The Heterogeneous Welfare Effects of Business Cycles

This study investigates the welfare effects of business cycle fluctuations from distributional perspectives. To this end, we develop a quantitative heterogeneous-agent model which incorporates 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. Lastly, we show that the existing findings on the welfare effects of business cycles in the representative-agent literature might not hold true in our incomplete markets model