Saving at the top and the long-run relationship between wealth and income inequality

Abstract

ABSTRACT This paper analyzes the joint long-run evolution of wealth and income inequality. We find that top wealth and income shares were cointegrated over the past century in France and the US. We rationalize this finding in two macroeconomic heterogeneous agent models featuring growth and incomplete markets, respectively. In both frameworks, the co-movement of top wealth and income shares is determined by the relative saving rate at the top, i.e. the ratio of the saving rate of rich individuals to the aggregate saving rate. Our empirical results suggest that relative saving rates at the top have been fairly stable over time, thus explaining the observed tight co-movement between top wealth and income shares over the past century.