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Abstract

Endogenous labor supply decisions are introduced in an equilibrium model of limited insurance against idiosyncratic shocks. Unlike in the standard case with exogenous labor (e.g. [Aiyagari, S.R., 1994. Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109, 659–684; Huggett, M., 1997. The one-sector growth model with idiosyncratic shocks: steady states and dynamics. Journal of Monetary Economics 39, 385–403]), labor supply is likely to be lower than under complete markets. This is due to an ex post wealth effect on labor supply (rich productive agents work fewer hours) that runs counter the precautionary savings motive. As a result, equilibrium savings and output may be lower under incomplete markets. It is also found that long-run savings remain finite even when the interest rate equals the inverse of the discount factor.

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Paper provided by Sciences Po in its series Open Access publications from Sciences Po with number info:hdl:2441/8623.

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Date of creation: Nov 2007
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Publication status: Published in ICFAI Journal of Monetary Economics (2007-11) v.54, p.2621-2635
Handle: RePEc:ner:sciepo:info:hdl:2441/8623

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Related research

Keywords: diosyncratic shocks;

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Find related papers by JEL classification:

• D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
• D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
• J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

References

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