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Endogenous growth and wealth inequality under incomplete markets and idiosyncratic risk

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  • Clemens, Christiane
  • Heinemann, Maik

Abstract

This paper describes the equilibrium properties and dynamics of a model which combines the key features of the standard incomplete market model (Aiyagari, 1994) with a standard endogenous growth mechanism to gain a deeper understanding of the feedback effects between growth and wealth inequality in the presence of credit frictions and idiosyncratic risk. We characterize growth equilibria and find that a balanced growth path not necessarily exists if households are subject to ad hoc borrowing constraints. Growth, inequality, and risk are positively related in our model, but we also identify a hump-shaped relationship between welfare and risk, indicating a tradeoff relationship between risk-pooling and growth in the determination of welfare. The growth rate responds to changes in the wealth distribution and displays transitional dynamics towards the balanced growth path.

Suggested Citation

  • Clemens, Christiane & Heinemann, Maik, 2015. "Endogenous growth and wealth inequality under incomplete markets and idiosyncratic risk," Journal of Macroeconomics, Elsevier, vol. 45(C), pages 300-317.
    • Handle: RePEc:eee:jmacro:v:45:y:2015:i:c:p:300-317
    DOI: 10.1016/j.jmacro.2015.05.008
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    4. Böhl, Gregor & Fischer, Thomas, 2017. "Can taxation predict US top-wealth share dynamics?," IMFS Working Paper Series 118, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).

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    More about this item

    Keywords

    Endogenous growth; Borrowing constraints; Wealth distribution; Idiosyncratic risk; Heterogeneous agents;
    All these keywords.

    JEL classification:

    • O4 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity
    • D3 - Microeconomics - - Distribution
    • D8 - Microeconomics - - Information, Knowledge, and Uncertainty
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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