Firm leverage and wealth inequality

0532594 - NHU-C 2021 CZ eng V - Výzkumná zpráva
Bakota, Ivo
Firm leverage and wealth inequality.
Prague: CERGE-EI, 2020. 44 s. CERGE-EI Working Paper Series, 667. ISSN 1211-3298
Grant ostatní: UK(CZ) GAUK 344217
Institucionální podpora: Progres-Q24
Klíčová slova: portfolio choice * heterogeneous agents * life-cycle
Obor OECD: Applied Economics, Econometrics
https://www.cerge-ei.cz/pdf/wp/Wp667.pdf

This paper studies the effects of a change in firm leverage on wealth inequality and macroeconomic aggregates. The question is studied in a general equilibrium model with a continuum of heterogeneous agents, life-cycle, incomplete markets, and idiosyncratic
and aggregate risk. The analysis focuses on the particular change in firm leverage that occurred in the U.S. during the 1980s, when firm leverage increased significantly, and subsequently has been dropping since the early 1990s. In the benchmark model, an increase
in firm leverage of the size that occurred during the 1980s increases capital accumulation by 5.38%, decreases wealth inequality by 1.07 Gini points and decreases government revenues by 0.11% of output. An increase in firm leverage increases average after-tax
returns on savings, as firm debt has beneficial tax treatment. This increases the saving rates of all households, and disproportionately increases the saving rates of relatively poorer households. Consequently, the model implies that the increase in firm leverage did
not contribute to rising inequality in the U.S. in the 1980s, but rather the opposite; that the reduction in leverage from the early 1990s to 2008 has contributed to rising wealth inequality. Furthermore, I show that if the model abstracts from beneficial tax treatment
of corporate debt, the change in leverage has only minor effects on macro aggregates and inequality, despite having significant implications for asset prices. This is consistent with the previous result in the literature showing that the Modigliani-Miller theorem approximately holds in the heterogeneous agents model with imperfect markets.
Trvalý link: http://hdl.handle.net/11104/0311037