Uninsured Idiosyncratic Investment Risk

32 Pages Posted: 1 Apr 2005 Last revised: 21 Jul 2022

See all articles by George-Marios Angeletos

George-Marios Angeletos

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

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Date Written: March 2005

Abstract

This paper augments the neoclassical growth model to study the macroeconomic effects of idiosyncratic investment risk. The general equilibrium is solved in closed form under standard assumptions for preferences and technologies. A simple condition is identified for incomplete markets to result in both a lower interest rate and a lower capital stock in the steady state: the elasticity of intertemporal substitution must be higher than the income share of capital. For plausible calibrations of the model, the reduction in the steady-state levels of aggregate savings and income relative to complete markets is quantitatively significant. Finally, cyclical variation in private investment risks is shown to amplify the transitional dynamics.

Suggested Citation

Angeletos, George-Marios, Uninsured Idiosyncratic Investment Risk (March 2005). NBER Working Paper No. w11180, Available at SSRN: https://ssrn.com/abstract=684706

George-Marios Angeletos (Contact Author)

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