Wealth heterogeneity : a model with friction

Abstract

Abstract of thesis entitledWealth Heterogeneity: A Model with FrictionSubmitted by Yue JiangFor the Degree of Master of PhilosophyAt the University of Hong Kong in May 2019I investigate the wealth heterogeneity in wealth distribution by making extension to the iconic wealth heterogenous model of Krusell and Smith (1998). With the introduction of “friction” in the employment process in my model, the unemployed agents can only be employed when the following two condition hold: First, the number of workers needed in the economy in this period is larger than the the number of workers who survived the shock of economy in the past; Second, those who are employed in this period must have survived the “friction” as lay-off decision made by firms. Moreover, I prove that the model performs well when matching with real wealth distributions in U.S. and China as it captures the skewness in the data, which means that the highest income group would hold more wealth. Finally, I show the friction in employment would lead to the phenomenon where laid off agents would generally stay long in unemployment status and thus would be more vulnerable to economic shocks. The long duration of unemployment would make them easily trapped in poverty and thus would lead to greater wealth skewness and wealth heterogeneity in population. (192 words)