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Uninsured Idiosyncratic Production Risk With Borrowing Constraints

Author

Listed:
  • Francisco Covas

    (Monetary and Financial Analysis Bank of Canada)

Abstract

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

Suggested Citation

  • Francisco Covas, 2005. "Uninsured Idiosyncratic Production Risk With Borrowing Constraints," Computing in Economics and Finance 2005 198, Society for Computational Economics.
    • Handle: RePEc:sce:scecf5:198
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    More about this item

    Keywords

    Incomplete markets; Precautionary savings; Entrepreneurial investment; Borrowing constraints; Aggregate savings.;
    All these keywords.

    JEL classification:

    • E22 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Investment; Capital; Intangible Capital; Capacity
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • M13 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - New Firms; Startups

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