Essays on the Determinants of Wealth Inequality

Abstract

This dissertation consists of three independent chapters on the determinants of wealth inequality and of its dynamics. In the first chapter, which is co-authored with George Sorg-Langhans and Maximilian Vogler, we look at standard theories of wealth inequality that rely on skewed distribution of earnings and differences in saving rates.We first develop a quantitative model that nests four competing channels that can all generate a high level of wealth inequality; then we assess the effects of different policy experiments by sequentially shutting off all but one of these model mechanisms and find stark differences in predictions across channels. We conclude that, by choosing a particular mechanism to generate wealth inequality, researchers might already predetermine the outcome of their policy experiments In the second chapter I show that, unlike suggested by standard theories of the wealth distribution, the main determinants of inequality are heterogeneity in expected returns and aggregate risk.I solve a wealth-accumulation model that exactly replicates households' portfolio heterogeneity and show that such heterogeneity is a crucial determinant of wealth inequality and of its dynamics. I therefore conclude that models of wealth inequality should carefully take into account both heterogeneity in households portfolios and the nature of return risk. In the third chapter I argue that the observed dynamics of wealth inequality in the U.S. are largely driven by heterogeneous exposure to aggregate risk in asset returns.I propose a quantitative model of households' optimal portfolio choice that replicates portfolio heterogeneity along the wealth distribution. The model has strong implications for the evolution of inequality; in particular, temporary shocks in equity returns have large and persistent effects on top wealth shares. A key implication is that the observed rise in U.S. wealth inequality was mostly due to abnormal equity returns and it is therefore expected to revert back to lower levels.