Working Paper 2017-10: Jess Benhabib, Alberto Bisin, Mi Luo
Jess Benhabib, Professor of Economics, New York University
Alberto Bisin, Professor of Economics, New York University
Mi Luo, PhD Candidate, New York University
This paper attempts to quantitatively identify the factors that drive wealth dynamics in the U.S. and are consistent with its observed skewed cross-sectional distribution and with observed social mobility. We concentrate on three critical factors: i) skewed and persistent distribution of earnings, ii) differential saving and bequest rates across wealth levels, and iii) stochastic idiosyncratic returns to wealth (capital income risk), possibly differential across wealth levels. All of these factors are fundamental for matching both distribution and mobility, each with a distinct role in inducing wealth accumulation near the borrowing constraints, contributing to the thick top tail of wealth, and affecting upward and/or downward social mobility. The stochastic process for capital income risk which best fits the cross-sectional distribution of wealth and social mobility in the U.S. shares several statistical properties with those of the returns to wealth uncovered by Fagereng et al. (2017) from tax records in Norway.