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Uninsured idiosyncratic production risk with borrowing constraints

  • Covas, Francisco

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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Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 30 (2006)
Issue (Month): 11 (November)
Pages: 2167-2190

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Handle: RePEc:eee:dyncon:v:30:y:2006:i:11:p:2167-2190
Contact details of provider: Web page: http://www.elsevier.com/locate/jedc

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  18. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
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