 2015;OECD, 2017) applied this truncation of data with negative values. The truncation can lead to a loss of information, but studies from Seidl et al (2012) and Bray (2014) showed consistency in the results setting negative values to zero.…”