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  5. Wealth Inequality and Consumption Inequality Session
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Wealth Inequality and Consumption Inequality Session

Paper Session

Sunday, Jan. 7, 2024 8:00 AM - 10:00 AM (CST)

Grand Hyatt, Travis A
Hosted By: Econometric Society
  • Chair: Matthieu Gomez, Columbia University

Asset Prices, Wealth Inequality, and Taxation

Suleyman Basak
,
London Business School
Georgy Chabakauri
,
London School of Economics

Abstract

We investigate asset prices and wealth inequality in a dynamic general equilibrium economy populated by multiple agents with heterogeneous risk aversion and subject to consumption tax. Tax revenues are equally redistributed to all investors through non-pledgeable government transfers, effectively taxing consumption relative to the economy’s average. Taxes address wealth inequality by ensuring stationarity of consumption share distributions and preventing consumption shares of less affluent investors from diminishing toward zero. Higher taxes increase stock risk premia and volatilities by shifting wealth toward poorer risk-averse investors, and tend to decrease stock price-dividend ratios and interest rates. The rise in risk premia and decrease in interest rates benefit more affluent, less risk-averse investors, partially offsetting the negative impact of higher taxes on their wealth, albeit to a small extent. We find that taxes do not prevent high concentrations of wealth at the top of the wealth distribution due to the investment decisions and tax responses of more affluent investors.

Beliefs, Stockholding, and Wealth Accumulation Throughout the Life-Cycle

Mateo Velásquez-Giraldo
,
Johns Hopkins University

Abstract

Survey measurements of expectations about future stock returns can reduce the difficulties that life-cycle portfolio-choice models face in matching the portfolios and savings of U.S. households. The measurements suggest that not everyone believes that there is an equity premium, that people underestimate the probability of positive returns and overestimate the probability of extreme returns, and that people with more education are more optimistic about stocks. Using a long panel of measured expectations, I estimate a model of the distribution of beliefs about stock returns across the population. I then construct a life-cycle model of saving and portfolio decisions in which beliefs about stock returns are heterogeneous and follow my estimated distribution. The model outperforms its full-information rational-expectations counterpart in fitting the age profiles of savings, stock-market participation rates, and conditional shares of wealth in stocks for high-school and college-graduates. Moreover, the improved fit is attained with moderate coefficients of relative risk-aversion
of 4.0 for high-school graduates and 3.9 for college graduates, and with low stock-market entry costs.

Consumption Inequality in the Digital Age

Kai Arvai
,
Bank of France
Katja Mann
,
Copenhagen Business School

Abstract

This paper studies how digitalization affects consumption inequality. We assemble a novel
dataset of digital technology used in the production process, link it to US consumption data
and establish a new stylized fact: High-income households consume a higher share of digitally
produced products than low-income households. Building on this finding, we present a
structural model in which digitalization affects consumption inequality in two ways: By a polarization of incomes and by a decline in the relative price of digitally produced goods. Both channels work in favor of high-income households. Calibrating the model to the US economy
between 1960 and 2017, we demonstrate that the price channel has sizeable welfare effects and
amplifies the increase in consumption inequality that is caused by digitalization by around
25%.

Perceived versus Calibrated Income Risks in Heterogeneous-Agent Consumption Models

Tao Wang
,
Johns Hopkins University

Abstract

Models of microeconomic consumption (including those used in HA-macro models) typically calibrate the size of income risk to match panel data on household income. But, for several reasons, the measured risk from such data may not correspond to the risk perceived by the agent. This paper instead uses data from the New York Fed’s Survey of Consumer Expectations to calibrate perceived risks directly. One of the several implications of heterogeneity in perceived risks is increased wealth inequality stemming from differential precautionary saving motives. I also explore the implications of the perceived risk being lower than the calibrated level either due to unobserved heterogeneity by researchers or over-confidence by the agents.
JEL Classifications
  • C1 - Econometric and Statistical Methods and Methodology: General