Stochastic Earnings Growth and Equilibrium Wealth Distributions

The cross-section distribution of U.S. wealth is more skewed than the labor earnings. Stachurski and Toda (2019) explain how plain vanilla Bewley-Aiyagari-Huggett (BAH) models with infinitely lived agents can't generate that pattern because an equilibrium risk-free rate lower time preference each person's process stationary. We provide two modifications a BAH model this pattern: (1) overlapping generations who have low at birth pass through N life-stage transitions stochastic lengths, (2) labor-earnings processes exhibit growth. With only few parameters such can well approximate mappings from Lorenz curve Gini coefficient for cross-sections earnings to their counterparts cross sections wealth. Three forces amplify inequality in relative labor-earnings: transitions; precautionary savings motive high wage earners especially strong after they receive positive permanent shocks; energetic life-cycle saving birth. An interest exceeds fosters fat-tailed distribution. Institutional subscribers NBER working paper series, residents developing countries may download without additional charge www.nber.org.