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Credit Constraints, Idiosyncratic Risks, and the Wealth Distribution in a Heterogeneous Agent Model

  • Chrsitiane Clemens

    ()

    (Otto-von-Guericke University Magdeburg)

  • Maik Heinemann

    ()

    (University of Lueneburg)

This paper examines the effects of credit market imperfections and idiosyncratic risks on occupational choice, capital accumulation, as well as on the income and wealth distribution in a two sectore heterogeneous agent general equilibrium model. Workers and firm owners are subject to idiosyncratic shocks. Entrepreneurship is the riskier occupation. Compared to an economy with perfect capital markets, we find for the case of serially correlated shocks that more individuals choose the entrepreneurial profession in the presence of credit consraints, and that the fluctuation between occupationa increase too. Workers and entrepreneurs with high individual productivity tend to remain in their present occupantion, whereas low productivity individuals are more likely to switch between professions. Interestingly, these results reverse if we assume iid shocks, thus indicating that the nature of the underlying shocks plays an important role for the general equilibrium effects. In general, the likelihood of entrepreneurship increases with individual wealth.

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Paper provided by University of Lüneburg, Institute of Economics in its series Working Paper Series in Economics with number 46.

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Length: 31 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:lue:wpaper:46
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  1. Joachim Wagner, 2006. "International Firm Activities and Innovation: Evidence from Knowledge Production Functions for German Firms," Working Paper Series in Economics 25, University of Lüneburg, Institute of Economics.
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