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Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2018 > (Research Paper) Risk-Taking, Inequality and Output in the Long-Run
March 12, 2018
We develop a tractable dynamic general equilibrium model with incomplete markets for business risk sharing, which allows for analytical characterization under Epstein-Zin preference with unitary elasticity of intertemporal substitution and Cobb-Douglas technology. Household stationary wealth dispersion is shown to follow a Pareto distribution. In this environment, we conduct comparative statics of stationary output and household inequality when the cost of business risk sharing is reduced. Enhanced risk-taking results in greater long-run outputs and real wage and a lower risk-free interest rate, while its impact on inequality is ambiguous. A quantitative analysis under the parameter values calibrated to Japanese economy shows that elimination of purchase costs for mutual funds leads to an increase in output by 1.3 percent, a decrease in risk-free rate by 15 basis points, and an increase in Gini coefficient of wealth in 2 percentage points.
Financial development; risk-free rate; safe asset; Pareto distribution; depository institutions; mutual funds
This paper was presented at the Seventh Joint Conference organized by the University of Tokyo Center for Advanced Research in Finance and the Bank of Japan Research and Statistics Department in November 2017. We are grateful to Shuhei Takahashi and conference participants for useful comments.
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