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Time Preference and the Distributions of Wealth and Income

Suen, Richard M. H. (2012): Time Preference and the Distributions of Wealth and Income.

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Abstract

This paper examines the connection between time preference heterogeneity and economic inequality in a deterministic environment. Specifically, we extend the standard neoclassical growth model by introducing three additional features, namely (i) heterogeneity in consumers' discount rates, (ii) direct preferences for wealth, and (iii) human capital formation. The second feature prevents the wealth distribution from collapsing into a degenerate distribution. The third feature generates a strong positive correlation between earnings and capital income across consumers. A calibrated version of the model is able to generate patterns of wealth and income inequality that are very similar to those observed in the United States.

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