Effects of aspirations and habits on the distribution of wealth

Abstract

Financial support from the Government of Spain (grants ECO2012-33993, ECO2012-32392 and the Severo Ochoa program), the Generalitat of Catalonia (SGR2009-00350 and ICREA Academia program), and Fundación BBVA is gratefully acknowledged. The paper has benefited from comments by three anonymous referees.

We analyze how the introduction of habits and aspirations affects the distribution of wealth when the labor productivity of individuals is subject to idiosyncratic shocks and when 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 contemporaneous shocks, determines the distribution of wealth. We show that the introduction of aspirations (habits) decreases (increases) the average wealth, and increases (decreases) both its intragenerational variability and the degree of intergenerational mobility. Therefore, a distinction between aspirations and habits is relevant because they involve different implications for the distribution of wealth