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Wednesday, May 15, 2019
4:00 PM - 5:00 PM
Baxter B125

Ulric B. and Evelyn L. Bray Social Sciences Seminar

An Impossibility Theorem for Wealth in Heterogeneous-agent Models with Limited Heterogeneity
Alexis Toda, Assistant Professor, Department of Economics, UC San Diego,

Abstract: It has been conjectured that canonical Bewley-Huggett-Aiyagari heterogeneous-agent models cannot explain the joint distribution of income and wealth. The results stated below verify this conjecture and clarify its implications under very general conditions. We show in particular that if (i) agents are infinitely-lived, (ii) saving is risk-free, and (iii) agents have constant discount factors, then the wealth distribution inherits the tail behavior of income shocks (e.g., light-tailedness or the Pareto exponent). Our restrictions on utility require only that relative risk aversion is bounded, and a large variety of income processes are admitted. Our results show conclusively that it is necessary to go beyond standard models to explain the empirical fact that wealth is heavier-tailed than income. We demonstrate through examples that relaxing any of the above three conditions can generate Pareto tails.

Click here to read the full paper.

For more information, please contact Mary Martin by phone at 626-395-4571 or by email at mmartin@caltech.edu