Contents

14.1. Some Facts on the Income and Wealth Distribution 1233

14.2. ModelingtheSourcesofMacroInequality 1236

14.2.1 Theories of Wealth InequalityGiven the Process for Earnings 1237

14.2.1.1 The Irrelevance of Income and Wealth Inequality in the Neoclassical Model 1237

14.2.1.2 Overlapping Generations Models and Wealth Inequality 1238

14.2.1.3 StationaryTheoriesofEarningsandWealthInequality 1241

14.2.2 TheoriesofEarningsInequality 1246

14.2.2.1 Human Capital Investments 1247

14.2.2.2 Human Capital Investment Versus Learning by Doing 1250

14.2.2.3 Prices of Skills 1251

14.2.2.4 Search and Inequality 1252

14.2.2.5 Occupational Choice and Earnings Inequality 1254

14.3.

14.3.1 InequalityandtheBusinessCycle 1256

14.3.1.1 The Determination of Factor Shares: Productivity Shocks, Bargaining Power Shocks,

and Financial Shocks 1258

14.3.1.2 Financial Accelerator and Inequality 1264

14.3.2 Low Frequency Movements in Inequality 1265

14.3.2.1 Labor Share's Reduction Since the Early 1980s 1265

14.3.2.2 Increased Wage Inequality: The Role of Competition for Skills 1266

14.3.2.3 Skill-Biased Technical Change 1269

14.4. Inequality and Financial Markets 1272

14.4.1 Financial Markets and Investment Possibilities 1272

14.4.2 Changes in the Borrowing Constraint 1274

14.4.3 Limits in the Ability to Borrow 1277

14.4.4 Endogenous Financial Markets Under Actual Bankruptcy Laws 1279

14.4.4.1 A Weakness of This Approach 1281

14.4.5 CreditScoring 1281

14.4.6 FinancialDevelopmentandLong-RunDynamics 1282

14.4.6.1 Long-Run Growth and Financial Development 1282

14.4.6.2 Global Imbalances 1283

14.5. The Political Economy Channel 1288

14.5.1 A Simple Two-Period Model 1288

14.5.1.1 The Case of Risk Neutrality 1291

14.5.1.2 The Case of Risk Aversion 1292

14.5.2 More on the Political Economy Channel 1294

Handbook of Income Distribution, Volume 2B

© 2015 Elsevier B.V.

All rights reserved. 1229

ISSN 1574-0056, http://dx.doi.org/10.1016/B978-0-444-59429-7.00015-7

14.6. Conclusion 1295

Acknowledgments 1295

Appendix A. Derivation of the Inequality Index 1296

Appendix B. Wage Equation with Endogenous Debt 1297

References 1298

Abstract

We revise some of the main ways in which the study of aggregate performance of an economy over­laps with the study of inequality.

Keywords

Macromodels of inequality, Inequality dynamics, Inequality and financial markets, Political economy of inequality

JEL Classification Codes

E2, D31, B22