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Wealth inequality and dynamic stability

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  • Ghiglino, Christian

Abstract

In 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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Suggested Citation

  • Ghiglino, Christian, 2005. "Wealth inequality and dynamic stability," Journal of Economic Theory, Elsevier, vol. 124(1), pages 106-115, September.
    • Handle: RePEc:eee:jetheo:v:124:y:2005:i:1:p:106-115
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    9. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
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    Cited by:

    1. Bosi, Stefano & Seegmuller, Thomas, 2008. "Can heterogeneous preferences stabilize endogenous fluctuations," Journal of Economic Dynamics and Control, Elsevier, vol. 32(2), pages 624-647, February.
    2. Ghiglino, Christian & Venditti, Alain, 2007. "Wealth inequality, preference heterogeneity and macroeconomic volatility in two-sector economies," Journal of Economic Theory, Elsevier, vol. 135(1), pages 414-441, July.
    3. Hori, Katsuhiko, 2007. "Indeterminacy in a monetary economy with heterogeneous agents," MPRA Paper 49316, University Library of Munich, Germany.
    4. KONDO Atsumasa, "undated". "The Role of Productivity Growth Rates for Rising Inequality in an Economy with Heterogeneous Agents," ESRI Discussion paper series 326, Economic and Social Research Institute (ESRI).
    5. Stefano Bosi & Thomas Seegmuller, 2008. "Can Heterogeneous Preferences Stabilize Endogenous Fluctuations?," Post-Print halshs-00266713, HAL.
    6. Bosi, Stefano & Seegmuller, Thomas, 2006. "Optimal cycles and social inequality: What do we learn from the Gini index?," Research in Economics, Elsevier, vol. 60(1), pages 35-46, March.
    7. Stefano Bosi & Thomas Seegmuller, 2005. "Animal Spirits in Woodford and Reichlin Economies: The Representative Agent Does Matter," Documents de recherche 05-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    8. Stefano Bosi & Thomas Seegmuller, 2006. "Optimal Cycles and Social Inequality: What Do We Learn from the Gini Index?," Post-Print halshs-00194182, HAL.
    9. Ghiglino, Christian, 2007. "Trade, redistribution and indeterminacy," Journal of Mathematical Economics, Elsevier, vol. 43(3-4), pages 365-389, April.
    10. Ingolf Schwarz, 2006. "Monetary Equilibria in a Baumol-Tobin Economy," Discussion Paper Series of the Max Planck Institute for Research on Collective Goods 2006_15, Max Planck Institute for Research on Collective Goods.

    More about this item

    JEL classification:

    • D30 - Microeconomics - - Distribution - - - General
    • D50 - Microeconomics - - General Equilibrium and Disequilibrium - - - General
    • D90 - Microeconomics - - Micro-Based Behavioral Economics - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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