How Important is Discount Rate Heterogeneity for Wealth Inequality?

By Lutz Hendricks. Social Science Research Network, 2007

155 citations recorded by the source corpus.

This paper investigates the role of discount rate heterogeneity for wealth inequality. The key idea is to infer the distribution of preference parameters from the observed age profile of wealth inequality. The contribution of preference heterogeneity to wealth inequality can then be measured using a quantitative life-cycle model. I find that discount rate heterogeneity increases the Gini coefficient of wealth by 0.06 to 0.11. The share of wealth held by the richest 1% of households rises by 0.03 to 0.13. The larger changes occur when altruistic bequests are large and when preferences are strongly persistent across generations. Discount rate heterogeneity also helps account for the large wealth inequality observed among households with similar lifetime earnings.

View Paper: https://www.semanticscholar.org/paper/a2604ca02c6f68d08ee2d614f94f11fdd2563bb5

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Citations in the corpus

• Saving and Wealth Inequality (2017, unknown): “Hendricks (2007b) argues that the difference in results between the infinitely- and finitelylived formulations is due to the fact that the presence of an additional (retirement) saving motive implies that, for the same parameter values, the life-cycle model implies a higher wealth-income ratio than…”
• Macroeconomics and Household Heterogeneity (2016, methodology): “Household heterogeneity in time discount factors had already been explored by the original Krusell and Smith (1998) paper, and has been further analyzed by Hendricks (2007) and Carroll, Slacalek, Tokuoka and White (2015); the latter also incorporates a stochastic earnings process in the analysis.”