The Heterogeneous Welfare Effects of Business Cycles

Eunseong Ma and Daeha Cho

No 2022rwp-204, Working papers from Yonsei University, Yonsei Economics Research Institute

Abstract: This study investigates the welfare effects of business cycle fluctuations from a distributional perspective. To this end, we develop a quantitative heterogeneous-agent model which incorporates market incompleteness and non-convexity into the mapping from the time devoted to work to labor services. In this setup, households can insure against aggregate uncertainty using labor and savings and have substantially different labor supply elasticities. We find that the welfare effects are heterogeneous across households, with wealth-rich households benefiting most from business cycles. Wealth-rich households enjoy business cycles more than wealth-poor households, because they experience less volatile consumption and can enjoy higher average income through reallocating savings intertemporally.

Keywords: Business Cycle; Welfare; Inequality; Volatility Effect; Level Effect; Nonconvexity. (search for similar items in EconPapers)
JEL-codes: D31 D61 E32 (search for similar items in EconPapers)
Pages: 40pages
Date: 2022-10
New Economics Papers: this item is included in nep-dge
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Related works:
Journal Article: The heterogeneous welfare effects of business cycles (2023)
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