IDEAS home Printed from https://ideas.repec.org/p/red/sed012/1056.html
   My bibliography  Save this paper

Enduring Relationships in an Economy with Capital and Private Information

Author

Listed:
  • Latchezar Popov

    (The University of Virginia)

  • B Ravikumar

    (Federal Reserve Bank of St. Louis)

  • Aubhik Khan

    (Ohio State University)

Abstract

We introduce capital accumulation into an economy where individuals have private information with respect to productivity shocks. Efficient, incentive-compatible risk-sharing is achieved by conditioning current and future payoffs on the history of productivity reports. We develop a notion of efficiency, similar to that of Atkeson and Lucas (1992). The capital stock in the economy is endogenous in periods after date zero, so our notion of efficiency is minimizing the initial capital stock that is required to attain an initial distribution of promised utility. Under constant relative risk aversion and linear technology, we find that the planner allocates more capital to agents with a history of high productivity reports relative to agents with a history of low productivity reports. This higher allocation of capital occurs despite the fact that the expected marginal product of capital is the same across all agents. In contrast to the unobservable endowment model, the agent's welfare in the private information economy exceeds the value of autarchy in every period. Hence, the contract exhibits voluntary long-term participation by the agent. Risk-sharing does not require net transfers across different wealth groups, so the efficient allocation exhibits scale invariance. The allocation allows a simple decentralization through a sequence of actuarially fair insurance contracts. An alternative, long-run decentralization has implications for the risk-free interest rate in our economy.

Suggested Citation

  • Latchezar Popov & B Ravikumar & Aubhik Khan, 2012. "Enduring Relationships in an Economy with Capital and Private Information," 2012 Meeting Papers 1056, Society for Economic Dynamics.
  • Handle: RePEc:red:sed012:1056
    as

    Download full text from publisher

    File URL: https://economicdynamics.org/meetpapers/2012/paper_1056.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Feldstein, Martin & Horioka, Charles, 1980. "Domestic Saving and International Capital Flows," Economic Journal, Royal Economic Society, vol. 90(358), pages 314-329, June.
    2. S. Rao Aiyagari & Stephen D. Williamson, 1999. "Credit in a Random Matching Model with Private Information," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(1), pages 36-64, January.
    3. Bohacek Radim, 2005. "Capital Accumulation in Private Information Economies," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-24, December.
    4. Bart Taub, 1990. "The Equivalence of Lending Equilibria and Signalling-Based Insurance under Asymmetric Information," RAND Journal of Economics, The RAND Corporation, vol. 21(3), pages 388-408, Autumn.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:red:sed012:1056. 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: (Christian Zimmermann). General contact details of provider: http://edirc.repec.org/data/sedddea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.