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Financial market economy vs self-financing economy and the role of risk aversion

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  • Augier, Laurent
  • Yin, Chao

Abstract

This paper revisits the thesis of Levine (1991) on the positive contribution of the financial market on the rate of economic growth. According to the author, the stock market performs, because it facilitates the formation of capital by increasing the liquidity of the market. In contrast, the economy private financial markets would be less effective. Such a conclusion is yet far from obvious. From the model of Levine (1991), we examine the equilibrium proportion invested in high-return (illiquid) projects and we show that the self-financing economy can record a growth rate higher than that of the economy of financial markets. Regardless of the stock market, economic growth is related to the interactions between the aversion to risk and the parameters of the set of production.

Suggested Citation

  • Augier, Laurent & Yin, Chao, 2022. "Financial market economy vs self-financing economy and the role of risk aversion," International Economics, Elsevier, vol. 172(C), pages 15-28.
    • Handle: RePEc:eee:inteco:v:172:y:2022:i:c:p:15-28
    DOI: 10.1016/j.inteco.2022.08.001
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    More about this item

    Keywords

    Economic development; Financial markets; Risk aversion;
    All these keywords.

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • O16 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment; Corporate Finance and Governance
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)

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