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Efficient Allocations with Hidden Income and Hidden Storage

  • Harold L Cole
  • Narayana Kocherlakota

We consider an environment in which individuals receive income shocks that are unobservable to others and can privately store resources. We provide a simple characterization of the unique efficient allocation of consumption in cases in which the rate of return on storage is sufficiently high or, alternatively, in which the worst possible outcome is sufficiently dire. We show that, unlike in environments without unobservable storage, the symmetric efficient allocation of consumption is decentralizable through a competitive asset market in which individuals trade riskfree bonds among themselves.

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Paper provided by David K. Levine in its series Levine's Working Paper Archive with number 1909.

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Date of creation: 08 Dec 2010
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Handle: RePEc:cla:levarc:1909
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  1. Recursive Macroeconomic Theory

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