 Uninsured Idiosyncratic Investment Risk: Positive and Normative ImplicationsNo 596, 2006 Meeting Papers from Society for Economic Dynamics Abstract: The neoclassical growth model is augmented to study the macroeconomic effects of uninsured idiosyncratic investment risk. As compared to complete markets, the steady state is characterized by both a lower interest rate and a lower capital stock when the elasticity of intertemporal substitution is sufficiently high relative to the contribution of private equity in total wealth. Turning to normative implications, the constrained efficient level of investment in a two-period version of the model is higher than the equilibrium one---and hence a subsidy on investment is optimal---even in situations where the equilibrium features higher capital that the first best. While the positive results contrast with Bewley-type models, where labor-income risk necessarily leads to higher aggregate saving, the normative results highlight how idiosyncratic investment (or entrepreneurial) risk can have novel implications also for optimal taxation Keywords: idiosyncratic risk; incomplete markets; efficiency; pecuniary externality (search for similar items in EconPapers) There are no downloads for this item, see the EconPapers FAQ for hints about obtaining it. Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:red:sed006:596 Access Statistics for this paper More papers in 2006 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.