INCREASING RETURNS TO SAVINGS AND WEALTH INEQUALITY

In this paper I present an explanation to the fact that in the data wealth is substantially more concentrated than income. Starting from the observation that the composition of households' portfolios changes towards a larger share of high-yield assets as the level of net worth increases, I first use data on historical asset returns and portfolio composition by wealth level to construct an empirical return function. I then augment the standard neoclassical growth model with idiosyncratic labor income risk and missing insurance markets to allow for returns to savings to be increasing in the level of accumulated assets. The quantitative properties of the model are examined and show that an empirically plausible difference between the return faced by poor and wealthy agents is able to generate a substantial increase in wealth inequality compared to the basic model, enough to match the Gini index of the U.S. Distribution of wealth.Wealth inequality, self-insurance, portfolio composition, increasing returns

Leraning, life-cycle and entrepreneurial investment

In this paper, present a calibrated model of life-cycle occupation and investment decisions where households choose between paid work and entrepreneurship and conditional on the latter how much of their savings to invest in their business. The returns to entrepreneurial activity are modeled through Bayesian learning. The model is able to reproduce the main stylized facts of entry in and exit out of self-employment over the life-cycle. It also suggests a partial explanation of the recent finding of Moskowitz and Vissing-Jørgensen (2002) that entrepreneurs seem not to require a premium for the extra risk of their private equity investment.Occupational choice, portfolio choice, entrepreneurship, firm dynamics, learning, private equity premium

Private equity returns in a model of entrepreneurial choice with learning

Entrepreneurs invest a large share of their financial wealth in a single business that they personally manage. Despite the large risk implied by this undiversified investment they do not seem to require any extra return on a diversified public equity index. In light of the large public equity premium this fact seems puzzling. In the present paper I use a quantitative model of entrepreneurial choice with learning over unknown firm quality to explore this issue and find that the choice to be entrepreneurs can be rationalized even with a negative private equity premium when the full return on entrepreneurial investment is properly accounted for