Capital Market Risk and the Dynamics of the Income Distribution

This paper introduces a dynamic model of the wealth distribution with risk aversion and aggre-gate risk in the capital market. It shows that aggregate risk increases the barriers to growth. It gives sufficient conditions for the long-run distribution of wealth to be independent of the initial income distribution. Credit rationing in the long run is consistent with these conditions. An arbitrarily small amount of aggregate uncertainty can change an economy from one where the initial conditions do matter, to one in which the long-run behaviour is independent of the initial conditions. 1