Capitalist Spirit Preferences, Saving Behaviour and the Distribution of Wealth: A Simulation Study for Sweden

University essay from Handelshögskolan i Stockholm/Institutionen för nationalekonomi

Abstract: Wealth is very unequally distributed and highly concentrated among a small percentage of the population in virtually every country. This empirical regularity appears to be driven by the fact that saving rates increase with the level of permanent income. However, standard life-cycle models of consumption and saving fail to account for these empirical facts. In order to generate the observed heterogeneity in saving behaviour, Carroll (1998) proposed so-called “capitalist-spirit preferences” which include wealth directly in the utility function as a luxury good. The aim of this paper is to analyze the effect of capitalist spirit preferences on the consumption and saving paths of individuals and therefore on the distribution of wealth. To address these research questions a quantitative life-cycle model with capitalist spirit preferences and heterogeneous agents in terms of income is calibrated to Swedish data. The results of this paper indicate the following: First of all, capitalist spirit preferences induce higher mean and median savings compared to the standard life-cycle model. Second, capitalist spirit preferences lead to higher saving rates as the level of permanent income of the agent increases. Moreover, the incentive to save due to the capitalist spirit decreases with age. This leads to the undesirable side effect that consumption increases exponentially during the last model periods for agents where the capitalist spirit is most active. Furthermore, this mechanism has the effect of reducing wealth inequality between different age cohorts. Therefore, only certain parameter calibrations lead to a higher concentration of wealth in the top end of the distribution. Without bequests none of the calibrations examined in this paper result in a higher gini coefficient for wealth compared to the standard life-cycle model. Allowing for bequests generates higher wealth inequality only for some calibrations.

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