Risk sharing, investment, and incentives in the neoclassical growth model
AbstractWe first study growth and risk sharing in a stochastic growth model with preference shocks and two risk-averse agents. In periods in which one of the agents needs extra consumption (insurance), it is socially optimal to reduce the consumption of the other agent (redistribution) and also to accumulate fewer resources for the future (disinvestment). The latter hurts growth while the former only affects the distribution of aggregate consumption. Then, to analyze if information matters, we study if the same allocation would be implementable under private information. We find that it depends on the state of the economy. The provision of insurance that is implemented by reducing capital accumulation deteriorates the prospects of all agents in the economy and thus helps to alleviate informational frictions. The size of redistribution versus disinvestment and the outlook of economic growth at the time of disinvestment affects the possibilities of implementing the best possible allocation when the preference shock is private information. Therefore, we conjecture that under private information the best allocation compatible with incentives would tend to hurt growth and to concentrate resources in agents with private information in order to provide incentives to report the shock truthfully.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of Richmond in its journal Economic Quarterly.
Volume (Year): (2010)
Issue (Month): 4Q ()
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Greenwood, Jeremy & Sanchez, Juan M & Wang, Cheng, 2007.
"Financing Development: The Role of Information Costs,"
Staff General Research Papers
12848, Iowa State University, Department of Economics.
- Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2010. "Financing Development: The Role of Information Costs," American Economic Review, American Economic Association, vol. 100(4), pages 1875-91, September.
- Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2007. "Financing Development: The Role of Information Costs," Economie d'Avant Garde Research Reports 14, Economie d'Avant Garde.
- Jeremy Greenwood & Juan M. Sánchez & Cheng Wang, 2010. "Financing development: the role of information costs," Working Papers 2010-024, Federal Reserve Bank of St. Louis.
- Jeremy Greenwood, 2007. "Financing Development: The Role of Information Costs," 2007 Meeting Papers 171, Society for Economic Dynamics.
- Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2007. "Financing Development: The Role of Information Costs," NBER Working Papers 13104, National Bureau of Economic Research, Inc.
- Jeremy Greenwood & Juan M. Sanchez & Cheng Wang, 2009. "Financing development : the role of information costs," Working Paper 08-08, Federal Reserve Bank of Richmond.
- Aubhik Khan & B. Ravikumar, 1998.
"Growth and Risk-Sharing with Private Information,"
- Thomas, Jonathan & Worrall, Tim, 1990. "Income fluctuation and asymmetric information: An example of a repeated principal-agent problem," Journal of Economic Theory, Elsevier, vol. 51(2), pages 367-390, August.
- Sorger, Gerhard, 2002. "On the Long-Run Distribution of Capital in the Ramsey Model," Journal of Economic Theory, Elsevier, vol. 105(1), pages 226-243, July.
- Espino, Emilio, 2005.
"On Ramsey's conjecture: efficient allocations in the neoclassical growth model with private information,"
Journal of Economic Theory,
Elsevier, vol. 121(2), pages 192-213, April.
- Espino, Emilio, 2004. "On Ramsey's Conjecture: Efficient Allocations in the Neoclassical Growth Model with Private Information," Economics Series 154, Institute for Advanced Studies.
- Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
- Robert E. Hall, 1998.
"Macroeconomic Fluctuations and the Allocation of Time,"
NBER Working Papers
5933, National Bureau of Economic Research, Inc.
- Hall, Robert E, 1997. "Macroeconomic Fluctuations and the Allocation of Time," Journal of Labor Economics, University of Chicago Press, vol. 15(1), pages S223-50, January.
- Chatterjee, Satyajit, 1994. "Transitional dynamics and the distribution of wealth in a neoclassical growth model," Journal of Public Economics, Elsevier, vol. 54(1), pages 97-119, May.
- Beker, Pablo F. & Espino, Emilio, 2011.
"The dynamics of efficient asset trading with heterogeneous beliefs,"
Journal of Economic Theory,
Elsevier, vol. 146(1), pages 189-229, January.
- Pablo F Beker & Emilio Espino, 2007. "The Dynamics of Efficient Asset Trading with Heterogeneous Beliefs," Levine's Bibliography 122247000000001715, UCLA Department of Economics.
- Wang, Cheng, 1997. "Incentives, CEO Compensation and Shareholder Wealth in a Dynamic Agency Model," Staff General Research Papers 5170, Iowa State University, Department of Economics.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (William Perkins).
If references are entirely missing, you can add them using this form.