Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/315460 
Year of Publication: 
2024
Citation: 
[Journal:] Mathematics and Financial Economics [ISSN:] 1862-9660 [Volume:] 18 [Issue:] 2 [Publisher:] Springer [Place:] Berlin, Heidelberg [Year:] 2024 [Pages:] 379-411
Publisher: 
Springer, Berlin, Heidelberg
Abstract: 
We develop a dynamic model economy where self-employed entrepreneurs allocate their net worth to their firm capital and risk-less government bonds, facing borrowing constraints, uninsurable labour endowment and capital depreciation risk. We derive a numerical approximation of the model’s equilibrium and compare it with a benchmark economy with no capital risk. Unlike labour endowment risk, capital risk reduces aggregate capital accumulation and wages and generates a positive risk premium. Low- (high-) net-worth entrepreneurs, whose consumption depends primarily on labour (financial) income, hold higher (lower) capital risk exposure. These patterns exacerbate inequality by increasing the share of financially constrained individuals and fattening the tails of the net worth distribution. Fiscal policy affects these outcomes by redistributing resources and affecting the risk premium. Capital tax cuts benefit more low- or high-net-worth entrepreneurs, depending on whether taxes on bonds or labour income finance them.
Subjects: 
Capital risk
Fiscal policy
Incomplete market
Net worth distribution
JEL: 
C61
E21
E62
G11
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by Logo
Document Type: 
Article
Document Version: 
Published Version

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