Wealth and the capitalist spirit

Journal of Money, Credit and …, 2009

Recent research has shown that the "spirit of capitalism" -a preference for wealth itself, in addition to consumption -has important implications for growth and asset pricing. This paper explores how the spirit of capitalism affects saving and consumption behavior. We demonstrate that the spirit of capitalism may reduce the importance of precautionary savings. It can also explain the excess sensitivity puzzle: the spirit of capitalism causes dramatic deviations from a random walk. It may also offer a partial explanation of the excess smoothness puzzle. J y J J c y rw J J a J J y J J a bw J y rw J J a J J J J J J J J J J J y w J Irvine

The Federal Reserve Bank of Kansas City Research Working Papers, 2021

Wealth in the utility function (WIU) has been increasingly used in macroeconomic models and this specification can be justified by a few theories such as Max Weber's (1904-05, German; 1958) theory on "spirit of capitalism." We incorporate the WIU into a general equilibrium consumption-portfolio choice model to study the implications of the WIU for consumption inequality, equilibrium interest rate, and equity premium-an unexplored area in the literature. Our general equilibrium framework features recursive exponential utility, uninsurable labor risks, and multiple assets and can deliver closed-form solutions to help disentangle the effects of the WIU in driving the key results. We show a stronger preference for wealth lowers the risk-free rate but increases the consumption inequality and equity premium in the equilibrium. We show these properties improve the model's performance in explaining the data. We also compare the WIU with a closely related hypothesis, habit formation, and find that they have opposite effects on equilibrium asset returns and consumption inequality.

In this paper we explore the impact of demographic variables on the aggregate propensity to save, on the aggregate wealth-income ratio and on the inequality in the distribution of wealth, in the life cycle "egalitarian" model. We depart from and pioneering papers by assuming that the consumption level of the household is an increasing function of the number of its members. In this framework we show that in a stationary economy the timing of births strongly affects both the aggregate wealth-income ratio and the inequality of wealth distribution, and that the dispersion, within each household, of such a timing affects the inequality of wealth distribution only. In an economy with steadily growing population we show that the aggregate propensity to save is a decreasing function of the rate of growth of population when such a rate varies: i) due to changes in the timing of births or ii) due to changes in the number of children, provided that the age of parenthood is very low. As for inequality in the distribution of wealth, we show that it is a non-monotonic function of the timing of births and of the number of births per-household. The latter results, concerning the aggregate propensity to save and the inequality in the wealth distribution are in clear contrast with some of the fundamental propositions of the traditional life cycle theory. Classificazione JEL: D31, D91, J13.

Economic Inquiry, 2013

This paper presents a dynamic competitive equilibrium model with heterogeneous time preferences that can account for the observed patterns of wealth and income inequality in the United States. This model generalizes the standard neoclassical growth model by including (i) a demand for status by the consumers and (ii) human capital formation. The …rst feature prevents the wealth distribution from collapsing into a degenerate distribution. The second feature generates a strong positive correlation between earnings and wealth across agents. A calibrated version of this model succeeds in replicating the wealth and income distributions of the United States.

2020

Several models of economic behavior currently compete for an explanation of individual wealth accumulation and savings patterns. In this paper we focus in particular upon the role of income uncertainty, and the role played by a retirement period, during which time-expected earnings are zero. We "nd that income uncertainty can alter savings patterns over the lifecycle signi"cantly, with the greatest in#uence on the wealth of young individuals. However, its in#uence on the aggregate stock of wealth is less than earlier theoretical work indicates.

This paper considers several alternative explanations for the fact that households with higher levels of lifetime income ('the rich') have higher lifetime saving rates ; Lillard and Karoly ). The paper argues that the saving behavior of the richest households cannot be explained by models in which the only purpose of wealth accumulation is to finance future consumption, either their own or that of heirs. The paper concludes that the simplest model that explains the relevant facts is one in which either consumers regard the accumulation of wealth as an end in itself, or unspent wealth yields a flow of services (such as power or social status) which have the same practical effect on behavior as if wealth were intrinsically desirable.

In an extended variant of the life-cycle hypothesis, saving behaviour is shown to depend crucially on the interaction between two preference parameters : Y (gamma), which represents "risk" attitudes (aversion, prudence...), and d (delta), the rate of "time" depreciation. Hence, the predictions of four specific accumulation regimes : the "Armchair investors" (high Y, low d) ; the "Entreprising" (low Y, low d) ; the "Hotheads" (low Y, high d) ; and the "Short-sighted prudent" (high Y, high d). The Insee "Patrimoine 1997" survey allows to obtain global relative measures of the two preference parameters. An econometric analysis of the amount and composition of wealth shows then that this savers' typology has sizeable explanatory power, with effects as predicted. Ceteris paribus, "armchair investors" accumulate more wealth than other households. "Hotheads" own less homes and Pep (insurance savin...

This paper uses the Panel Study of Income Dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty. However, the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cycle model in which consumers are patient enough to begin saving for retirement early in life: wealth is estimated to be far less sensitive to uncertainty than implied by that model. Instead, our results suggest that over most of their working lifetime, consumers behave in accordance with the "buffer-stock" models of saving described in or , in which consumers hold wealth principally to insulate consumption against near-term fluctuations in income.

The Review of Austrian Economics, 2006

There is no doubt that when income or wealth increases, impatience for present goods declines. When time preference for the present falls, interest rates decline as well. But is this phenomenon a necessary condition of human action as Rothbard and Hoppe contend? This is widely thought to be true when a man is on the very verge of death. There is an aphorism according to which "a drowning man will grasp even at the blade of a sword." In this view, someone who is starving will not postpone the consumption of food for tomorrow that is necessary to keep him alive today. But we disagree. And what is the situation under more ordinary circumstances far removed from starvation? We argue in this paper that, contrary to Rothbard and Hoppe, under these conditions it is a reliable but only a broad empirical generalization that time preferences and interest rates are inversely related to wealth or income, it is not a matter of praxeology.

UFAE and IAE Working Papers, 2008

In this paper, we analyze how the introduction of habits and aspirations affects the distribution of wealth when individuals' labor productivity is subject to idiosyncratic shocks and bequests arise from a joy-of-giving motive. In the presence of either bequests or aspirations, labor income shocks are transmitted intergenerationally and this transmission, together with the contemporaneous income shocks, determines the stationary distribution of wealth. We show that the introduction of aspirations increases both the intragenerational variability of wealth and the corresponding degree of intergenerational mobility. The opposite result holds when habits are introduced. Finally, we discuss how aspirations and habits interact with the redistributive features of an unfunded social security system. JEL classification codes: D31, E21, E62.