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Stationary Equilibrium In An Altruistic Two Sector Economy

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  • Subir Chattopadhyay

    (Universidad de Alicante)

Abstract

We study an overlapping generations economy with altruistic agents in which the productivity of a child?s labour endowment depends on an idiosyncratic shock and on the resources spent by her parent in education her. The parent cannot borrow but can leave a nonnegative bequest which earns a deterministic return in the capital market; this possibility mitigates the liquidity constraint faced by an agent when deciding on the level of education for her child. The shock is assumed to follow a Markov process thus allowing for serial correlation in abilities. A stationary equilibrium of the model is a situation in which the endogenously determined aggregate amounts of capital and efficiency units of labour remain constant, so factor prices are constant, the choices made by agents can be summarized via an invariant distribution, and factor supplies are determined by the mean, taken with respect to the invariant distribution, of the agents? decision rules, and all the markets clear. We develop and discuss conditions under which a stationary equilibrium exists.

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File URL: http://www.ivie.es/downloads/docs/wpasad/wpasad-2003-07.pdf
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Bibliographic Info

Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2003-07.

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Length: 38 pages
Date of creation: Feb 2003
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2003-07

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Keywords: Stationary Equilibrium; Idiosyncratic Shocks; Altruism; Two Sector Model; Human Capital;

References

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  1. 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.
  2. Schechtman, Jack & Escudero, Vera L. S., 1977. "Some results on "an income fluctuation problem"," Journal of Economic Theory, Elsevier, vol. 16(2), pages 151-166, December.
  3. Hopenhayn, Hugo A & Prescott, Edward C, 1992. "Stochastic Monotonicity and Stationary Distributions for Dynamic Economies," Econometrica, Econometric Society, vol. 60(6), pages 1387-406, November.
  4. Loury, Glenn C, 1981. "Intergenerational Transfers and the Distribution of Earnings," Econometrica, Econometric Society, vol. 49(4), pages 843-67, June.
  5. Aiyagari, S Rao, 1994. "Uninsured Idiosyncratic Risk and Aggregate Saving," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 659-84, August.
  6. Laitner, John, 1992. "Random earnings differences, lifetime liquidity constraints, and altruistic intergenerational transfers," Journal of Economic Theory, Elsevier, vol. 58(2), pages 135-170, December.
  7. Brock, William A. & Mirman, Leonard J., 1972. "Optimal economic growth and uncertainty: The discounted case," Journal of Economic Theory, Elsevier, vol. 4(3), pages 479-513, June.
  8. Gary Chamberlain & Charles A. Wilson, 2000. "Optimal Intertemporal Consumption Under Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 365-395, July.
  9. Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
  10. Aiyagari, S Rao, 1995. "Optimal Capital Income Taxation with Incomplete Markets, Borrowing Constraints, and Constant Discounting," Journal of Political Economy, University of Chicago Press, vol. 103(6), pages 1158-75, December.
  11. Feldman, Mark & Gilles, Christian, 1985. "An expository note on individual risk without aggregate uncertainty," Journal of Economic Theory, Elsevier, vol. 35(1), pages 26-32, February.
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