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EFFECTS OF DIFFERENCES IN RISK AVERSION ON THE DISTRIBUTION OF WEALTH

Published online by Cambridge University Press:  01 November 2004

DANIELE COEN-PIRANI
DANIELE COEN-PIRANI
Affiliation:
Carnegie Mellon University
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Abstract

This paper studies the role played by differences in risk aversion in affecting the long-run distribution of wealth across agents in the context of an endowment economy. The economy is populated by two types of Epstein-Zin agents who differ only in their attitudes toward risk. By choosing riskier portfolio strategies, less-risk-averse agents enjoy returns on their investments characterized by a higher mean and a higher variance than the ones enjoyed by more-risk-averse agents. The former effect tends to make less-risk-averse agents wealthier over time, whereas the latter tends to make them poorer. The paper shows that, contrary to the results obtained using standard expected utility preferences, for some parameter values the long-run distribution of wealth is dominated by more-risk-averse agents.

Keywords

Wealth DistributionRisk AversionHeterogeneous Agents
Type
ARTICLES
Information
Macroeconomic Dynamics , Volume 8 , Issue 5 , November 2004 , pp. 617 - 632
Copyright
© 2004 Cambridge University Press

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