The geography of wealth: shocks, mobility, and precautionary savings

Dvorkin, Maximiliano; Greaney, Brian

doi:10.20955/wp.2024.033

Working Paper Revision

The geography of wealth: shocks, mobility, and precautionary savings

Abstract: The spatial distribution of wealth in the United States is very heterogeneous. We study the spatial distribution of wealth in a country and how it is shaped by regional earning characteristics and mobility frictions. For this, we develop a tractable model of consumption, savings, and location choice with many regions, incomplete markets, and heterogeneous agents facing persistent and transitory income shocks. Our theory extends a workhorse macroeconomic model of consumption and savings under uncertainty to an economy with multiple labor markets and costly mobility. Despite complex spatial and individual heterogeneity, we characterize the optimal consumption, savings, and mobility decisions of workers in closed form. Mobility frictions increase precautionary savings as workers hedge against consumption fluctuations generated by moving decisions. The spatial distribution of wealth is primarily driven by the interaction between persistent income shocks, saving behavior, and worker sorting over locations. Our results highlight the importance of accounting for worker mobility and regional heterogeneity in earnings dynamics when studying the spatial distribution of wealth.

JEL Classification: R12; R23; E21; J61; F16;

https://doi.org/10.20955/wp.2024.033