Expectation heterogeneity and wealth inequality

Official URL: http://risc01.sabanciuniv.edu/record=b2311536_ (Table of contents)

This study examines the effect of expectation heterogeneity on wealth inequality assuming that people with higher income are more optimistic about future returns of their savings, through a modified version of Krusell - Smith heterogeneous agent’s model with uninsured idiosyncratic risk and aggregate uncertainty. Our main finding is that wealth distribution is jointly determined by general equilibrium effect, individual policy functions and income mobility under heterogeneous expectations assumption. As a result, an inverse U-shape relation between wealth inequality and level of expectation heterogeneity is observed