Entrepreneurship, Firm Sales and the Dynamics of the Wealth Distribution

Abstract:

This paper studies the dynamics of the wealth distribution in a heterogeneous agent economy with entrepreneurship. Using a novel panel dataset of household wealth, I study how stable the top of the wealth distribution is, and the characteristics of households that move into the top of the wealth distribution. I show that (1) households move in and out of the top of the wealth distribution at high frequencies - e.g., up to 15% of households in the top-5% in a given year were not present the previous year; (2) a third of those households display “wealth jumps”, i.e., sudden large increases in wealth; (3) entrepreneurs are vastly overrepresented in the top of the wealth distribution and among the upwardly mobile households. More generally, being an entrepreneur greatly increases the probability of being or becoming a millionaire. The first two facts are at odds with existing quantitative models of the wealth distribution, which do not allow for wealth jumps and display very slow wealth accumulation processes. The last fact motivates the second part. The literature has shown that entrepreneurs are an essential element in explaining the wealth distribution. However, they were modeled as “lifetime entrepreneurs”, stuck with their firm for life and patiently accumulating wealth. This allows for neither wealth jumps nor frequent movements in wealth. I construct a quantitative model where entrepreneurs have the opportunity to sell their firm. In general equilibrium, I show that this model replicates the known facts of the wealth distribution as well as previous work, and also the new stylized facts described above. The policy relevance of this work lies in the tax consequences: it is essential to correctly model the incentives and dynamics of wealth creation when considering a tax on wealth. This work shows that even in partial equilibrium (i.e., neglecting the effects on the interest rate), a wealth tax can have negative effects by limiting the leverage entrepreneurs can access, and this effect weakens with better financial markets.