Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/284032 
Year of Publication: 
2023
Series/Report no.: 
Staff Report No. 1072
Publisher: 
Federal Reserve Bank of New York, New York, NY
Abstract: 
Wealthier individuals have stronger incentives to seek higher returns. We investigate theoretically the effect this has on long-run wealth inequality. Incorporating capital management into a standard RamseyCass-Koopmans model generates substantial long-run inequality: the majority of the population works and holds no capital, while a small minority holds a large amount of capital and manages it full-time. Counterintuitively, financial innovations or policies that reduce return differentials increase long-run wealth inequality. Egalitarian steady states may exist, but are inefficient and unstable: a small concentration in capital ownership causes a transition to an unequal steady state. Capital management introduces a novel equity-efficiency tradeoff: scale economies make it efficient for a few individuals to manage capital full-time, but under laissez-faire this generates substantial inequality. A utilitarian planner would instead instruct a few individuals to manage capital on behalf of society and transfer most of their income to the workers.
Subjects: 
wealth inequality
capital
returns
management
information
financial innovation
JEL: 
D31
D83
E21
E22
G51
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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