Abstract
Recent studies find that sufficiently volatile idiosyncratic investment risk plays an important role in generating wealth inequality. I introduce idiosyncratic investment risk into the Becker and Tomes (J Polit Econ 87:1153–1189, 1979) model and find an explicit expression of the stationary wealth distribution in this simple model. This explicit expression brings us new insights of how bequest motives and estate taxes influence wealth distributions. I find that inheritance increases wealth inequality in models with idiosyncratic investment risk through exaggerating labor earnings uncertainty, while inheritance decreases wealth inequality in the Becker and Tomes (1979) model through mitigating labor earnings uncertainty. This causes estate taxes to have different impacts on wealth inequality in my model and the Becker and Tomes (1979) model.
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