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Computing General Equilibrium Models with Occupational Choice and Financial Frictions

  • António Antunes


  • Tiago Cavalcanti
  • Anne Villamil

This paper establishes the existence of a stationary equilibrium and a procedure to compute solutions to a class of dynamic general equilibrium models with two important features. First, occupational choice is determined endogenously as a function of heterogeneous agent type, which is defined by an agents managerial ability and capital bequest. Heterogeneous ability is exogenous and independent across generations. In contrast, bequests link generations and the distribution of bequests evolves endogenously. Second, there is a financial market for capital loans with a deadweight intermediation cost and a repayment incentive constraint. The incentive constraint induces a non-convexity. The paper proves that the competitive equilibrium can be characterized by the bequest distribution and factor prices, and uses the monotone mixing condition to ensure that the stationary bequest distribution that arises from the agents optimal behavior across generations exists and is unique. The paper next constructs a direct, non-parametric approach to compute the stationary solution. The method reduces the domain of the policy function, thus reducing the computational complexity of the problem.

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Paper provided by East Asian Bureau of Economic Research in its series Macroeconomics Working Papers with number 22560.

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Date of creation: Jan 2006
Date of revision:
Handle: RePEc:eab:macroe:22560
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  1. Andres Erosa, 2001. "Financial Intermediation and Occupational Choice in Development," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 303-334, April.
  2. Abhijit V. Banerjee & Andrew F. Newman, 1990. "Occupational Choice and the Process of Development," Discussion Papers 911, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Krasa, Stefan & Sharma, Tridib & Villamil, Anne P., 2005. "Debt contracts and cooperative improvements," Journal of Mathematical Economics, Elsevier, vol. 41(7), pages 857-874, November.
  4. Bhattacharya, Joydeep & Betts, Caroline, 1998. "Unemployment, Credit Rationing, and Capital Accumulation: A Tale of Two Frictions," Staff General Research Papers Archive 5104, Iowa State University, Department of Economics.
  5. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," Review of Economic Studies, Oxford University Press, vol. 60(4), pages 865-888.
  6. António Antunes & Tiago Cavalcanti & Anne Villamil, 2006. "The Effect of Financial Repression & Enforcement on Entrepreneurship and Economic Development," SCAPE Policy Research Working Paper Series 0610, National University of Singapore, Department of Economics, SCAPE.
  7. Stefan Krasa & Anne P. Villamil, 2000. "Optimal Contracts when Enforcement Is a Decision Variable," Econometrica, Econometric Society, vol. 68(1), pages 119-134, January.
  8. Huw Lloyd-Ellis & Dan Bernhardt, 2000. "Enterprise, Inequality and Economic Development," Review of Economic Studies, Oxford University Press, vol. 67(1), pages 147-168.
  9. 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.
  10. John H. Boyd & Bruce D. Smith, 1995. "The evolution of debt and equity markets in economic development," Working Papers 542, Federal Reserve Bank of Minneapolis.
  11. Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-45, November.
  12. Gaetano Antinolfi & Elisabeth Huybens, 1996. "Capital Accumulation and Real Exchange Rate Behavior in a Small Open Economy with Credit Market Frictions," Working Papers 9604, Centro de Investigacion Economica, ITAM.
  13. Krasa, Stefan & Yannelis, Nicholas C, 1994. "An Elementary Proof of the Knaster-Kuratowski-Mazurkiewicz-Shapley Theorem," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 4(3), pages 467-71, May.
  14. Nancy L Stokey, 1986. "Learning-by-Doing and the Introduction of New Goods," Discussion Papers 699, Northwestern University, Center for Mathematical Studies in Economics and Management Science, revised May 1987.
  15. Antunes, Antonio R. & Cavalcanti, Tiago V. de V., 2007. "Start up costs, limited enforcement, and the hidden economy," European Economic Review, Elsevier, vol. 51(1), pages 203-224, January.
  16. Amaral, Pedro S. & Quintin, Erwan, 2006. "A competitive model of the informal sector," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1541-1553, October.
  17. John Stachurski & University of Melbourne, 2006. "Computing the Distributions of Economic Models via Simulation," Computing in Economics and Finance 2006 185, Society for Computational Economics.
  18. Antunes, António & Cavalcanti, Tiago & Villamil, Anne, 2008. "The effect of financial repression and enforcement on entrepreneurship and economic development," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 278-297, March.
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