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Pareto-Improving Redistribution of Wealth - The Case of the NLSY 1979 Cohort

Author

Listed:
  • Klaus Wälde

    (Johannes Gutenberg-University Mainz)

Abstract

We quantify a model of idiosyncratic labour income and idiosyncratic interest rates to perfectly match the evolution of the wealth distribution of the NLSY 79 cohort from 1986 to 2008. Given a simple and plausible labour income process with a posi- tive growth rate of labour income, the crucial feature is an ex-ante heterogeneity in interest rate distributions and an interest rate that ?uctuates between two values. One value lies below and one above the threshold level that implies a stationary long-run wealth distribution. We propose an "investment insurance" which, if im- plemented in 1986, would have reduced wealth inequality of the NLSY 79 cohort in 2008 by 23%. It would also have increased ex-ante welfare and would even have increased average wealth in 2008 by 38%. The economic rationale behind this sur- prising ?nding that everybody becomes richer through an inequality-reducing policy intervention is explained.

Suggested Citation

  • Klaus Wälde, 2016. "Pareto-Improving Redistribution of Wealth - The Case of the NLSY 1979 Cohort," Working Papers 1610, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz.
    • Handle: RePEc:jgu:wpaper:1610
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    File URL: https://download.uni-mainz.de/RePEc/pdf/Discussion_Paper_1610.pdf
    File Function: First version, 2016
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    Citations

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    Cited by:

    1. Steger, Thomas & Grossmann, Volker & Larin, Benjamin & Löfflad, Hans Torben, 2019. "Distributional Effects of Surging Housing Costs under Schwabe`s Law of Rent," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203613, Verein für Socialpolitik / German Economic Association.
    2. Mariacristina De Nardi & Giulio Fella, 2017. "Saving and Wealth Inequality," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 26, pages 280-300, October.
    3. Volker Grossmann & Benjamin Larin & Hans Torben Löfflad & Thomas Steger, 2019. "Distributional effects of surging housing costs under Schwabe's Law," CESifo Working Paper Series 7684, CESifo.

    More about this item

    Keywords

    dynamics of wealth distributions; NLSY 1979 cohort; capital income risk; redistribution; insurance; Fokker-Planck equations;
    All these keywords.

    JEL classification:

    • C02 - Mathematical and Quantitative Methods - - General - - - Mathematical Economics
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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