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, with important differences within and across US states. We study the distribution of wealth in a country and how it is shaped by the characteristics earnings across regions, and by the frictions individuals face to move and reallocate across space. 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 analysis focuses on the role of income shocks, precautionary savings, mobility, and sorting in shaping the geographic distribution of income and wealth over time. Our theory extends the workhorse macroeconomic model of consumption and savings under uncertainty and risk to an economy with multiple labor markets and costly mobility. Despite the complex spatial and individual heterogeneity, we can characterize the optimal consumption, savings, and mobility decisions of workers in closed form. Mobility frictions increase precautionary savings as workers hedge against sharp fluctuations in consumption generated by their mobility decisions. The spatial distribution of wealth is primarily driven by the interaction between persistent income shocks, saving behavior, and worker sorting across locations. The results highlight the importance of accounting for worker mobility and regional heterogeneity in earnings dynamics when studying the spatial distribution of wealth.

Keywords: mobility; precautionary savings; spatial equilibrium; wealth; inequality;

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

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