Idiosyncratic and aggregate risks, inequality and growth

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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.

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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.