When a `rat race' implies an intergenerational wealth trap

Abstract

Two critical questions about intergenerational outcomes are: one, whether significant barriers or traps exist between different social or economic strata; and two, the extent to which intergenerational outcomes do (or can be used to) affect individual investment and consumption decisions. We develop a model to explicitly relate these two questions, and prove the first such `rat race' theorem, showing that a fundamental relationship exists between high levels of individual investment and the existence of a wealth trap, which traps otherwise identical agents at a lower level of wealth. Our simple model of intergenerational wealth dynamics involves agents which balance current consumption with investment in a single descendant. Investments then determine descendant wealth via a potentially nonlinear and discontinuous competitiveness function about which we do not make concavity assumptions. From this model we demonstrate how to infer such a competitiveness function from investments, along with geometric criteria to determine individual decisions. Additionally we investigate the stability of a wealth distribution, both to local perturbations and to the introduction of new agents with no wealth.