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Uninsured Idiosyncratic Production Risk With Borrowing Constraints

  • Francisco Covas

    ()

    (Monetary and Financial Analysis Bank of Canada)

This paper analyzes a general-equilibrium model of a heterogeneous agents economy in which the agents are subject to borrowing constraints and uninsurable idiosyncratic production risk. In particular, it addresses the impact of these frictions for aggregate capital accumulation. In contrast to other studies, the results suggest that, when entrepreneurs are poorly diversified, the underaccumulation of capital in the entrepreneurial sector of the model economy is less likely to hold, because of a strong precautionary savings motive. Furthermore, the effect of these frictions on entrepreneurial investment exacerbates the overaccumulation of capital in the non-entrepreneurial sector of the economy that is reported in Bewley models with uninsurable labor income risk

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Paper provided by Society for Computational Economics in its series Computing in Economics and Finance 2005 with number 198.

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Date of creation: 11 Nov 2005
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Handle: RePEc:sce:scecf5:198
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