Time Preference and the Distributions of Wealth and Income

Abstract

This paper presents a dynamic competitive equilibrium model with heterogeneous time pref- erences that can account for the observed patterns of wealth and income inequality in the United States. This model generalizes the standard neoclassical growth model by including (i) a demand for status by the consumers and (ii) human capital formation. The Örst feature prevents the wealth distribution from collapsing into a degenerate distribution. The second feature generates a strong positive correlation between earnings and wealth across agents. A calibrated version of this model succeeds in replicating the wealth and income distributions of the United States.Length: 38 pagesInequality, Heterogeneity, Time Preference, Human Capital