Wealth inequality and dynamic stability
AbstractIn this paper we explore the link between wealth inequality and stability in a two-sector neoclassical growth model with heterogeneous agents. The stability of the steady state depends on the various parameters of the model and in particular on individual preferences. We show that when consumers have identical preferences and the inverse of absolute risk aversion (or risk tolerance) is a strictly convex function, inequality is a factor that favors instability. In the opposite case, inequality favors stability. Our characterization also shows that whenever absolute risk tolerance is linear, as when preferences exhibit hyperbolic absolute risk aversion (HARA), wealth heterogeneity is neutral. As there is not yet evidence on the concavity of absolute risk tolerance, our results unfortunately do not lead to a unique conclusion on the sign of the effect of wealth inequality on stability.
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Date of creation: Aug 2003
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Economic growth; Heterogeneity; Wealth and Income Inequality; Instability;
Other versions of this item:
- D30 - Microeconomics - - Distribution - - - General
- D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
- D90 - Microeconomics - - Intertemporal Choice - - - General
- O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
This paper has been announced in the following NEP Reports:
- NEP-DEV-2003-08-24 (Development)
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