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Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks

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Author Info
Julio Davila () (CERMSEM, University of Pennsylvania et ECARES (ULB))
Jay H. Hong () (University of Pennsylvania)
Per Krusell () (Princeton University, IIES et CAERP)
José-Victor Rios Rull () (University of Pennsylvania et CAERP)

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Abstract

We investigate the welfare properties of the one-sector neoclassic growth model with uninsurable idiosyncratic shocks. We focus on the constrained efficiency notion of the general equilibrium literature, and we demonstrate constrained inefficiency for our model. We provide a characterization of constrained efficiency that uses the first-order condition of a constrained planner's problem that points to the margins of relevance for whether capital is too high or too low : the income composition of the (consumption) poor. We calibrate our benchmark model parameters governing idiosyncratic risks to the U.S. earnings and wealth distribution, and for this distribution the income of the poor is mainly composed of labor earnings. We compute the constrained-efficient allocations -including transition dynamics- for our model economy, and we conclude that the long-run capital stock in a laissez faire world is not only too low, but much too low. We also show that one can find parameterizations with different qualitative features : in one case, the steady-state capital stock is too high, and in another case no steady state exists.

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Paper provided by Université Panthéon-Sorbonne (Paris 1) in its series Cahiers de la Maison des Sciences Economiques with number b05066.

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Length: 52 pages
Date of creation: Jul 2005
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Handle: RePEc:mse:wpsorb:b05066

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Related research
Keywords: Constrained efficiency; idiosyncratic risk; neoclassical growth model.;

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Find related papers by JEL classification:
O41 - Economic Development, Technological Change, and Growth - - Economic Growth and Aggregate Productivity - - - One, Two, and Multisector Growth Models

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(explanations, 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.)

  1. Josep Pijoan-Mas, 2006. "Precautionary Savings or Working Longer Hours?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(2), pages 326-352, April. [Downloadable!] (restricted)
    Other versions:
  2. Arpad Abraham & Eva Carceles-Poveda, 2006. "Complete Markets, Enforcement Constraints and Intermediation," Computing in Economics and Finance 2006 320, Society for Computational Economics. [Downloadable!]
    Other versions:
  3. Narayana R. Kocherlakota, 2007. "Money and bonds: an equivalence theorem," Staff Report 393, Federal Reserve Bank of Minneapolis. [Downloadable!]
    Other versions:
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