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Relative capital accumulation with heterogeneous individuals

Author

Listed:
  • Laura Marsiliani

    (Durham Business School)

  • Thomas I. Renstroem

    (Durham Business School)

Abstract

The purpose of this paper is to show how differences in individuals’ labour productivities cause differences in their accumulation of capital, and thereby analysing the evolution of the income distribution. There are three cases of interest: (i) the high productive accumulate relatively more capital [growing inequality], (ii) no individual accumulates relatively more capital [neutrality], (iii) the low productive accumulate relatively more [diminishing inequality]. Which of these cases is generated depends on the price dynamics (the growth rate of wages and the level of the interest rate relative to the rate of time preference), together with the preferences for consumption. The exact conditions for the price dynamics to generate (i), (ii) and (iii) are derived. Furthermore, since the price dynamics is endogenous in general equilibrium, we find the conditions for preferences and technology that determine relative capital accumulation. We find (in general equilibrium) that growing economies typically cause the high productive to accumulate more capital than the low productive if preferences are Decreasing Absolute Risk Aversion, and shrinking economies cause the less productive to accumulate more (i.e. decumulate less). The relations are reversed for Constant and Increasing Relative Risk Aversion. The final part of the paper analyses the effects of capital taxation on the income distribution.

Suggested Citation

  • Laura Marsiliani & Thomas I. Renstroem, 2009. "Relative capital accumulation with heterogeneous individuals," Department of Economics Working Papers 2009_06, Durham University, Department of Economics.
  • Handle: RePEc:dur:durham:2009_06
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    References listed on IDEAS

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    More about this item

    Keywords

    Consumer heterogeneity; income distribution dynamics; relative capital accumulation; taxation.;
    All these keywords.

    JEL classification:

    • E25 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Aggregate Factor Income Distribution
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • D33 - Microeconomics - - Distribution - - - Factor Income Distribution
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household

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