Enduring Relationships in an Economy with Capital and Private Information
AbstractWe introduce capital accumulation into an economy where individuals have private information with respect to productivity shocks. Efficient, incentive-compatible risk-sharing is achieved by conditioning current and future payoffs on the history of productivity reports. We develop a notion of efficiency, similar to that of Atkeson and Lucas (1992). The capital stock in the economy is endogenous in periods after date zero, so our notion of efficiency is minimizing the initial capital stock that is required to attain an initial distribution of promised utility. Under constant relative risk aversion and linear technology, we find that the planner allocates more capital to agents with a history of high productivity reports relative to agents with a history of low productivity reports. This higher allocation of capital occurs despite the fact that the expected marginal product of capital is the same across all agents. In contrast to the unobservable endowment model, the agent's welfare in the private information economy exceeds the value of autarchy in every period. Hence, the contract exhibits voluntary long-term participation by the agent. Risk-sharing does not require net transfers across different wealth groups, so the efficient allocation exhibits scale invariance. The allocation allows a simple decentralization through a sequence of actuarially fair insurance contracts. An alternative, long-run decentralization has implications for the risk-free interest rate in our economy.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Society for Economic Dynamics in its series 2012 Meeting Papers with number 1056.
Date of creation: 2012
Date of revision:
Contact details of provider:
Postal: Society for Economic Dynamics Christian Zimmermann Economic Research Federal Reserve Bank of St. Louis PO Box 442 St. Louis MO 63166-0442 USA
Web page: http://www.EconomicDynamics.org/society.htm
More information through EDIRC
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.:
- Alvarez, Fernando & Stokey, Nancy L., 1998. "Dynamic Programming with Homogeneous Functions," Journal of Economic Theory, Elsevier, vol. 82(1), pages 167-189, September.
- Aiyagari, S.R. & Williamson, S.D., 1997.
"Credit in a Random Matching Model with Private Information,"
97-03, University of Iowa, Department of Economics.
- S. Rao Aiyagari & Stephen D. Williamson, 1999. "Credit in a Random Matching Model with Private Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 36-64, January.
- S. Rao Aiyagari & Stephen D. Williamson, 1997. "Credit in a Random Matching Model With Private Information," Game Theory and Information 9705005, EconWPA.
- Andrew Atkeson, 2010.
"International lending with moral hazard and risk of repudiation,"
Levine's Working Paper Archive
200, David K. Levine.
- Atkeson, Andrew, 1991. "International Lending with Moral Hazard and Risk of Repudiation," Econometrica, Econometric Society, vol. 59(4), pages 1069-89, July.
- Khan, A. & Ravikumar, B., 1997.
"Growth and Risk-Sharing with Private Information,"
97-13, University of Iowa, Department of Economics.
- Edward J. Green, 1994. "Individual Level Randomness in a Nonatomic Population," GE, Growth, Math methods 9402001, EconWPA.
- Townsend, Robert M, 1982. "Optimal Multiperiod Contracts and the Gain from Enduring Relationships under Private Information," Journal of Political Economy, University of Chicago Press, vol. 90(6), pages 1166-86, December.
- Bohacek Radim, 2005. "Capital Accumulation in Private Information Economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-24, December.
- Spear, Stephen E & Srivastava, Sanjay, 1987. "On Repeated Moral Hazard with Discounting," Review of Economic Studies, Wiley Blackwell, vol. 54(4), pages 599-617, October.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Christian Zimmermann).
If references are entirely missing, you can add them using this form.