Wealth inequality and dynamic stability

Christian Ghiglino

Diskussionsschriften from Universitaet Bern, Departement Volkswirtschaft

Abstract: In this paper we explore the link between wealth inequality and stability in a two-sector neoclassical growth model with heterogeneous agents. The stability of the steady state depends on the various parameters of the model and in particular on individual preferences. We show that when consumers have identical preferences and the inverse of absolute risk aversion (or risk tolerance) is a strictly convex function, inequality is a factor that favors instability. In the opposite case, inequality favors stability. Our characterization also shows that whenever absolute risk tolerance is linear, as when preferences exhibit hyperbolic absolute risk aversion (HARA), wealth heterogeneity is neutral. As there is not yet evidence on the concavity of absolute risk tolerance, our results unfortunately do not lead to a unique conclusion on the sign of the effect of wealth inequality on stability.

Keywords: Economic growth; Heterogeneity; Wealth and Income Inequality; Instability (search for similar items in EconPapers)
JEL-codes: D30 D50 D90 O41 (search for similar items in EconPapers)
Date: 2003-08
New Economics Papers: this item is included in nep-dev
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Citations: View citations in EconPapers (3)

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Journal Article: Wealth inequality and dynamic stability (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:ube:dpvwib:dp0310

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