Has the Decline in the Price of Investment Increased Wealth Inequality?

Abstract

The price of investment relative to consumption has steadily declined in the United States over the last three decades. Over the same period, inequality at the top of the wealth distribution has increased substantially. This paper develops a framework that allows to associate these two trends. Households are modeled as entrepreneurs who accumulate capital, and are subject to persistent idiosyncratic productivity shocks. In this environment, the decline in the relative price of investment benefits productive entrepreneurs more than unproductive ones, increasing the saving rate differential between them. In turn, this increases wealth inequality. In a version of the model calibrated to match the observed degree of wealth concentration in the United States in 1980, the proposed mechanism can account for half of the increase in wealth inequality observed over the last thirty years.