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Uninsured Idiosyncratic Production Risk with Borrowing Constraints

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Author Info
Francisco Covas

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Abstract

The author analyzes a general-equilibrium model of a heterogeneous agents economy in which the agents are subject to borrowing constraints and uninsurable idiosyncratic production risk. In particular, he addresses the impact of these frictions on entrepreneurial investment and illustrates the trade-off between production risk and precautionary savings faced by the entrepreneur. In contrast to other studies, the author's results suggest that, when entrepreneurs' earnings are poorly diversified and production risk mainly affects the total output produced, the underaccumulation of capital in the entrepreneurial sector of the model economy is less likely to hold, because of a strong precautionary savings motive. Furthermore, the presence of these frictions on entrepreneurial investment exacerbates the overaccumulation of capital in the corporate sector of the economy that is reported in Bewley models with uninsurable labour income risk.

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File URL: http://www.bankofcanada.ca/en/res/wp/2005/wp05-26.pdf
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Paper provided by Bank of Canada in its series Working Papers with number 05-26.

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Length: 37 pages
Date of creation: 2005
Date of revision:
Handle: RePEc:bca:bocawp:05-26

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Related research
Keywords: Economic models; Financial institutions; Financial markets;

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Find related papers by JEL classification:
E22 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Capital; Investment; Capacity
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
M13 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - New Firms; Startups

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Tobias J. Moskowitz & Annette Vissing-Jørgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," American Economic Review, American Economic Association, vol. 92(4), pages 745-778, September. [Downloadable!]
  2. Bewley, Truman, 1977. "The permanent income hypothesis: A theoretical formulation," Journal of Economic Theory, Elsevier, vol. 16(2), pages 252-292, December. [Downloadable!] (restricted)
  3. Angeletos, George-Marios & Calvet, Laurent-Emmanuel, 2006. "Idiosyncratic production risk, growth and the business cycle," Journal of Monetary Economics, Elsevier, vol. 53(6), pages 1095-1115, September. [Downloadable!] (restricted)
    Other versions:
  4. M. Fatih Guvenen, 2002. "Does Stockholding Provide Perfect Risk Sharing?," RCER Working Papers 490, University of Rochester - Center for Economic Research (RCER), revised Mar 2003. [Downloadable!]
    Other versions:
  5. Quadrini, Vincenzo, 1999. "The Importance of Entrepreneurship for Wealth Concentration and Mobility," Review of Income and Wealth, Blackwell Publishing, vol. 45(1), pages 1-19, March.
  6. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, 06. [Downloadable!] (restricted)
  7. Coleman, Wilbur John, II, 1990. "Solving the Stochastic Growth Model by Policy-Function Iteration," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 27-29, January.
  8. Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2001. "Asset Pricing with Idiosyncratic Risk and Overlapping Generations," CEPR Discussion Papers 3065, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  9. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & Jose-Victor Rios-Rull, 2002. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Centro de Alti­simos Estudios Ri­os Pe©rez(CAERP) 2, Centro de Altisimos Estudios Rios Perez (CAERP). [Downloadable!]
    Other versions:
  10. Tobias J. Moskowitz & Annette Vissing-Jorgensen, 2002. "The Returns to Entrepreneurial Investment: A Private Equity Premium Puzzle?," NBER Working Papers 8876, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  11. Khan, Aubhik & Ravikumar, B., 2001. "Growth and risk-sharing with private information," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 499-521, June. [Downloadable!] (restricted)
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  12. Gary Chamberlain & Charles A. Wilson, 2000. "Optimal Intertemporal Consumption Under Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 365-395, July. [Downloadable!] (restricted)
  13. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969. [Downloadable!] (restricted)
  14. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August. [Downloadable!] (restricted)
    Other versions:
Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mark A. Carlson & Thomas B. King & Kurt F. Lewis, 2009. "Distress in the financial sector and economic activity," Finance and Economics Discussion Series 2009-01, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  2. Andrea Caggese, 2006. "Entrepreneurial Risk, Investment and Innovation," Economics Working Papers 1011, Department of Economics and Business, Universitat Pompeu Fabra. [Downloadable!]
    Other versions:
  3. Vincenzo Quadrini, 2009. "Entrepreneurship in macroeconomics," Annals of Finance, Springer, vol. 5(3), pages 295-311, June. [Downloadable!] (restricted)
  4. Francisco Covas & Shigeru Fujita, 2007. "Private risk premium and aggregate uncertainty in the model of uninsurable investment risk," Working Papers 07-30, Federal Reserve Bank of Philadelphia. [Downloadable!]
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