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The Origin of Risk

Author

Listed:
  • Kopytov, Alexandr
  • Taschereau-Dumouchel, Mathieu
  • Xu, Zebang

Abstract

We propose a model in which risk, at both the micro and macro levels, is endogenous and driven by incentives. In the model, each firm chooses the mean and variance of its productivity process, as well as how it covaries with the productivity of other firms. Aggregate risk arises when firms select productivity processes that are correlated with one another. The theory predicts that firms with larger sales and lower markups are less volatile and less correlated with aggregate productivity. We find support for these predictions in the data. Through their impact on risk-taking decisions, distortions such as taxes and markups can make GDP more volatile in equilibrium. In a calibrated version of the model, removing distortions significantly reduces GDP volatility.

Suggested Citation

  • Kopytov, Alexandr & Taschereau-Dumouchel, Mathieu & Xu, Zebang, 2025. "The Origin of Risk," EconStor Preprints 341039, ZBW - Leibniz Information Centre for Economics.
    • Handle: RePEc:zbw:esprep:341039
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    Keywords

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    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C67 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Input-Output Models
    • D57 - Microeconomics - - General Equilibrium and Disequilibrium - - - Input-Output Tables and Analysis

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