The heterogeneous welfare effects of business cycles

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 incor-porates 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.