Wealth Inequality and Asset Prices

Abstract

Wealthy households disproportionately invest in equity, causing equity returns to generate large and persistent fluctuations in top wealth inequality. Motivated by this observation, I study the joint dynamics of asset prices and wealth inequality in a model where a subset of agents (entrepreneurs) hold levered positions on the economy. In the model, as in the data, the wealth distribution is stochastic and it exhibits a Pareto tail, with a tail index that depends on the logarithmic average return of top households. The model features a feedback loop between asset prices and wealth inequality, which amplifies the effect of aggregate shocks on the economy. The model, calibrated to the U.S. data, can account for a substantial portion of the fluctuations in asset prices and top wealth shares over the 20th century.