and working hours. Inflation declines and most of the price adjustment takes place
in the first period of the shock (period 2). As the productivity increases, both factor
prices (wages and interest rate) increase. In addition, profits increase markedly in the
first period.
The behavior of the wealth and income distribution in response to a technology shock
is displayed in Figure 3. Both, the distribution of wealth and the distribution of
disposable income become more equal although the effects are small: a one percent
shock decreases the Gini coefficient of wealth (disposable income) by about 0.23 percent
(0.20 percent). In order to understand these effects consider, first, the distribution of
market income, i.e., the sum of wages and rental income from capital (solid line in the
lower right graph of Figure 3). As explained above, the increase of profit income reduces
the labor supply of young and poor households, whereas older and rich households -
for whom profit income is a much smaller share of their total income - supply more
hours. In addition, the older and richer households benefit from the higher rental
rate of capital relatively more than younger and poorer generations. Therefore, the
distribution of market income becomes more unequal. There are several effects that
explain the more equal distribution of disposable income, i.e., market income plus
profits and transfers minus taxes. Profits and transfers are distributed lump-sum.
Profits increase sharply in the first period of the shock and they remain above the
normal level for several periods.15 Moreover, the real value of pensions also surges
in the first period of the shock. The increased market income raises taxes and the
government’s transfer payments rise. In addition, richer and older agents pay relatively
higher taxes. The more equal distribution of wealth is a direct consequence of the
more equal distribution of disposable income, reinforced by the fact that poorer agents
increase their capital stock relatively more than richer ones.
We find that the behavior of our heterogeneous-agent economy in response to a tech-
nology shock is similar to the one in the corresponding representative-agent economy.
In Figure 4, we compare the impulse responses of the aggregate variables for the repre-
sentative agent model (dotted line) with those of the heterogeneous-agent OLG model
(solid line). The ordering of the variables is exactly as in Figure 2. Qualitatively, the
responses are the same for all variables, except for working hours. The representative
agent supplies additional hours of work in the first five quarters following the shock.
15 The spike in profits in the first period of the shock also explains the spike in the Gini of disposable
income (dotted line in the lower right graph of Figure 3).
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