Economic Theory Seminar Series: An Impossibility Theorem for Wealth in Heterogeneous-agent Models without Financial Risk

We show that in heterogeneous-agent dynamic general equilibrium models that feature only idiosyncratic income risk, the wealth distribution inherits the tail behavior of income shocks such as light-tailedness and the Pareto exponent. Consequently, in this class of models, (i) it is impossible to generate heavy-tailed wealth distributions from light-tailed income shocks, and (ii) if income has a Pareto tail, wealth has the same Pareto exponent.

Presented by Alexis Akira Toda, University of California, San Diego