| By: |
Ichiro Muto (General Manager, Aomori Branch, Bank of Japan (E-mail: ichirou.mutou@boj.or.jp));
Fumitaka Nakamura (Director, Institute for Monetary and Economic Studies, Bank of Japan (currently, International Monetary Fund, E-mail: fumitaka.nakamura@boj.or.jp));
Makoto Nirei (Professor, Graduate School of Economics, University of Tokyo (E-mail: nirei@e.u-tokyo.ac.jp)) |
| Abstract: |
What are the main drivers of the recent increase in wealth concentration in
the U.S.? This paper quantifies the role played by digitalization using a
tractable model with heterogeneous agents with risk aversion. The model
combines (1) digital capital that substitutes for labor in the production
process and (2) households' investments in risky digital assets to replicate
the asset growth of the wealthy since the 1990s. In the equilibrium, a small
number of prosperous households with low risk aversion, i.e., digital
entrepreneurs, hold most of the risky digital capital, whereas a large number
of risk-averse households rely mainly on labor income. Hence, when
digitalization advances, these risk-tolerant households enjoy higher returns
from digital capital, further accumulating digital capital disproportionately.
Based on the model calibrated to the U.S. economy, we show that digitalization
(an increase in digital productivity by 21-43 percent) has contributed to more
than about 50 percent of the increase in the share of wealth of the top 1
percent of households and more than about 80 percent of that of the top 0.1
percent of households observed over the last 30 years. Moreover, it explains
about 20-40 percent increase in the annual savings of the top 1 percent of
households. Finally, the comparative statics on the macroeconomic variables
show that while advances in digitalization decrease the labor share by 3-5
percentage points, which is in line with the empirical literature, it also
increases wages, meaning that risk- averse households, who rely mainly on
labor earnings, also gain some benefits from digitalization. |