Idiosyncratic and aggregate risks, inequality and growth
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Date
Authors
Getachew, Yoseph
Journal Title
Journal ISSN
Volume Title
Publisher
Wiley
Abstract
The paper disaggregates productivity shocks at a firm level into idiosyncratic and aggregate risks, and studies their impacts on inequality, growth and welfare. It develops a growth model with human capital and incomplete insurance and credit markets that provides a closed-form solution for income inequality dynamics. We find that uninsured idiosyncratic risks are the most important determinants of inequality, growth and welfare. They are the source of nondegenerate wealth distribution. A lower weight of these shocks leads to lower steady-state inequality, higher growth and welfare. A redistribution of income that serves as social insurance against such risks increases welfare and decreases inequality. But, it also decreases growth by distorting individual consumption and saving decisions.
Description
Keywords
Inequality, Growth, Productivity shock, Idiosyncratic risk, Aggregate risk, Welfare
Sustainable Development Goals
Citation
Getachew, YY 2017, 'Idiosyncratic and aggregate risks, inequality and growth', Bulletin of Economic Research, vol. 69, no. 2, pp. 109-123.