Firm Leverage and Wealth Inequality

This paper studies the effects of a change in firm leverage on wealth inequality and macroeconomic aggregates. The question is studied in a general equilibrium model with a continuum of heterogeneous agents, life-cycle, incomplete markets, and idiosyncratic and aggregate risk. In the benchmark model, an increase in firm leverage of the size that occurred during the 1980s increases capital accumulation by 5.38%, decreases wealth inequality by 1.07 Gini points and decreases government revenues by 0.11% of output. Furthermore, I show that if the model abstracts from beneficial tax treatment of corporate debt, the change in leverage has only minor effects on macro aggregates and inequality, despite having significant implications for asset prices