Wealth inequality and dynamic stability

Ghiglino, Christian (August 2003). Wealth inequality and dynamic stability (Diskussionsschriften 03-10). Bern: Universität Bern Volkswirtschaftliches Institut

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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.

Item Type:

Working Paper

Division/Institute:

03 Faculty of Business, Economics and Social Sciences > Department of Economics

UniBE Contributor:

Ghiglino, Christian

Subjects:

300 Social sciences, sociology & anthropology > 330 Economics

Series:

Diskussionsschriften

Publisher:

Universität Bern Volkswirtschaftliches Institut

Language:

English

Submitter:

Aline Lehnherr

Date Deposited:

16 Jul 2020 16:16

Last Modified:

06 Aug 2020 14:18

JEL Classification:

D30, D50, D90, O41

BORIS DOI:

10.7892/boris.144078

URI:

https://boris.unibe.ch/id/eprint/144078

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