Journal of Monetary Economics 2018 DOI: 10.1016/j.jmoneco.2017.11.008 View full text
Kenneth Kasa, Xiaowen Lei

Abstract: This paper studies the dynamics of wealth inequality in a continuous-time Blanchard/Yaari model. Its key innovation is to assume that idiosyncratic investment returns are subject to (Knightian) uncertainty. In response, agents formulate robust portfolio policies (Hansen and Sargent (2008)). These policies are nonhomothetic; wealthy agents invest a higher fraction of their wealth in uncertain assets yielding higher mean returns. This produces an endogenous feedback mechanism that amplifies inequality. It also p…

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