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We study the dynamics of the distribution of wealth in an economy with infinitely lived agents, intergenerational transmission of wealth, and redistributive fiscal policy. We show that wealth accumulation with idiosyncratic investment risk and uncertain lifetimes can generate a double Pareto wealth distribution.

We introduce the investment risk into a heterogeneous agents model and present a mechanism to analytically generate a double Pareto distribution of wealth. We replicate the distribution of the U.S. wealth and especially the three prominent features: a high Gini coe¢ cient, skewness to the right, and Pareto tails. We disentangle the contribution of inheritance, age and stochastic rates of capital return to wealth inequality, in particular to the Gini coe¢ cient. Finally, we investigate the e¤ects of the …scal and redistributive policies on wealth inequality and social welfare.We would like to thank

We study the wealth distribution in Bewley economies with idiosyncratic capital income risk. We show analytically that under rather general conditions on the stochastic structure of the economy, a unique ergodic distribution of wealth displays a fat tail; more precisely, a Pareto distribution in the right tail.

No abstract