Endogenous growth and wealth inequality under incomplete markets and idiosyncratic risk

Christiane Clemens and Maik Heinemann

Journal of Macroeconomics, 2015, vol. 45, issue C, 300-317

Abstract: This paper describes the equilibrium properties and dynamics of a model which combines the key features of the standard incomplete market model (Aiyagari, 1994) with a standard endogenous growth mechanism to gain a deeper understanding of the feedback effects between growth and wealth inequality in the presence of credit frictions and idiosyncratic risk. We characterize growth equilibria and find that a balanced growth path not necessarily exists if households are subject to ad hoc borrowing constraints. Growth, inequality, and risk are positively related in our model, but we also identify a hump-shaped relationship between welfare and risk, indicating a tradeoff relationship between risk-pooling and growth in the determination of welfare. The growth rate responds to changes in the wealth distribution and displays transitional dynamics towards the balanced growth path.

Keywords: Endogenous growth; Borrowing constraints; Wealth distribution; Idiosyncratic risk; Heterogeneous agents (search for similar items in EconPapers)
JEL-codes: C6 D3 D8 D9 O4 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:45:y:2015:i:c:p:300-317

DOI: 10.1016/j.jmacro.2015.05.008

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