Abstract
We present a formal model with heterogeneous households examining the dynamics of wealth disparity. We concentrate on financial wealth and study asset accumulation in terms of net wealth. Households borrow to finance investment and consumption. If the asset value is larger then the liability, then new net wealth is accumulated. The question then becomes what variables drive differences in net asset accumulation among households. The returns on assets, saving rates and borrowing capacity are major driving forces behind the differences in asset accumulation among households. The empirical part utilizes US Survey of Consumer Finance (SCF) data and supports the theoretical model. Specifically, the paper finds substantial evidence suggesting that when income groups are subdivided into those that dominantly borrow for consumption and those that dominantly borrow for investment (functioning as consumption smoothers), the former group suffers losses in net wealth while the latter maintains a steady increase in net worth.
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