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Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality

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  • Marco Cozzi

    (Queen's University)

Abstract

This paper considers the macroeconomic implications of a se t of empirical studies finding a high degree of dispersion in preference heterogeneity. It develops a model with risk aversion heterogeneity, uninsurable idiosyncratic income risk, and self-selection into risky jobs to quantify their effects on wealth inequality. The results show that, when estimating the risk aversion distribution with the appropriate PSID data on income lotteries, the model can match the observed degree of wealth inequality in the U.S., accounting for the wealth Gini index in several cases. The model replicates well many features of the wealth distribution, such as its quintiles. However, the share of wealth held by the top 1% is still substantially lower than in the data. Quantitatively, with fairly persistent income processes, the variance of the income shocks greatly matters in generating enough wealth inequality. It is also shown that models without risk aversion heterogeneity underestimate the size of precautionary savings by up to 14 percentage points, and that they account for up to a 55% increase of the complete markets capital stock.

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  • Marco Cozzi, 2013. "Risk Aversion Heterogeneity, Risky Jobs and Wealth Inequality," 2013 Meeting Papers 842, Society for Economic Dynamics.
  • Handle: RePEc:red:sed013:842
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    Cited by:

    1. Marco Cozzi, 2014. "Heterogeneity In Macroeconomics And The Minimal Econometric Interpretation For Model Comparison," Working Paper 1333, Economics Department, Queen's University.
    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. 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.
    4. Tyler Abbot, 2017. "General Equilibrium Under Convex Portfolio Constraints and Heterogeneous Risk Preferences," Papers 1706.05877, arXiv.org, revised Jun 2018.

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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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