Stochastic Growth and Factor Income Risk

Abstract

This paper examines the effects of aggregate factor income risk in a tractable version of the stochastic Romer endogenous growth model. Labor supply is endogenous. The presence of labor income risk unambiguously increases savings and growth due to precautionary motives. Households not only underaccumulate but also work less along the balanced growth path of the competitive economy when compared with the Pareto-efficient allocation. The paper also discusses distributive disturbances for the case of inelastic labor supply. Here, growth effects are negative for empirically plausible correlations of the underlying shocks. Copyright 2009 The Author. Journal Compilation Verein für Socialpolitik and Blackwell Publishing Ltd.

Labor Supply and Growth Effects of Environmental Policy Under Technological Risk

“…A positive sign of r s is important for existence and uniqueness of the steady state. See also Clemens (2009) for an extensive discussion of the feasibility of balanced growth paths in continuoustime stochastic growth models with elastic labor supply.…”

“…Notable exceptions for the case of inelastic labor supply are Clemens and Soretz (2004) and Clemens (2004Clemens ( , 2005. Recently, Turnovsky and Smith (2006) and Clemens (2009) succeeded in deriving closed-form solutions for the equilibrium growth path of an economy with endogenous labor-leisure choice, where households are simultaneously subject to capital and income risk.…”

Dynamic Extensions of the Solow Growth Model (1956): Editorial

“…A stochastic version – with aggregate productivity shocks as the source of uncertainty – of the Romer (1986) endogenous growth model with human capital externalities is analyzed in the paper by Clemens (2009). By the variational principle, a stochastic Hamiltonian is set up for the optimizing household.…”