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Accounting for private information

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  • Pricila Maziero
  • Laurence Ales

Abstract

We study the quantitative properties of constrained efficient allocations in an environment 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 productivity have a component that is public information and one that is private information. The presence of private shocks has important implications for the age profiles of consumption and income. 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 benefits (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 find that for the model and data to be consistent, a large fraction of shocks to labor productivities must be private information.

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Bibliographic Info

Paper provided by Federal Reserve Bank of Minneapolis in its series Working Papers with number 663.

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Date of creation: 2008
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Handle: RePEc:fip:fedmwp:663

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Cited by:
  1. Larry E. Jones & Alice Schoonbroodt, 2010. "Complements Versus Substitutes And Trends In Fertility Choice In Dynastic Models," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 51(3), pages 671-699, 08.
  2. Pricila Maziero, 2009. "Non-Exclusive Dynamic Contracts, Competition, and the Limits of Insurance," 2009 Meeting Papers 509, Society for Economic Dynamics.
  3. Zhu, Guozhong, 2013. "Age-specific rise of income and consumption inequality," Economics Discussion Papers 2013-21, Kiel Institute for the World Economy.
  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 & Aleh Tayvinski & Matthew Weinzierl, 2010. "Preference Heterogeneity and Optimal Capital Income Taxation," STICERD - Public Economics Programme Discussion Papers 04, Suntory and Toyota International Centres for Economics and Related Disciplines, LSE.
  6. Mikhail Golosov & Maxim Troshkin & Aleh Tsyvinski, 2011. "Optimal Dynamic Taxes," NBER Working Papers 17642, National Bureau of Economic Research, Inc.

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