This research studies the dynamic interplay between the evolution of risk attitudes and the process of economic development. This is achieved by integrating an endogenous growth model with a cultural transmission mechanism that captures how parents shape the risk attitudes of their children in response to economic incentives. The model predicts that in an economy in which the material benefits associated with risky entrepreneurial activity are high, agents will over time develop more risk tolerant attitudes, which in turn will speed up the rate of economic growth. It is shown that policy interventions aiming at supporting entrepreneurial activity can play an important role for overcoming the forces of risk aversion and promoting long-run economic growth. Furthermore, the paper highlights how by inducing cultural change, such policy interventions may quantitatively have larger effects than what would be predicted by more standard models of endogenous growth.
- Endogenous growth, Earnings risk, Risk aversion, Cultural transmission