 Heterogeneous Risk Preferences and the Welfare Cost of Business CyclesNo 1045, Working Papers from Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics. Abstract: I study the welfare cost of business cycles in a complete-markets economy where some people are more risk averse than others. Relatively more risk-averse people buy insurance against aggregate risk, and relatively less risk-averse people sell insurance. These trades reduce the welfare cost of business cycles for everyone. Indeed, the least risk-averse people bene t from business cycles. Moreover, even in nitely risk-averse people su er only nite and, in my empirical estimates, very small welfare losses. In other words, when there are complete insurance markets, aggregate uctuations in consumption are essentially irrelevant not just for the average person { the surprising nding of Lucas (1987) { but for everyone in the economy, no matter how risk averse they are. If business cycles matter, it is because they a ect productivity or interact with uninsured idiosyncratic risk, not because aggregate risk per se reduces welfare. Keywords: business cycles; risk aversion; risk sharing; heterogeneity (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: http://EconPapers.repec.org/RePEc:pri:wwseco:1045 Access Statistics for this paper More papers in Working Papers from Princeton University, Woodrow Wilson School of Public and International Affairs, Discussion Papers in Economics. |
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