Income Inequality and Asset Prices under Redistributive Taxation / Lubos Pastor, Pietro Veronesi.

Format:

Book

Author/Creator:

Pastor, Lubos.

Contributor:

National Bureau of Economic Research.

Veronesi, Pietro.

Series:

Working Paper Series (National Bureau of Economic Research) no. w21668.

NBER working paper series no. w21668

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2015.

Summary:

Our simple model features agents heterogeneous in skill and risk aversion, incomplete financial markets, and redistributive taxation. In equilibrium, agents become entrepreneurs if their skill is sufficiently high or risk aversion sufficiently low. Under heavier taxation, entrepreneurs are more skilled and less risk-averse, on average. Through these selection effects, the tax rate is positively related to aggregate productivity and negatively related to the equity risk premium. Both income inequality and stock prices initially increase but eventually decrease with the tax rate. Investment risk, stock market participation, and skill heterogeneity all contribute to inequality. Cross-country empirical evidence supports the model's predictions.

Notes:

Print version record

October 2015.