Capital management and wealth inequality

Arbeitspapier

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.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Staff Report ; No. 1072

Classification and Topics

• Classification: Wirtschaft ; Personal Income, Wealth, and Their Distributions ; Search; Learning; Information and Knowledge; Communication; Belief; Unawareness ; Macroeconomics: Consumption; Saving; Wealth ; Investment; Capital; Intangible Capital; Capacity
• Subject: wealth inequality ; capital ; returns ; management ; information ; financial innovation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Best, James ; Dogra, Keshav
• Event: Veröffentlichung
• (who): Federal Reserve Bank of New York
• (where): New York, NY
• (when): 2023

Further information

• DOI: doi:10.59576/sr.1072
• Handle: http://hdl.handle.net/10419/284032
• Last update: 10.03.2025, 11:46 AM CET