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Risk Aversion in a Model of Endogenous Growth

Tabasso, N and Ghiglino, C (2016) Risk Aversion in a Model of Endogenous Growth Journal of Mathematical Economics..

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Despite the evidence on incomplete financial markets and substantial risk being borne by innovators, current models of growth through creative destruction predominantly model innovators’ as risk neutral. Risk aversion is expected to reduce the incentive to innovate and we might fear that without insurance innovation completely disappears in the long run. The present paper introduces risk averse agents into an occupational choice model of endogenous growth in which insurance against failure to innovate is not available. We derive a clear negative relationship between the level of risk aversion and long run growth. Surprisingly, we show that in an equilibrium there exists a cut-off value of risk aversion below which the growth rate of the mass of innovators tends to a strictly positive constant. In this case, innovation persists on the long run and consumption per capita grows at a strictly positive rate. On the other hand, for levels of risk aversion above the cut-off value, the economy eventually stagnates.

Item Type: Article
Subjects : subj_Economics
Divisions : Faculty of Arts and Social Sciences > School of Economics
Authors :
Date : 11 November 2016
Copyright Disclaimer : © 2016 This manuscript version is made available under the CC-BY-NC-ND 4.0 license
Related URLs :
Additional Information : Full text may be available at a later date.
Depositing User : Symplectic Elements
Date Deposited : 11 May 2016 12:56
Last Modified : 11 May 2016 12:57

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