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Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality

  • Marco Cozzi


    (Queen's University)

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 heterogeneity, 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.

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Paper provided by Queen's University, Department of Economics in its series Working Papers with number 1286.

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Length: 56 pages
Date of creation: Dec 2012
Date of revision:
Handle: RePEc:qed:wpaper:1286
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