| In this article, we study the factors that contribute to the stability or instability of the distribution of wealth across generations. In particular, we test the effects of heterogeneous savings rates, labor endowments, and rates of return on savings in environments of both balanced and unbalanced growth. We also test the effectiveness of a wealth tax and a progressive income tax in reducing inequality in these environments. The study of wealth inequality has received increased attention in recent years, due in large part to advances in the collection of detailed time series data on the distribution of wealth from multiple countries. Also helpful have been advances in heterogeneous agent modeling techniques and advances in the availability of high-powered computing resources and capabilities. In his recent work, Piketty (2014, 26) lays out extensive evidence that inequality is increasing in many countries across the globe. He attributes this increase to economic forces which build up the wealth of the already wealthy. He claims that the forces that tend toward convergence of wealth levels—namely, “diffusion of knowledge and investment in training and skills”—are insufficient to overcome the divergent forces that come into play when “growth is weak and the return on capital is high.” Piketty (2014, 26) lays out the logic very clearly in his introductory chapter. When the rate of return on capital significantly exceeds the growth rate of the economy (as it did through much of history until the nineteenth century and as is likely to be the case again in the twenty-first century), then it logically follows that inherited wealth grows faster than output and income. People with inherited wealth need save only a portion of their income from capital to see that capital grows more quickly than the economy as a whole. Under such conditions, it is almost inevitable that inherited wealth will dominate wealth amassed from a lifetime’s labor by a wide margin, and the concentration of capital will attain extremely high levels—levels potentially incompatible with the meritocratic values and principles of social justice fundamental to modern democratic societies. Our goal in this article is to explore the conditions under which extreme wealth concentration is possible. We test the properties of various economic conditions in a fairly stylized theoretical framework. A host of recent papers address these issues in depth. For example, Acemoglu and Robinson (2014, abstract) argue that “the focus on the share of top incomes gives a misleading characterization of the key determinants of societal inequality” and show that “inequality dynamics are closely linked to institutional factors and their endogenous evolution, much more than the forces emphasized in Piketty’s book.” Krusell and Smith (2014, abstract) note that Piketty’s “second fundamental law of capitalism,” which states that in the long run, the wealthto-income ratio equals s g, where s is the economy’s saving rate and g its growth rate, “rests on a theory of saving that is hard to justify.” Semieniuk (2014) reviews Piketty’s elasticity argument, which relies on a nonstandard capital definition. His estimation results cast doubt on Piketty’s hypothesis of an elasticity of substitution greater than one. |