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Why Is Risk Aversion Essentially Important for Endogenous Economic Growth?

Harashima, Taiji (2020): Why Is Risk Aversion Essentially Important for Endogenous Economic Growth?

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Abstract

The familiar condition for a balanced growth path indicates that a household’s attitude toward risk plays a significantly important role for endogenous economic growth, but the mechanism behind this importance has not been sufficiently examined. In this paper, I show that in the process of endogenous growth, the decreasing rate of marginal utility is kept constant and the household’s quickness of response to new technologies determines the growth rate. Quickness of response to new technology and degree of risk aversion are quite similar. Given a constant decreasing rate of marginal utility, if on average households in a country are more cautious and respond less quickly to new technologies, firms in that country will invest less in new technologies. As a result, the endogenous economic growth rate of the country will be lower than that of others. If people respond more quickly, the growth rate will be higher.

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