Unpacking Rising Inequality: The Roles of Markups, Taxes, and Asset Prices

Overview

This study examines the drivers of income and wealth inequality in France from 1984 onward, focusing on three primary forces: changes in taxation, rising markups, and asset price movements. The research employs a heterogeneous-agent model that incorporates endogenous portfolio choice and a detailed representation of the tax-and-transfer system. A reduced-form mechanism links markups to top incomes through entrepreneurial risk, allowing the model to capture distributional dynamics at the upper tail of the distribution. The analysis targets observed trends in inequality up to the top 1% income and wealth shares, seeking to decompose the relative contributions of each driving force and identify the channels through which they operate.

Methods and approach

The model framework combines heterogeneous agents with endogenous portfolio decisions and a granular representation of fiscal policy instruments. The reduced-form mechanism connecting markups to top incomes operates through entrepreneurial risk exposure. The researchers calibrate the model to replicate observed inequality trends in France since 1984, using empirical data on income and wealth distributions. Counterfactual simulations isolate the effects of each driver by varying taxation parameters, markup levels, and asset price trajectories independently. A simple accounting decomposition of wealth accumulation complements the structural analysis, enabling the researchers to quantify both mechanical effects and behavioral responses. This dual approach separates direct impacts of differential returns from endogenous adjustments in saving behavior.

Results

The analysis identifies rising markups as the primary driver of income inequality over the study period. For wealth inequality, all three forces contribute significantly, with taxation, markups, and asset prices each playing distinct roles. The decomposition reveals that differential asset price movements exert mechanical effects on wealth accumulation, directly benefiting asset holders with particular portfolio compositions. Endogenous saving responses emerge as a central mechanism shaping wealth inequality dynamics over time. The model successfully accounts for observed trends in both income and wealth inequality measures, including the concentration at the top 1% of the distribution. The counterfactual simulations demonstrate that isolating individual drivers produces divergent inequality trajectories, underscoring the importance of their interactive effects.

Implications

The findings establish rising market power, reflected in increased markups, as the dominant force behind income inequality growth in France. The multifaceted nature of wealth inequality requires attention to multiple channels: fiscal policy design, market structure, and asset market dynamics all contribute substantially. The central role of endogenous saving responses indicates that wealth inequality outcomes depend not only on differential returns but also on behavioral adjustments to changing economic conditions. Policy interventions targeting inequality must account for these behavioral margins to accurately predict distributional consequences. The methodology demonstrates the value of combining structural heterogeneous-agent models with decomposition techniques to disentangle mechanical from behavioral channels in inequality dynamics.