Heterogeneous Dynasties and Long-Run Mobility

Recent empirical work has demonstrated a positive correlation between grandparent-child wealth-rank, even after controlling for parent-child wealth-rank, and a positive correlation between dynastic wealth-ranks across almost 600 years. We show that a simple heterogeneous agents model with idiosyncratic wealth returns generates a realistic wealth distribution but fails to capture these long-run patterns of wealth mobility. An auto-correlated returns specification of this model also fails to capture both short and long-run mobility. However, an extension of the heterogeneous agents model which includes permanent heterogeneity in wealth returns is able to simultaneously match the wealth distribution and short- and long-run wealth mobility.