 Impact of Risk Aversion on Optimal Market IntegrationJournal of Economic Integration, 2016, vol. 31, issue 4, 968-994 Abstract: This paper examines the equilibrium growth rate of capital stock and social welfare under an infinite-horizon economy with productivity shocks. The analysis is conducted in an international context where the volatility of production is assumed to be endogenously determined by the degree of market integration. The evidence suggests that when risk aversion is high, endogenous productivity risks can induce precautionary savings and the over-accumulation of capital stock, whereas spillovers from integrated markets are conducive to the under-accumulation of capital stock. Only in this case does a unique equilibrium exist in which partial market integration contributes to growth and social welfare. When risk aversion is low, there exist multiple equilibria depending on the degree of market integration, and full market integration is desirable for social welfare. The model gives an explanation of the withdrawal of the United Kingdom from the European Union as an example of rational market participation decisions. Keywords: Endogenous Productivity Shocks; Optimal Market Integration; Economic Growth; Social Welfare; Risk Aversion (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:ris:integr:0704 Access Statistics for this article Journal of Economic Integration is currently edited by Seongeun Kim More articles in Journal of Economic Integration from Center for Economic Integration, Sejong University Contact information at EDIRC. |
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