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Wealth inequality and dynamic stability

  • Christian Ghiglino

In this paper we explore the link between wealth inequality and stability in a two-sector neoclassical growth model with heterogeneous agents. The stability of the steady state depends on the various parameters of the model and in particular on individual preferences. We show that when consumers have identical preferences and the inverse of absolute risk aversion (or risk tolerance) is a strictly convex function, inequality is a factor that favors instability. In the opposite case, inequality favors stability. Our characterization also shows that whenever absolute risk tolerance is linear, as when preferences exhibit hyperbolic absolute risk aversion (HARA), wealth heterogeneity is neutral. As there is not yet evidence on the concavity of absolute risk tolerance, our results unfortunately do not lead to a unique conclusion on the sign of the effect of wealth inequality on stability.

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Paper provided by Universitaet Bern, Departement Volkswirtschaft in its series Diskussionsschriften with number dp0310.

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Date of creation: Aug 2003
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Handle: RePEc:ube:dpvwib:dp0310
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  1. Timothy J. Kehoe & David K. Levine & Paul M. Romer, 1989. "Determinacy of equilibria in dynamic models with finitely many consumers," Staff Report 118, Federal Reserve Bank of Minneapolis.
  2. Christian Ghiglino & Marielle Olszak-Duquenne, 2001. "Inequalities and fluctuations in a dynamic general equilibrium model," Economic Theory, Springer, vol. 17(1), pages 1-24.
  3. Huggett, Mark & Vidon, Edouard, 2002. "Precautionary wealth accumulation: a positive third derivative is not enough," Economics Letters, Elsevier, vol. 76(3), pages 323-329, August.
  4. Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, vol. 64(4), pages 981-92, July.
  5. Cecilia Garcia-Penalosa & Eve Caroli & Philippe Aghion, 1999. "Inequality and Economic Growth: The Perspective of the New Growth Theories," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1615-1660, December.
  6. Mark Huggett, 2004. "Precautionary Wealth Accumulation," Review of Economic Studies, Wiley Blackwell, vol. 71, pages 769-781, 07.
  7. Gollier, Christian, 2001. "Wealth Inequality and Asset Pricing," Review of Economic Studies, Wiley Blackwell, vol. 68(1), pages 181-203, January.
  8. Boldrin, Michele & Deneckere, Raymond J., 1990. "Sources of complex dynamics in two-sector growth models," Journal of Economic Dynamics and Control, Elsevier, vol. 14(3-4), pages 627-653, October.
  9. Santos, M.S., 1989. "Differentiability And Comparative Analysis In Discrete-Time Infinite-Horizon Optimization Problems," UFAE and IAE Working Papers 127-89, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
  10. Rothschild, Michael & Stiglitz, Joseph E., 1970. "Increasing risk: I. A definition," Journal of Economic Theory, Elsevier, vol. 2(3), pages 225-243, September.
  11. Frank Cowell, 1998. "Measurement of inequality," LSE Research Online Documents on Economics 2084, London School of Economics and Political Science, LSE Library.
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