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Neoclassical Growth with Limited Commitment

Author

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  • Dirk Krueger

    (University of Pennsylvania CEPR and NBER)

  • Harald Uhlig

    (University of Chicago CEPR and NBER)

Abstract

This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which agents can insure against idiosyncratic income risk by trading agent-shock contingent assets, subject to limited commitment constraints that rule out selling these assets short. For a general N-state Poisson labor productivity process we characterize the optimal consumption-asset allocation, the stationary asset distribution as well as the aggregate supply of capital by the household sector. For the special case in which production is Cobb-Douglas, agent labor productivity takes two values, one of which is zero, and agents have log-utility, we solve the equilibrium interest rate, capital stock and the consumption distribution in closed form. The paper therefore provides a tractable alternative to the standard incomplete markets general equilibrium model as in Aiyagari (1994).

Suggested Citation

  • Dirk Krueger & Harald Uhlig, 2024. "Neoclassical Growth with Limited Commitment," PIER Working Paper Archive 22-023, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  • Handle: RePEc:pen:papers:22-023
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    References listed on IDEAS

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    1. Gersbach, Hans & Rochet, Jean-Charles & von Thadden, Ernst-Ludwig, 2023. "Public Debt and the Balance Sheet of the Private Sector," TSE Working Papers 23-1412, Toulouse School of Economics (TSE).

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    More about this item

    Keywords

    Idiosyncratic Risk; Limited Commitment; Stationary Equilibrium;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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