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Thomas Piketty and the rate of time preference

Fischer, Thomas LU (2017) In Journal of Economic Dynamics and Control 77. p.111-133
Abstract

Using a standard model in which the individual consumption path is computed solving an optimal control problem, we investigate central claims of Piketty (2014). Rather than r > g (confirmed in the data) r−ρ>g – with ρ being the rate of time preference – matters. If this condition holds and the elasticity of substitution in the production function is larger than one, the capital share converges to one in the long run. Nevertheless, this does not have major impact on the distribution of wealth. The latter, however, converges to maximum inequality for heterogeneous time preferences or rates of interest (either persistent or stochastic). For the latter, the presence of finite life times leads to a distribution with finite wealth... (More)

Using a standard model in which the individual consumption path is computed solving an optimal control problem, we investigate central claims of Piketty (2014). Rather than r > g (confirmed in the data) r−ρ>g – with ρ being the rate of time preference – matters. If this condition holds and the elasticity of substitution in the production function is larger than one, the capital share converges to one in the long run. Nevertheless, this does not have major impact on the distribution of wealth. The latter, however, converges to maximum inequality for heterogeneous time preferences or rates of interest (either persistent or stochastic). For the latter, the presence of finite life times leads to a distribution with finite wealth inequality featuring fat tails.

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author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Dynamic efficiency, Fat tails, Optimal control path, Wealth inequality
in
Journal of Economic Dynamics and Control
volume
77
pages
23 pages
publisher
Elsevier
external identifiers
  • scopus:85014561980
  • wos:000399624800006
ISSN
0165-1889
DOI
10.1016/j.jedc.2017.02.006
language
English
LU publication?
yes
id
3f49b7ab-bae8-47b3-b520-aecfc14ae055
date added to LUP
2017-03-14 11:44:24
date last changed
2017-09-18 11:39:07
@article{3f49b7ab-bae8-47b3-b520-aecfc14ae055,
  abstract     = {<p>Using a standard model in which the individual consumption path is computed solving an optimal control problem, we investigate central claims of Piketty (2014). Rather than r &gt; g (confirmed in the data) r−ρ&gt;g – with ρ being the rate of time preference – matters. If this condition holds and the elasticity of substitution in the production function is larger than one, the capital share converges to one in the long run. Nevertheless, this does not have major impact on the distribution of wealth. The latter, however, converges to maximum inequality for heterogeneous time preferences or rates of interest (either persistent or stochastic). For the latter, the presence of finite life times leads to a distribution with finite wealth inequality featuring fat tails.</p>},
  author       = {Fischer, Thomas},
  issn         = {0165-1889},
  keyword      = {Dynamic efficiency,Fat tails,Optimal control path,Wealth inequality},
  language     = {eng},
  month        = {04},
  pages        = {111--133},
  publisher    = {Elsevier},
  series       = {Journal of Economic Dynamics and Control},
  title        = {Thomas Piketty and the rate of time preference},
  url          = {http://dx.doi.org/10.1016/j.jedc.2017.02.006},
  volume       = {77},
  year         = {2017},
}