Dimensions of Inequality: Facts on the U.S. Distributions of
Earnings, Income, and Wealth
(joint with José-Víctor Ríos-Rull)
This article describes the current state of economic theory
intended to explain the unequal distribution of wealth among
U.S. households. The models reviewed are heterogeneous agent versions
of standard neoclassical growth models with uninsurable idiosyncratic shocks
to earnings. The models endogenously generate differences in asset holdings
as a result of the household's desire to smooth consumption while earnings
fluctuate. Both of the dominant types of models—dynastic and life cycle
models—reproduce the U.S. wealth distribution poorly. The article describes
several features recently proposed as additions to the theory based on
changes in earnings, including business ownership, higher rates of return
on high asset levels, random capital gains, government programs to guarantee
a minimum level of consumption, and changes in health and marital status.
None of these features has been fully analyzed yet, but they all seem to
have potential to move the models in the right direction.