Incomplete Markets and the Evolution of the US. Consumer Wealth Distribution

Abstract

We use a buffer-stock saving model to explain the evolution of the consumer net-worth distribution in the US between 1983 and 2004. We focus on net-worth up to the 90th percentile due to the well-known problem of matching the wealth concentration in the top percentiles. The model .fits the net-worth distribution (up to the 90th percentile) in the Survey of Consumer Finances 1983 well if we account for heterogeneity across consumers, especially in terms of age and education. Most interestingly, the estimated model for 1983 predicts the observed stability of net worth up to the 90th percentile between 1983 and 2004 if we attribute only part of the observed increase in the variance of labor earnings to higher income uncertainty. Quantitatively, the stronger precautionary-saving motive due to the increase in labor income risk is then counterbalanced by the higher cost of buffer-stock savings due to the fall of the real interest rate.