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On Ramsey's Conjecture: Efficient Allocations in the Neoclassical Growth Model with Private Information

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  • Espino, Emilio

    (Institute for Advanced Studies, Vienna)

Abstract

In his seminal paper of 1928, Ramsey conjectured that if agents discounted the future differently, in the long run all agents except the most patient would live at the subsistence level. The validity of this conjecture was investigated in different environments. In particular, it has been confirmed in the neoclassical growth model with dynamically complete markets. This paper studies this conjecture in a version of this model that includes private information and heterogeneous agents. A version of Bayesian Implementation is introduced and a recursive formulation of the original allocation problem is established. Efficient allocations are renegotiation-proof and the expected utility of any agent cannot go to zero with positive probability if the economy does not collapse. If the economy collapses all agents will get zero consumption forever. Thus, including any degree of private information in the neoclassical growth model will deny Ramsey's conjecture, if efficient allocations are considered.

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Bibliographic Info

Paper provided by Institute for Advanced Studies in its series Economics Series with number 154.

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Length: 40 pages
Date of creation: May 2004
Date of revision:
Handle: RePEc:ihs:ihsesp:154

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Related research

Keywords: Dynamic contracts; Capital accumulation; Private information;

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References

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  1. Aubhik Khan & B. Ravikumar, 1999. "Growth and risk-sharing with private information," Working Papers 99-12, Federal Reserve Bank of Philadelphia.
  2. Phelan, C. & Townsend, R.M., 1990. "Computing Multiperiod, Information-Constrained Optima," University of Chicago - Economics Research Center 90-13, Chicago - Economics Research Center.
  3. Ghiglino, Christian, 2002. "Introduction to a General Equilibrium Approach to Economic Growth," Journal of Economic Theory, Elsevier, vol. 105(1), pages 1-17, July.
  4. Lucas, Robert Jr. & Stokey, Nancy L., 1984. "Optimal growth with many consumers," Journal of Economic Theory, Elsevier, vol. 32(1), pages 139-171, February.
  5. Andrew Atkeson & Robert E Lucas, 2010. "On Efficient Distribution with Private Information," Levine's Working Paper Archive 2179, David K. Levine.
  6. Wang, Cheng, 1995. "Dynamic Insurance with Private Information and Balanced Budgets," Review of Economic Studies, Wiley Blackwell, vol. 62(4), pages 577-95, October.
  7. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  8. Harold L Cole & Narayana Kocherlakota, 2010. "Efficient Allocations with Hidden Income and Hidden Storage," Levine's Working Paper Archive 1909, David K. Levine.
  9. Albert Marcet & Ramon Marimon, 1992. "Communication, commitment, and growth," Discussion Paper / Institute for Empirical Macroeconomics 74, Federal Reserve Bank of Minneapolis.
  10. Huggett, Mark, 1997. "The one-sector growth model with idiosyncratic shocks: Steady states and dynamics," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 385-403, August.
  11. Phelan, Christopher, 1998. "On the Long Run Implications of Repeated Moral Hazard," Journal of Economic Theory, Elsevier, vol. 79(2), pages 174-191, April.
  12. Aubhik Khan & B. Ravikumar, 2002. "Enduring relationships in an economy with capital," Working Papers 02-5, Federal Reserve Bank of Philadelphia.
  13. 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.
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Cited by:
  1. Emilio Espino & Juan M. Sanchez, 2010. "Risk sharing, investment, and incentives in the neoclassical growth model," Economic Quarterly, Federal Reserve Bank of Richmond, issue 4Q, pages 399-416.
  2. Gian Luca Clementi & Thomas F. Cooley & Sonia B. Di Giannatale, 2010. "A Theory of Firm Decline," Levine's Working Paper Archive 661465000000000149, David K. Levine.
  3. Richard M. H. Suen, 2014. "Time Preference And The Distributions Of Wealth And Income," Economic Inquiry, Western Economic Association International, vol. 52(1), pages 364-381, 01.
  4. Thomas Hintermaier & Emilio Espino, 2005. "Asset Trading Volume in a Production Economy," 2005 Meeting Papers 363, Society for Economic Dynamics.
  5. Emilio Espino, 2012. "Investment and Insurance in an Economic Union," 2012 Meeting Papers 1176, Society for Economic Dynamics.
  6. Emilio Espino & Julian Kozlowski & Juan M. Sánchez, 2013. "Too big to cheat: efficiency and investment in partnerships," Working Papers 2013-001, Federal Reserve Bank of St. Louis.

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