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The heterogeneous welfare effects of business cycles

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  • Cho, Daeha
  • Ma, Eunseong

Abstract

This study investigates the welfare effects of business cycle fluctuations from a distributional perspective. To this end, we develop a quantitative heterogeneous-agent model which incorporates market incompleteness and non-convexity into the mapping from the time devoted to work to labor services. In this setup, households can insure against aggregate uncertainty using labor and savings and have substantially different labor supply elasticities. We find that the welfare effects are heterogeneous across households, with wealth-rich households benefiting most from business cycles. Wealth-rich households enjoy business cycles more than wealth-poor households, because they experience less volatile consumption and can enjoy higher average income through reallocating savings intertemporally.

Suggested Citation

  • Cho, Daeha & Ma, Eunseong, 2023. "The heterogeneous welfare effects of business cycles," European Economic Review, Elsevier, vol. 153(C).
    • Handle: RePEc:eee:eecrev:v:153:y:2023:i:c:s0014292123000296
    DOI: 10.1016/j.euroecorev.2023.104400
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    More about this item

    Keywords

    Business cycle; Welfare; Inequality; Volatility effect; Level effect; Non-convexity;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution

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