Borrowing Constraints, Entrepreneurial Risks, and the Wealth Distribution in a Heterogeneous Agent Model
AbstractThis paper deals with credit market imperfections and idiosyncratic risks in a two–sector heterogeneous agent dynamic general equilibrium model of occupational choice. We focus especially on the effects of tightening financial constraints on macroeconomic performance, entrepreneurial risk–taking, and social mobility. Contrary to many models in the literature, our comparative static results cover the entire range of borrowing constraints, from complete markets to a perfectly constrained economy. In our baseline model, we find substantial gains in output, welfare, and wealth equality associated with relaxing the constraints, but argue that it might also prove worthwhile to examine the marginal gains from credit market improvements. Interestingly, the amount of entrepreneurial activity and social mobility increases if borrowing constraints become more tight. These results can be attributed to the general equilibrium nature of our approach, where optimal firm sizes and the demand for credit are determined endogenously. The comparative static results on the entrepreneurship rate and social mobility respond sensitively to a change in income persistence.
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Bibliographic InfoPaper provided by Otto-von-Guericke University Magdeburg, Faculty of Economics and Management in its series FEMM Working Papers with number 08008.
Length: 38 pages
Date of creation: Mar 2008
Date of revision:
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More information through EDIRC
DSGE model; wealth distribution; occupational choice; borrowing constraints;
Find related papers by JEL classification:
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- D3 - Microeconomics - - Distribution
- D8 - Microeconomics - - Information, Knowledge, and Uncertainty
- D9 - Microeconomics - - Intertemporal Choice
- G0 - Financial Economics - - General
- J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-03-15 (All new papers)
- NEP-BEC-2008-03-15 (Business Economics)
- NEP-CFN-2008-03-15 (Corporate Finance)
- NEP-DGE-2008-03-15 (Dynamic General Equilibrium)
- NEP-ENT-2008-03-15 (Entrepreneurship)
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