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Essays in wealth inequality

Albuquerque, Daniel (2022) Essays in wealth inequality. PhD thesis, London School of Economics and Political Science.

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Identification Number: 10.21953/lse.00004485


Wealth inequality in the United States is large and has been increasing in the last five decades. In my thesis I try to help our understanding of both of these facts. The first chapter shows that portfolios of US households changed recently, and argues that these changes contributed to the increase in wealth inequality. The portfolio changes are characterised by an increase in investment in equity in the top 1% of the wealth distribution, and an increase in debt to invest in real estate at the bottom 50%. With an accounting exercise I show that, as equity had a higher return than other assets in the same period, wealth inequality increased as a result of these portfolio movements. In the second chapter I propose that portfolio choices are important for understanding the impact of income taxes on wealth inequality. I develop an analytical model and show that when taxes fall households want to invest more in high-risk, high-return assets, just like households at the top 1% did with equity. I then construct a quantitative model of US households’ portfolio choice and wealth inequality and show that portfolio choices amplify the impact of the observed fall in top income taxes on wealth inequality in a quantitatively significant way. Finally, one of the most striking features of the wealth distribution in the US is the racial wealth gap between Black and White households. In the third chapter we develop a model with endogenous entrepreneurship choice and wealth inequality, and use it to quantify the impact of racial gaps in wages and business start-up costs. We find that the wage gap is particularly important in explaining gaps at the bottom of the wealth distribution, while entrepreneurship is essential to explain gaps at the top. Furthermore, changes in the racial wealth gap are slow in our setting, due to the long time required for Black households to reach the top 10% of wealth. Finally, we discuss the impact of reparations and demonstrate that, while they are not successful at speeding the transition towards permanent equality, they help make inequality smaller during the transition.

Item Type: Thesis (PhD)
Additional Information: © 2022 Daniel Albuquerque
Library of Congress subject classification: H Social Sciences > HC Economic History and Conditions
H Social Sciences > HG Finance
Sets: Departments > Economics
Supervisor: Reis, Ricardo

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