A theory of the saving rate of the rich

DOI10.1016/J.JET.2021.105193zbMATH Open1458.91124arXiv2005.02379OpenAlexW3021898607MaRDI QIDQ1995332FDOQ1995332

Qingyin Ma, Alexis Akira Toda

Publication date: 23 February 2021

Published in: Journal of Economic Theory (Search for Journal in Brave)

Abstract: Empirical evidence suggests that the rich have higher propensity to save than do the poor. While this observation may appear to contradict the homotheticity of preferences, we theoretically show that that is not the case. Specifically, we consider an income fluctuation problem with homothetic preferences and general shocks and prove that consumption functions are asymptotically linear, with an exact analytical characterization of asymptotic marginal propensities to consume (MPC). We provide necessary and sufficient conditions for the asymptotic MPCs to be zero. We calibrate a model with standard constant relative risk aversion utility and show that zero asymptotic MPCs are empirically plausible, implying that our mechanism has the potential to accommodate a large saving rate of the rich and high wealth inequality (small Pareto exponent) as observed in the data.

Full work available at URL: https://arxiv.org/abs/2005.02379

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zbMATH Keywords

asymptotic linearityincome fluctuation problemsaving ratemonotone convex map

Mathematics Subject Classification ID

Group preferences (91B10) Consumer behavior, demand theory (91B42)

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Cited In (7)

• Tax progressivity and the Pareto tail of income distributions
• Perov's contraction principle and dynamic programming with stochastic discounting
• Recent advances on uniqueness of competitive equilibrium
• Unbounded dynamic programming via the Q-transform
• Pareto extrapolation: An analytical framework for studying tail inequality
• Existence and specific characters of rentiers: a savers-spenders theory approach
• Asymptotic linearity of consumption functions and computational efficiency

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