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Wealth inequality and dynamic stability

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  • Ghiglino, Christian

Abstract

In this paper we explore the link between wealth inequality and stability in a two-sector neoclassical growth model with heterogeneous agents. The stability of the steady state depends on the various parameters of the model and in particular on individual preferences. We show that when consumers have identical preferences and the inverse of absolute risk aversion (or risk tolerance) is a strictly convex function, inequality is a factor that favors instability. In the opposite case, inequality favors stability. Our characterization also shows that whenever absolute risk tolerance is linear, as when preferences exhibit hyperbolic absolute risk aversion (HARA), wealth heterogeneity is neutral. As there is not yet evidence on the concavity of absolute risk tolerance, our results unfortunately do not lead to a unique conclusion on the sign of the effect of wealth inequality on stability.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Theory.

Volume (Year): 124 (2005)
Issue (Month): 1 (September)
Pages: 106-115

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Handle: RePEc:eee:jetheo:v:124:y:2005:i:1:p:106-115

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Web page: http://www.elsevier.com/locate/inca/622869

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References

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  1. Boldrin, Michele & Deneckere, Raymond J., 1990. "Sources of complex dynamics in two-sector growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 14(3-4), pages 627-653, October.
  2. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics 9503003, EconWPA.
  3. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
  4. Gollier, Christian, 2001. "Wealth Inequality and Asset Pricing," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 181-203, January.
  5. Huggett, Mark & Vidon, Edouard, 2002. "Precautionary wealth accumulation: a positive third derivative is not enough," Economics Letters, Elsevier, vol. 76(3), pages 323-329, August.
  6. Frank Cowell, 1998. "Measurement of inequality," LSE Research Online Documents on Economics 2084, London School of Economics and Political Science, LSE Library.
  7. Santos, M.S., 1989. "Differentiability And Comparative Analysis In Discrete-Time Infinite-Horizon Optimization Problems," UFAE and IAE Working Papers 127-89, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  8. Timothy J. Kehoe & David K. Levine & Paul M. Romer, 1989. "Determinacy of equilibria in dynamic models with finitely many consumers," Staff Report 118, Federal Reserve Bank of Minneapolis.
  9. Christian Ghiglino & Marielle Olszak-Duquenne, 2001. "Inequalities and fluctuations in a dynamic general equilibrium model," Economic Theory, Springer, vol. 17(1), pages 1-24.
  10. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
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Citations

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Cited by:
  1. Bosi, Stefano & Seegmuller, Thomas, 2008. "Can heterogeneous preferences stabilize endogenous fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 624-647, February.
  2. Hori, Katsuhiko, 2007. "Indeterminacy in a monetary economy with heterogeneous agents," MPRA Paper 49316, University Library of Munich, Germany.
  3. Christian Ghiglino & Alain Venditti, 2008. "The role of the wealth distribution on output volatility," Economics Discussion Papers 653, University of Essex, Department of Economics.
  4. repec:hal:journl:halshs-00194182 is not listed on IDEAS
  5. Stefano Bosi & Thomas Seegmuller, 2005. "Animal Spirits in Woodford and Reichlin Economies: The Representative Agent Does Matter," Documents de recherche 05-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
  6. Ingolf Schwarz, 2006. "Monetary Equilibria in a Baumol-Tobin Economy," Working Paper Series of the Max Planck Institute for Research on Collective Goods 2006_15, Max Planck Institute for Research on Collective Goods.
  7. repec:hal:journl:halshs-00266713 is not listed on IDEAS
  8. Ghiglino, Christian & Venditti, Alain, 2007. "Wealth inequality, preference heterogeneity and macroeconomic volatility in two-sector economies," Journal of Economic Theory, Elsevier, vol. 135(1), pages 414-441, July.
  9. Christian Ghiglino & Marielle Olszak-Duquenne, 2004. "On the Impact of Heterogeneity on Indeterminacy," Research Papers by the Department of Economics, University of Geneva 2004.09, Département des Sciences Économiques, Université de Genève.
  10. Bosi, Stefano & Seegmuller, Thomas, 2006. "Optimal cycles and social inequality: What do we learn from the Gini index?," Research in Economics, Elsevier, vol. 60(1), pages 35-46, March.

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