Wealth distribution and social mobility in the US: A quantitative approach

This paper attempts to quantitatively identify the factors that drive wealth dynam-ics in the U.S. and are consistent with the observed skewed cross-sectional distribution of wealth and with social mobility in wealth. We concentrate on three critical factors: a skewed and persistent distribution of earnings, differential saving and bequest rates across wealth levels, and capital income risk in entrepreneurial activities. All of these three factor are necessary for matching both distribution and mobility, with a distinct role for each. Stochastic earnings avoid poverty traps and allow for upward mobility near the borrowing constraints, as capital income risk has relatively small effects at low levels of wealth. Saving and bequest rate differentials help match the top tail but they reduce social mobility, inducing the rich get richer accumulating at higher rates. Capital income risk also contributes to the thick top tail of wealth while allowing for social mobility, especially in terms of speeding up downward mobility