Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks
We investigate the welfare properties of the one-sector neoclassic growth model with uninsurable idiosyncratic shocks. We focus on the constrained efficiency notion of the general equilibrium 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.
|Date of creation:||23 Jul 2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Web page: http://economics.sas.upenn.edu/pier
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.:
- S. Rao Aiyagari & Ellen R. McGrattan, 1994.
"The optimal quantity of debt,"
538, Federal Reserve Bank of Minneapolis.
- Santiago Budria Rodriguez & Javier Diaz-Gimenez & Vincenzo Quadrini & Jose-Victor Rior-Rull, 2002. "Updated facts on the U.S. distributions of earnings, income, and wealth," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-35.
- Per Krusell & Anthony A. Smith, Jr., .
"Income and Wealth Heterogeneity, Portfolio Choice, and Equilibrium Asset Returns,"
GSIA Working Papers
1997-45, Carnegie Mellon University, Tepper School of Business.
- Krusell, Per & Smith, Anthony A., 1997. "Income And Wealth Heterogeneity, Portfolio Choice, And Equilibrium Asset Returns," Macroeconomic Dynamics, Cambridge University Press, vol. 1(02), pages 387-422, June.
- Tauchen, George, 1986. "Finite state markov-chain approximations to univariate and vector autoregressions," Economics Letters, Elsevier, vol. 20(2), pages 177-181.
- Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., .
"Generic inefficiency of stock market equilibrium when markets are incomplete,"
CORE Discussion Papers RP
-916, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- Geanakoplos, J. & Magill, M. & Quinzii, M. & Dreze, J., 1990. "Generic inefficiency of stock market equilibrium when markets are incomplete," Journal of Mathematical Economics, Elsevier, vol. 19(1-2), pages 113-151.
- John Geanakoplos & Michael Magill & Martine Quinzii & J. Dreze, 1988. "Generic Inefficiency of Stock Market Equilibrium When Markets Are Incomplete," Cowles Foundation Discussion Papers 863, Cowles Foundation for Research in Economics, Yale University.
- Gilbert Ghez & Gary S. Becker, 1975. "The Allocation of Time and Goods over the Life Cycle," NBER Books, National Bureau of Economic Research, Inc, number ghez75-1, May.
- Edward C. Prescott, 1986.
"Theory ahead of business cycle measurement,"
102, Federal Reserve Bank of Minneapolis.
- Edward C. Prescott, 1986. "Theory ahead of business cycle measurement," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 9-22.
- Prescott, Edward C., 1986. "Theory ahead of business-cycle measurement," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 11-44, January.
- Mark Huggett, 1995. "The one-sector growth model with idiosyncratic shocks," Discussion Paper / Institute for Empirical Macroeconomics 105, Federal Reserve Bank of Minneapolis.
- Timothy J Kehoe & David K Levine, 1993.
"Debt Constrained Asset Markets,"
Levine's Working Paper Archive
1276, David K. Levine.
- Hurd, Michael D, 1989. "Mortality Risk and Bequests," Econometrica, Econometric Society, vol. 57(4), pages 779-813, July.
- MaCurdy, Thomas E, 1981. "An Empirical Model of Labor Supply in a Life-Cycle Setting," Journal of Political Economy, University of Chicago Press, vol. 89(6), pages 1059-85, December.
- S. Rao Aiyagari, 1993.
"Uninsured idiosyncratic risk and aggregate saving,"
502, Federal Reserve Bank of Minneapolis.
- Mehra, Rajnish & Prescott, Edward C., 1985.
"The equity premium: A puzzle,"
Journal of Monetary Economics,
Elsevier, vol. 15(2), pages 145-161, March.
- Huggett, Mark, 1993. "The risk-free rate in heterogeneous-agent incomplete-insurance economies," Journal of Economic Dynamics and Control, Elsevier, vol. 17(5-6), pages 953-969.
- John M. Abowd & David Card, 1986.
"Intertemporal Labor Supply and Long Term Employment Contracts,"
NBER Working Papers
1831, National Bureau of Economic Research, Inc.
- Abowd, John M & Card, David, 1987. "Intertemporal Labor Supply and Long-term Employment Contracts," American Economic Review, American Economic Association, vol. 77(1), pages 50-68, March.
- repec:ner:carlos:info:hdl:10016/258 is not listed on IDEAS
- Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, vol. 54(3), pages 607-22, May.
- Imrohoruglu, Ayse, 1989. "Cost of Business Cycles with Indivisibilities and Liquidity Constraints," Journal of Political Economy, University of Chicago Press, vol. 97(6), pages 1364-83, December.
- Diaz, Antonia & Pijoan-Mas, Josep & Rios-Rull, Jose-Victor, 2003.
"Precautionary savings and wealth distribution under habit formation preferences,"
Journal of Monetary Economics,
Elsevier, vol. 50(6), pages 1257-1291, September.
- Josep Pijoan-Mas 2 & Antonia Díaz & José-Víctor Ríos-Rull, 2001. "Habit Formation: Inplications For The Wealth Distribution," Economics Working Papers we015114, Universidad Carlos III, Departamento de Economía.
- Kydland, Finn E., 1984. "Labor-force heterogeneity and the business cycle," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 21(1), pages 173-208, January.
- Carvajal, Andrés & Polemarchakis, Herakles, 2011. "Idiosyncratic risk and financial policy," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1569-1597, July.
- Stiglitz, Joseph E, 1982. "The Inefficiency of the Stock Market Equilibrium," Review of Economic Studies, Wiley Blackwell, vol. 49(2), pages 241-61, April.
- repec:cup:macdyn:v:1:y:1997:i:2:p:387-422 is not listed on IDEAS
When requesting a correction, please mention this item's handle: RePEc:pen:papers:05-023. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Dolly Guarini)
If references are entirely missing, you can add them using this form.