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The Dynamics of Wealth and Income Distribution in a Neoclassical Growth Model

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Abstract

We examine the evolution of the distributions of wealth and income in a Ramsey model in which agents differ in their initial capital endowment and where the labor supply is endogenous. The assumption that the utility function is homogeneous in consumption and leisure implies that the macroeconomic equilibrium is independent of the distribution of wealth and allows us to fully characterize income and wealth dynamics. We find non-degenerate longrun distributions of wealth and income. The model shows that (i) the initial level of aggregate capital is an essential determinant of whether inequality increases or decreases during the transition to the steady state; (ii) temporary shocks to the stock of capital have long-run effects on the distribution of wealth even if they do not affect the stationary aggregate variables; (iii) income inequality need not move together with wealth inequality if factor shares change during the transition.

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  • Stephen J. Turnovsky & Cecilia Garcia-Pe–alosa, 2006. "The Dynamics of Wealth and Income Distribution in a Neoclassical Growth Model," IDEP Working Papers 0604, Institut d'economie publique (IDEP), Marseille, France, revised Jul 2006.
    • Handle: RePEc:iep:wpidep:0604
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    2. Nakamoto, Yasuhiro, 2009. "Convergence speed and preference externalities in a one-sector model with elastic labor supply," Economics Letters, Elsevier, vol. 105(1), pages 86-89, October.

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    More about this item

    Keywords

    Wealth Distribution; Income Distribution; Endogenous Labor Supply; Transitional Dynamics.;
    All these keywords.

    JEL classification:

    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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