Universidad de Granada. Departamento de Teoría e Historia Económica
Abstract
In this paper, we analyze how the introduction of habits and aspirations affects the distribution of wealth when individuals’ labor productivity is subject to idiosyncratic shocks and bequests arise from a joy-of-giving motive. In the presence of either bequests or aspirations, labor income shocks are transmitted intergenerationally and this transmission, together with the contemporaneous income shocks, determines the stationary distribution of wealth. We show that the introduction of aspirations increases both the intragenerational variability of wealth and the corresponding degree of intergenerational mobility. The opposite result holds when habits are introduced. Finally, we discuss how aspirations and habits interact with the redistributive features of an unfunded social security system.The financial support from the Fundación BBVA to Jordi Caballé and from the Spanish Ministry of Education through grant SEJ2006-11067 and the Junta de Anadalucía through grant P07-SEJ-03261 to Ana I. Moro-Egido is gratefully acknowledged
