Cesar Augusto Mendonça Zambrano.

25/04/2019

Orientador: Eduardo Zilberman.

Co-orientador: Márcio Gomes Pinto Garcia.

Banca: Yvan Bécard. Felipe Iachan.

We introduce households’ portfolio decisions in a heterogeneous agents model to evaluate how this affects wealth inequality. To do so, we alter the Krusell and Smith (1998) model, incorporating a decreasing returns to scale technology, so that the representative firm issues risk-free bonds to raise capital for production and distributes profits (or losses) to equity holders. We also make use of Epstein-Zin preferences to augment the model’s equity premium, by increasing households risk aversion. The model is able to replicate stylized facts: (i) poorest households seldom participate in the equity markets; (ii) households allocate higher proportions of their savings to equity investments as they get wealthier; (iii) households’ expected return on savings increases with wealth. Inequality of wealth does increase in the model with portfolio decisions. Nevertheless, the effect on wealth inequality is small due to the low level of equity premium generated by the model. The result in unchanged even when we set very high values for risk aversion, and it is related to the lack of consumption growth volatility delivered by this class of model. Finally, we document that taking into account endogenous portfolio decisions enhances the effects of other sources of inequality.