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Distribution of Wealth: Theoretical Microfoundations and Empirical Evidence

Author

Listed:
  • Davide Fiaschi

    (University of Pisa)

  • Matteo Marsili

    (The Abdus Salam International Centre for Theoretical Physics,)

Abstract

This paper studies the dynamics of wealth distribution in an economy where dynasties with different wealth have constant marginal saving rates, firms’ productivities are subject to idiosyncratic shocks and factors’ returns are determined in competitive markets. Government imposes taxes on capital and labour incomes and redistributes the collected resources to individuals. The equilibrium distribution of wealth is explicitly calculated and it follows a Paretian law in the top tail. The Pareto exponent depends on the saving rate in a nonmonotonic fashion, on the net return on capital, on the growth rate of population and on the degree of portfolio diversification. On the contrary, the bottom tail of the wealth distribution mostly depends on the characteristics of the labour market. The resulting theoretical predictions find a corroboration in the empirical experiences of Italy and United States in the period 1987-2004.

Suggested Citation

  • Davide Fiaschi & Matteo Marsili, 2006. "Distribution of Wealth: Theoretical Microfoundations and Empirical Evidence," Working Papers 49, ECINEQ, Society for the Study of Economic Inequality.
    • Handle: RePEc:inq:inqwps:ecineq2006-49
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    File URL: http://www.ecineq.org/milano/WP/ECINEQ2006-49.pdf
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    References listed on IDEAS

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    1. Edward N. Wolff, 2004. "Changes in Household Wealth in the 1980s and 1990s in the U.S," Economics Working Paper Archive wp_407, Levy Economics Institute.
    2. A. F. Shorrocks, 1975. "On Stochastic Models of Size Distributions," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 42(4), pages 631-641.
    3. Stiglitz, Joseph E, 1969. "Distribution of Income and Wealth among Individuals," Econometrica, Econometric Society, vol. 37(3), pages 382-397, July.
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