Template-Type: ReDIF-Paper 1.0
Title: Capital Risk, Fiscal Policy, and the Distribution of Wealth
Author-Name: Andrea Modena
Author-Email: andrea.modena@uni-mannheim.de
Author-Name: Luca Regis
Author-Email: luca.regis@unito.it
Classification-JEL: C61, E21, E62, G11
Keywords: fiscal policy, incomplete market, portfolio choices, wealth distribution

Abstract: We develop a continuous-time model of a production economy where households
face leverage constraints, uninsurable labour income shocks, and capital depreciation
risk. We derive a numerical approximation of the model’s competitive equilibrium and
compare it with a benchmark economy with no capital risk. Introducing capital risk
generates a positive risk premium while fostering aggregate capital accumulation and
safe asset demand. At the same time, it exacerbates wealth inequality by making poor
households’ net worth more volatile than their wealthier peers. In this framework,
we investigate the impact of fiscal policy on households’ wealth distribution and welfare. 
Fiscal policy influences the equilibrium wealth distribution by changing the risk
premium. This channel unevenly impacts households’ consumption and asset allocation decisions, 
depending on their wage and net worth levels. Tax cuts on risky capital
may benefit wealthy or poor households, depending on whether they are financed by
raising taxes on safe assets or labour.

Note: 
Length: 30
Creation-Date: 2023-08
Revision-Date:
File-URL: https://www.crctr224.de/research/discussion-papers/archive/dp454
File-Format: application/pdf
Handle: RePEc:bon:boncrc:CRCTR224_2023_454