Authors: James Best and Keshav Dogra
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Staff Reports
Capital Management and Wealth Inequality
Number 1072
September 2023 Revised January 2024
September 2023 Revised January 2024
JEL classification: D31, D83, E21, E22, G53
Wealthier individuals have stronger incentives to seek higher returns. We investigate theoretically the effect this has on long-run wealth inequality. Incorporating capital management into a standard Ramsey-Cass-Koopmans model generates substantial long-run inequality: the majority of the population works and holds no capital, while a small minority holds a large amount of capital and manages it full-time. Counterintuitively, financial innovations or policies that reduce return differentials increase long-run wealth inequality. Egalitarian steady states may exist, but are inefficient and unstable: a small concentration in capital ownership causes a transition to an unequal steady state. Capital management introduces a novel equity-efficiency tradeoff: scale economies make it efficient for a few individuals to manage capital full-time, but under laissez-faire this generates substantial inequality. A utilitarian planner would instead instruct a few individuals to manage capital on behalf of society and transfer most of their income to the workers.
Author Disclosure Statement(s)
James Best
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Keshav Dogra
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Keshav Dogra
The author declares that he has no relevant or material financial interests that relate to the research described in this paper.
Suggested Citation:
Best, James and Keshav Dogra. 2023. “Capital Management and Wealth Inequality.” Federal Reserve Bank of New York Staff Reports, no. 1072, September. https://doi.org/10.59576/sr.1072
Best, James and Keshav Dogra. 2023. “Capital Management and Wealth Inequality.” Federal Reserve Bank of New York Staff Reports, no. 1072, September. https://doi.org/10.59576/sr.1072
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