Left and right: A tale of two tails of the wealth distribution

Christian Di Pietro, Marcello D'Amato, Marco M. Sorge

Abstract

We study a model of wealth accumulation in altruistic lineages, in which households face capital income risk, investment indivisibilities and credit market imperfections. A thick upper tail of the stationary distribution of wealth is shown to emerge as a robust prediction, irrespective of (i) the presence of multidimensional (wealth and ability) heterogeneity and non-convexities in human capital formation, and (ii) the nature of parental bequest motives (joy-of-giving vs. paternalism). Additionally, (iii) we identify conditions under which the unique, ergodic wealth distribution exhibits a mass point at the bottom of its support, where bequest incentives are inactive and social mobility can only occur via occupational upgrading. Our interest in the features of the left tail motivates the exploration of the effects of fiscal policies on intergenerational wealth transmission and long-run inequality. While uniform capital income taxes are found to increase the measure of the least-wealthy households, taxing wealth at the top to subsidize educational investment at the bottom unambiguously improves upward mobility of lineages and expected residence time in the lower states of the wealth space.