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Growth and Labor Income Risk with Inelastic and Elastic Labor Supply

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  • Clemens, Christiane

Abstract

We discuss long-run growth in an economy which is subject to aggregate productivity shocks affecting all factors of production. We demonstrate that the presence of labor income risk unambiguously is an important determinant of long-run expected growth. The issue of dynamic inefficiency of the underlying allocation is related to the size of the risk premium on capital return. The paper also examines the effects distributive disturbances and elastic labor supply, the latter giving rise to the possibility of multiple equilibria.

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File URL: http://diskussionspapiere.wiwi.uni-hannover.de/pdf_bib/dp-305.pdf
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Bibliographic Info

Paper provided by Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät in its series Hannover Economic Papers (HEP) with number dp-305.

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Length: 31 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:han:dpaper:dp-305

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Keywords: income risk; labor supply; endogenous growth;

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References

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  1. Maurice Obstfeld, 1992. "Risk-Taking, Global Diversification, and Growth," NBER Working Papers 4093, National Bureau of Economic Research, Inc.
  2. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-57, August.
  3. Paul M Romer, 1999. "Increasing Returns and Long-Run Growth," Levine's Working Paper Archive 2232, David K. Levine.
  4. Antonio Ladron de Guevara & Salvador Ortigueira & Manuel S. Santos, 1994. "Equilibrium Dynamics in Two-Sector Models of Endogenous Growth," Working Papers, Centro de Investigacion Economica, ITAM 9403, Centro de Investigacion Economica, ITAM.
  5. Robert G. King & Sergio T. Rebelo, 2000. "Resuscitating Real Business Cycles," NBER Working Papers 7534, National Bureau of Economic Research, Inc.
  6. Amilon, Henrik & Bermin, Hans-Peter, 2003. "Welfare effects of controlling labor supply: an application of the stochastic Ramsey model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 28(2), pages 331-348, November.
  7. Christiane Clemens, 2001. "Government Expenditure and Long-Run Stochastic Growth," Computing in Economics and Finance 2001, Society for Computational Economics 133, Society for Computational Economics.
  8. Süleyman Basak, . "On the Fluctuations in Consumption and Market Returns in the Presence of Labor and Human Capital: An Equilibrium Analysis," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 10-98, Wharton School Rodney L. White Center for Financial Research.
  9. Caballero, R.J., 1988. "Consumption Puzzles And Precautionary Savings," Discussion Papers, Columbia University, Department of Economics 1988_05, Columbia University, Department of Economics.
  10. Corsetti, Giancarlo, 1997. "A portfolio approach to endogenous growth: equilibrium and optimal policy," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(10), pages 1627-1644, August.
  11. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 16(3-4), pages 427-449.
  12. Garey Ramey & Valerie A. Ramey, 1994. "Cross-Country Evidence on the Link Between Volatility and Growth," NBER Working Papers 4959, National Bureau of Economic Research, Inc.
  13. Weil, Philippe, 1993. "Precautionary Savings and the Permanent Income Hypothesis," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 60(2), pages 367-83, April.
  14. Sandmo, Agnar, 1970. "The Effect of Uncertainty on Saving Decisions," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 37(3), pages 353-60, July.
  15. Eaton, Jonathan, 1981. "Fiscal Policy, Inflation and the Accumulation of Risky Capital," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 48(3), pages 435-45, July.
  16. Salvador Ortigueira, 2000. "A dynamic analysis of an endogenous growth model with leisure," Economic Theory, Springer, Springer, vol. 16(1), pages 43-62.
  17. Clemens, Christiane & Soretz, Susanne, 1997. "Welfare Effects of Income Taxation in a Model of Stochastic Growth," Hannover Economic Papers (HEP), Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät dp-210, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  18. Levhari, David & Srinivasan, T N, 1969. "Optimal Savings under Uncertainty," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 36(106), pages 153-63, April.
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