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Risk aversion in a model of endogenous growth

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  • Ghiglino, Christian
  • Tabasso, Nicole

Abstract

Despite the evidence on incomplete financial markets and substantial risk being borne by innovators, current models of growth through creative destruction predominantly model innovators’ as risk neutral. Risk aversion is expected to reduce the incentive to innovate and we might fear that without insurance innovation completely disappears in the long run. The present paper introduces risk averse agents into an occupational choice model of endogenous growth in which insurance against failure to innovate is not available. We derive a clear negative relationship between the level of risk aversion and long run growth. Surprisingly, we show that in an equilibrium there exists a cut-off value of risk aversion below which the growth rate of the mass of innovators tends to a strictly positive constant. In this case, innovation persists on the long run and consumption per capita grows at a strictly positive rate. On the other hand, for levels of risk aversion above the cut-off value, the economy eventually stagnates.

Suggested Citation

  • Ghiglino, Christian & Tabasso, Nicole, 2016. "Risk aversion in a model of endogenous growth," Journal of Mathematical Economics, Elsevier, vol. 64(C), pages 30-40.
  • Handle: RePEc:eee:mateco:v:64:y:2016:i:c:p:30-40
    DOI: 10.1016/j.jmateco.2016.03.002
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    Keywords

    Endogenous growth; Risk aversion; Occupational choice;

    JEL classification:

    • O40 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - General
    • O41 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models
    • O43 - Economic Development, Innovation, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - Institutions and Growth

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