Wealth Distribution under Idiosyncratic Investment Risk

I investigate the mechanisms through which idiosyncratic investment risk generates a fat tail of the wealth distribution. I set up a continuous time OLG model with a bequest motive and portfolio selection to show that idiosyncratic investment risk generates a Pareto tail in the wealth distribution. I calibrate my model to the U.S. economy and show that the wealth distribution in the simulated economy matches the Gini coe¢ cient and has a Lorenz curve close to that of U.S. Extending the model to allow for the age-dependent death rates generates both realistic age cohort distribution and fat-tailed wealth distribution.