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Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks

  • Julio Davila

    ()

    (CERMSEM - CEntre de Recherche en Mathématiques, Statistique et Économie Mathématique - CNRS : UMR8095 - Université Paris I - Panthéon-Sorbonne, European Centre for Advanced Research in Economics and Statistics (ECARES) - Université Libre de Bruxelles)

  • Jay H. Hong

    ()

    (University of Pennsylvania - University of Pennsylvania)

  • Per Krusell

    ()

    (CAERP - Centro Atlantico de Estudios Rios Perez)

  • José-Victor Rios Rull

    ()

    (University of Pennsylvania - University of Pennsylvania, CAERP - Centro Atlantico de Estudios Rios Perez)

We investigate the welfare properties of the one-sctor neoclassic growth model with uninsurable idiosyncratic shocks. We focus on the constrained efficiency notion of the general equiibrium 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 HAL in its series Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) with number halshs-00196183.

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Date of creation: Jul 2005
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Handle: RePEc:hal:cesptp:halshs-00196183
Note: View the original document on HAL open archive server: http://halshs.archives-ouvertes.fr/halshs-00196183
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