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Mengus, Eric and Pancrazi, Roberto (2015) The inequality accelerator. Working Paper. Coventry: University of Warwick. Department of Economics. Warwick economics research papers series (WERPS) (1067). (Unpublished)
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Official URL: https://www2.warwick.ac.uk/fac/soc/economics/resea...
Abstract
We show that the transition from an economy characterized by idiosyncratic
income shocks and incomplete markets a la Aiyagari (1994) to markets where statecontingent
assets are available but costly (in order to purchase a contingent asset,
households have to pay a xed participation cost) leads to a large increase of wealth
inequality. Using a standard calibration our model can match a Gini of 0.93 close
to the level of wealth inequality observed in the US. In addition, under this level of
participation costs, wealth inequality is particularly sensitive to income inequality.
We label this phenomenon as the Inequality Accelerator. We demonstrate how
costly access to contingent asset-markets generates these e ects. The key insight
stems from the non-monotonic relationship between wealth and desired degree of
insurance, in an economy with participation costs. Poor borrowing constrained
households remain uninsured, middle-class households are almost perfectly insured,
while rich households decide to self-insure by purchasing risk-free assets. This
feature of households' risk management has crucial e ects in asset prices, wealth
inequality, and social mobility.
| Item Type: | Working or Discussion Paper (Working Paper) | ||||
|---|---|---|---|---|---|
| Subjects: | H Social Sciences > HB Economic Theory | ||||
| Divisions: | Faculty of Social Sciences > Economics | ||||
| Library of Congress Subject Headings (LCSH): | Income distribution | ||||
| Series Name: | Warwick economics research papers series (WERPS) | ||||
| Publisher: | University of Warwick. Department of Economics | ||||
| Place of Publication: | Coventry | ||||
| ISSN: | 0083-7350 | ||||
| Official Date: | 15 September 2015 | ||||
| Dates: |
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| Number: | 1067 | ||||
| Number of Pages: | 45 | ||||
| Status: | Not Peer Reviewed | ||||
| Publication Status: | Unpublished | ||||
| Access rights to Published version: | Open Access | ||||
| Funder: | France. Agence nationale de la recherche (ANR) | ||||
| Grant number: | ANR-11-INEG-004-01 (ANR) |
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