The Origin of Risk

Alexandr Kopytov, Mathieu Taschereau-Dumouchel and Zebang Xu

EconStor Preprints from ZBW - Leibniz Information Centre for Economics

Abstract: We propose a model in which risk, at both the micro and macro levels, is endogenous and driven by incentives. In the model, each firm chooses the mean and variance of its productivity process, as well as how it covaries with the productivity of other firms. Aggregate risk arises when firms select productivity processes that are correlated with one another. The theory predicts that firms with larger sales and lower markups are less volatile and less correlated with aggregate productivity. We find support for these predictions in the data. Through their impact on risk-taking decisions, distortions such as taxes and markups can make GDP more volatile in equilibrium. In a calibrated version of the model, removing distortions significantly reduces GDP volatility.

Keywords: risk; uncertainty; endogenous risk (search for similar items in EconPapers)
JEL-codes: C67 D57 D81 E32 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:esprep:341039

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