From Income to Wealth Inequality: Trickle-Down vs. Capital Gains

Status

Submitted.

Abstract

Higher permanent labor income inequality (PLI) raises saving, since households with higher PLI save a larger share of it. For asset markets to clear, prices must adjust: how does this feed back on wealth inequality? If the saving finances capital, interest rates fall, wages rise, and poorer households gain. If it raises asset prices instead, the capital gains accrue to the rich. In a heterogeneous-agent model with non-homothetic wealth preferences and imperfect competition, markups weaken the first channel and let the second dominate for five decades along the transition. Fed with the observed U.S. rise in inequality since 1970, the model generates two fifths of the rise in the wealth-to-output ratio and a quarter of the rise in Tobin’s Q. These price effects raise the average wealth of the top 0.1% by 25% and average wealth by 8% by 2020; under perfect competition both fall, by 4% and 5%.

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Citation

@techreport{ElinaHuleux2026b,
author = {Eustache Elina and Raphaël Huleux},
year = {2026},
title = {From Income to Wealth Inequality: Trickle-Down vs. Capital Gains}}