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Wealth inequality and dynamic stability

Ghiglino, Christian Wealth inequality and dynamic stability. UNSPECIFIED. UNSPECIFIED.

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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.

Item Type: Monograph (UNSPECIFIED)
Uncontrolled Keywords: D30, D50, D90, O41, Economic growth, Heterogeneity, Wealth and Income Inequality, Instability
Subjects: H Social Sciences > HB Economic Theory
Divisions: Faculty of Social Sciences > Economics, Department of
Depositing User: Jim Jamieson
Date Deposited: 16 Jul 2012 19:26
Last Modified: 17 Aug 2017 18:10
URI: http://repository.essex.ac.uk/id/eprint/3014

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