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Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality

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  • Cozzi, Marco

Abstract

This paper considers the macroeconomic implications of a set of empirical studies finding a high degree of dispersion in preferences for risk. It develops a model with risk aversion heterogene- ity, uninsurable idiosyncratic income risk, and (with or without) self-selection into risky jobs to quantify their effects on the distribution of wealth. The results show that the role of risk aversion heterogeneity is quantitatively important. When estimating the risk aversion distribution with the appropriate PSID data on income lotteries, the model matches the observed degree of wealth inequality in the U.S., accounting for both the wealth Gini index and other key features of the wealth distribution. It is also shown that neglecting risk preference heterogeneity has a first order effect on the aggregate allocations.

Suggested Citation

  • Cozzi, Marco, 2012. "Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality," Queen's Economics Department Working Papers 274550, Queen's University - Department of Economics.
    • Handle: RePEc:ags:quedwp:274550
    DOI: 10.22004/ag.econ.274550
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    Cited by:

    1. Doepke, Matthias & Zilibotti, Fabrizio, 2014. "Culture, Entrepreneurship, and Growth," Handbook of Economic Growth, in: Philippe Aghion & Steven Durlauf (ed.), Handbook of Economic Growth, edition 1, volume 2, chapter 0, pages 1-48, Elsevier.
    2. Boitani, Andrea & Punzo, Chiara, 2019. "Banks’ leverage behaviour in a two-agent new Keynesian model," Journal of Economic Behavior & Organization, Elsevier, vol. 162(C), pages 347-359.
    3. Gianluca Femminis, 2019. "Risk aversion heterogeneity and the investment–uncertainty relationship," Journal of Economics, Springer, vol. 127(3), pages 223-264, August.
    4. Cozzi, Marco, 2014. "Heterogeneity in Macroeconomics and the Minimal Econometric Interpretation for Model Comparison," Queen's Economics Department Working Papers 274659, Queen's University - Department of Economics.
    5. Tyler Abbot, 2017. "General Equilibrium Under Convex Portfolio Constraints and Heterogeneous Risk Preferences," Papers 1706.05877, arXiv.org, revised Jun 2018.
    6. Christelis, Dimitris & Georgarakos, Dimitris & Jappelli, Tullio & Kenny, Geoff, 2025. "Wealth shocks and portfolio choice," Journal of Monetary Economics, Elsevier, vol. 149(C).
    7. Park, Seonyoung & Shin, Donggyun, 2020. "Welfare consequences of rising wage risk in the United States: Self-selection into risky jobs and family labor supply adjustments," Working Paper Series 7967, Victoria University of Wellington, School of Economics and Finance.
    8. Michael Patrick Curran & Scott J. Dressler, 2019. "Preference Heterogeneity, Inflation, and Welfare," Villanova School of Business Department of Economics and Statistics Working Paper Series 40, Villanova School of Business Department of Economics and Statistics.

    More about this item

    Keywords

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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models

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