Explaining the Top Tail of the Wealth Distribution: Capitalist Spirit or Altruistic Bequests?

The aim of this paper is to explain the wealth distribution in the US economy, in particular the high concentration of wealth at the very top end of the distribution. In the literature it was conjectured that rich households accumulate more wealth (given their income) than what can be explained by standard consumption/saving models. To address this issue, I develop a general equilibrium heterogenous agent model and confront it with data about the top income and wealth distribution. It turns out that an off-the-shelf model fails to explain some important characteristics of the data. Standard forms of altruistic bequest motives do not help either. However, I identify two elements that help to bring the model in line with the data. First, modelling the idiosyncratic return risk that rich household face from closely held businesses. Second, modelling a capitalist spirit motive, where capital provides utility services directly, not just through consumption, as was proposed by Carroll (1998). Address of the author: Michael Reiter Universitat Pompeu Fabra Department of Economics and Business Ramon Trias Fargas, 25–27 08005 Barcelona Spain e-mail: [email protected] ∗I am grateful to Chris Carroll, Albert Marcet, Ramon Marimon, Jaume Ventura and Ernesto Villanueva for helpful comments and discussions. Support from the Spanish Ministry of Education under the grant PB98-1066 is gratefully acknowledged.