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Accounting for Private Information

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  • Laurence Ales
  • Maziero Pricila

Abstract

We study the quantitative properties of constrained e¢ cient allocations in an environ- ment where risk sharing is limited by the presence of private information. We consider a life cycle version of a standard Mirrlees economy where shocks to labor productiv- ity have a component that is public information and one that is private information. The presence of private shocks has important implications for the age proÖles of con- sumption and hours. First, they introduce an endogenous dispersion of continuation utilities. As a result, consumption inequality rises with age even if the variance of the shocks does not. Second, they introduce an endogenous rise of the distortion on the marginal rate of substitution between consumption and leisure over the life cycle. This is because, as agents age, the ability to properly provide incentives for work must become less and less tied to promises of beneÖts (through either increased leisure or consumption) in future periods. Both of these features are also present in the data. We look at the data through the lens of our model and estimate the fraction of labor productivity that is private information. We Önd that for the model and data to be consistent, all of the shocks to labor productivities must be private information.

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Paper provided by Carnegie Mellon University, Tepper School of Business in its series GSIA Working Papers with number 2010-E58.

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Handle: RePEc:cmu:gsiawp:1972086957

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Postal: Tepper School of Business, Carnegie Mellon University, 5000 Forbes Avenue, Pittsburgh, PA 15213-3890
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Cited by:
  1. Larry E. Jones & Alice Schoonbroodt, 2007. "Complements versus Substitutes and Trends in Fertility Choice in Dynastic Models," NBER Working Papers 13680, National Bureau of Economic Research, Inc.
  2. Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski & Matthew Weinzierl, 2010. "Preference Heterogeneity and Optimal Capital Income Taxation," NBER Working Papers 16619, National Bureau of Economic Research, Inc.
  3. Pricila Maziero, 2009. "Non-Exclusive Dynamic Contracts, Competition, and the Limits of Insurance," 2009 Meeting Papers 509, Society for Economic Dynamics.
  4. Mark Huggett & Alejandro Badel, 2007. "Interpreting Life-Cycle Inequality Patterns asan Efficient Allocation: Mission Impossible?," Working Papers gueconwpa~07-07-03, Georgetown University, Department of Economics.
  5. Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski, 2011. "Optimal Dynamic Taxes," NBER Working Papers 17642, National Bureau of Economic Research, Inc.
  6. Zhu, Guozhong, 2013. "Age-specific rise of income and consumption inequality," Economics Discussion Papers 2013-21, Kiel Institute for the World Economy.

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