The role of the wealth distribution on output volatility
AbstractWe explore the link between wealth inequality and business cycle fluctuations in a two-sector neoclassical growth model with endogenous labor and heterogeneous agents. Assuming that wealth inequality is described by the distribution of shares of capital, we show that in the most plausible situations wealth equality is a stabilizing factor. In particular, when wealth is Pareto distributed and preferences generate non-linear absolute risk tolerance indices, a rise in the Gini index may only be associated to a rise in volatility. When individual preferences are such that the individual absolute risk tolerance indices are linear, as with HARA utility, even a low level of taste heterogeneity ensures that a rise in inequality may not reduce volatility, and this independently of the wealth distribution. Finally, we note that such a clear result is at odd with the existing related literature.
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Bibliographic InfoPaper provided by University of Essex, Department of Economics in its series Economics Discussion Papers with number 653.
Date of creation: 21 May 2008
Date of revision:
Postal: Discussion Papers Administrator, Department of Economics, University of Essex, Wivenhoe Park, Colchester CO4 3SQ, U.K.
Other versions of this item:
- Christian Ghiglino & Alain Venditti, 2008. "The role of the wealth distribution on output volatility," Working Papers halshs-00281379, HAL.
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