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Uninsured Idiosyncratic Production Risk with Borrowing Constraints

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  • Francisco Covas

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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Bibliographic Info

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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Keywords: Economic models; Financial institutions; Financial markets;

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References

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Citations

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Cited by:
  1. Caggese, Andrea, 2012. "Entrepreneurial risk, investment, and innovation," Journal of Financial Economics, Elsevier, vol. 106(2), pages 287-307.
  2. George-Marios Angeletos & Vasia Panousi, 2011. "Financial Integration, Entrepreneurial Risk and Global Imbalances," NBER Working Papers 16761, National Bureau of Economic Research, Inc.
  3. Jonathan E. Goldberg, 2013. "Credit-crunch dynamics with uninsured investment risk," Finance and Economics Discussion Series 2013-31, Board of Governors of the Federal Reserve System (U.S.).
  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.
  5. Jonathan E. Goldberg, 2013. "Credit-crunch dynamics with uninsured investment risk," Finance and Economics Discussion Series 2013-47, Board of Governors of the Federal Reserve System (U.S.).
  6. Valentina Bosetti & Marco Maffezzoli, 2013. "Taxing Carbon under Market Incompleteness," Working Papers 2013.72, Fondazione Eni Enrico Mattei.
  7. Per Krusell, 2009. "A Global Equilibrium Model of Economy-Climate Interactions," 2009 Meeting Papers 1186, Society for Economic Dynamics.
  8. Carlson Mark A & King Thomas & Lewis Kurt, 2011. "Distress in the Financial Sector and Economic Activity," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-31, June.
  9. Vincenzo Quadrini, 2009. "Entrepreneurship in macroeconomics," Annals of Finance, Springer, vol. 5(3), pages 295-311, June.
  10. Angeletos, George-Marios & Panousi, Vasia, 2009. "Revisiting the supply side effects of government spending," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 137-153, March.
  11. Francisco Buera & Yongseok Shin, 2010. "Self-Insurance vs. Self-Financing: A Welfare Analysis of the Persistence of Shocks," 2010 Meeting Papers 1153, Society for Economic Dynamics.
  12. Alexander Karaivanov & Robert M. Townsend, 2013. "Dynamic Financial Constraints: Distinguishing Mechanism Design from Exogenously Incomplete Regimes," NBER Working Papers 19617, National Bureau of Economic Research, Inc.
  13. Vasia Panousi & George-Marios Angeletos, 2007. "Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets," 2007 Meeting Papers 545, Society for Economic Dynamics.
  14. Panousi, Vasia, 2009. "Financial Integration and Capital Accumulation," MPRA Paper 24238, University Library of Munich, Germany.
  15. Dunbar, Geoffrey, 2013. "Returns-to-scale and the equity premium puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 37(9), pages 1736-1754.
  16. Shin-Ichi Nishiyama, 2011. "How Important are Financial Shocks for the Canadian Business Cycle?," TERG Discussion Papers 276, Graduate School of Economics and Management, Tohoku University.
  17. NIREI Makoto, 2011. "Investment Risk, Pareto Distribution, and the Effects of Tax," Discussion papers 11015, Research Institute of Economy, Trade and Industry (RIETI).

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