Uninsured Idiosyncratic Production Risk with Borrowing Constraints

Download or read book Uninsured Idiosyncratic Production Risk with Borrowing Constraints written by Francisco Covas and published by . This book was released on 2005 with total page 29 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes a general equilibrium heterogeneous agents model that includes borrowing constraints and uninsurable idiosyncratic production risks. In particular, it addresses the impact of these frictions on entrepreneurial investment and illustrates the trade-off between productivity risk and precautionary savings faced by the entrepreneur. When the entrepreneur is poorly diversified and production risk mainly affects total output produced, it finds - in contrast to other studies - that the under-accumulation of capital in the entrepreneurial sector of the model economy is less likely to hold because of a strong precautionary savings motive. Furthermore, the presence of these frictions on entrepreneurial investment accentuates the over-accumulation of capital in the corporate sector of the economy reported in Bewley models with uninsurable labor income risk.