Research and Studies

Home > Research and Studies > Bank of Japan Working Paper Series, Review Series, and Research Laboratory Series > Bank of Japan Working Paper Series 2018 > (Research Paper) Risk-Taking, Inequality and Output in the Long-Run

Risk-Taking, Inequality and Output in the Long-Run

March 12, 2018
Shuhei Aoki*1
Makoto Nirei*2
Kazufumi Yamana*3


We develop a tractable dynamic general equilibrium model with incomplete markets for business risk sharing, which allows for analytical characterization under Epstein-Zin preference with unitary elasticity of intertemporal substitution and Cobb-Douglas technology. Household stationary wealth dispersion is shown to follow a Pareto distribution. In this environment, we conduct comparative statics of stationary output and household inequality when the cost of business risk sharing is reduced. Enhanced risk-taking results in greater long-run outputs and real wage and a lower risk-free interest rate, while its impact on inequality is ambiguous. A quantitative analysis under the parameter values calibrated to Japanese economy shows that elimination of purchase costs for mutual funds leads to an increase in output by 1.3 percent, a decrease in risk-free rate by 15 basis points, and an increase in Gini coefficient of wealth in 2 percentage points.

JEL Classification
E2; G2

Financial development; risk-free rate; safe asset; Pareto distribution; depository institutions; mutual funds

This paper was presented at the Seventh Joint Conference organized by the University of Tokyo Center for Advanced Research in Finance and the Bank of Japan Research and Statistics Department in November 2017. We are grateful to Shuhei Takahashi and conference participants for useful comments.

  1. *1Shinshu University
  2. *2University of Tokyo
  3. *3Kanagawa University


Papers in the Bank of Japan Working Paper Series are circulated in order to stimulate discussion and comments. Views expressed are those of authors and do not necessarily reflect those of the Bank.
If you have any comment or question on the working paper series, please contact each author. When making a copy or reproduction of the content for commercial purposes, please contact the Public Relations Department ( at the Bank in advance to request permission. When making a copy or reproduction, the source, Bank of Japan Working Paper Series, should explicitly be credited.