Why are some people wealthy while others are poor? To what extent can governments affect inequality? Which instruments should they use? Answering these questions requires understanding why people save. Dynamic quantitative models of wealth inequality can help us to understand and quantify the determinants of the outcomes that we observe in the data and to evaluate the consequences of policy reform. This paper surveys the savings mechanisms generated by the transmission of bequests and human capital, by preference heterogeneity, by rate of return heterogeneity, by entrepreneurship, by richer earnings processes, and by medical expenses. It concludes that the transmission of bequests and human capital, entrepreneurship, and medical-expense risk are crucial determinants of savings and wealth inequality and that we need to look at more data to measure their relative importance.
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A previous version of this paper by De Nardi was circulated under the title “Quantitative Models of Wealth Inequality: A Survey” and was the basis of her 2016 SED plenary lecture. De Nardi gratefully acknowledges support from the ERC , grant 614328 “Savings and Risks.” We thank Orazio Attanasio, Marco Bassetto, Richard Blundell, Matthias Doepke, Moritz Kuhn, Tim Lee, Cormac O'Dea, Vasia Panousi, José-Victor Ríos-Rull, and an anonymous referee for helpful comments. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research, any agency of the federal government, or the Federal Reserve Bank of Chicago.
© 2017 The Author(s)