Incomplete Markets, Transitory Shocks And Welfare
Equilibrium allocations in models with incomplete markets are generally not Pareto-efficient, but some argue that the welfare losses from missing assets are small when time-horizons are long, agents are patient, and shocks are transitory. We show that even in the simplest infinite horizon model without aggregate uncertainty welfare losses can be substantial and do not disappear when agents become more patient. Our argument has two parts. First, we argue that in dynamic models the persistence of income shocks should increase when the length of a period in the model decreases. This is necessary to maintain realistic properties for the serial correlation in annual income. We show computationally that in this case, the welfare losses from incomplete markets remain constant even as we reduce the model period. Second, we reexamine the analysis in Levine and Zame (1999). They claim that the incomplete market welfare converges to the complete market welfare as the discount factor converges to one. We show that this critically relies on their implicit assumptions regarding debt constraints, and that there is no convergence with more realistic debt constraint assumptions.
To our knowledge, this item is not available for
download. To find whether it is available, there are three
1. Check below under "Related research" whether another version of this item is available online.
2. Check on the provider's web page whether it is in fact available.
3. Perform a search for a similarly titled item that would be available.
|Date of creation:||05 Jul 2000|
|Contact details of provider:|| Postal: CEF 2000, Departament d'Economia i Empresa, Universitat Pompeu Fabra, Ramon Trias Fargas, 25,27, 08005, Barcelona, Spain|
Fax: +34 93 542 17 46
Web page: http://enginy.upf.es/SCE/
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.:
- Michael Magill & Martine Quinzii, 2000. "Infinite horizon CAPM equilibrium," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 15(1), pages 103-138.
- Per Krusell & Anthony A. Smith, Jr., "undated".
"Income and Wealth Heterogeneity in the Macroeconomy,"
GSIA Working Papers
1997-37, Carnegie Mellon University, Tepper School of Business.
- Per Krusell & Anthony A. Smith & Jr., 1998. "Income and Wealth Heterogeneity in the Macroeconomy," Journal of Political Economy, University of Chicago Press, vol. 106(5), pages 867-896, October.
- Krusell, P & Smith Jr, A-A, 1995. "Income and Wealth Heterogeneity in the Macroeconomic," RCER Working Papers 399, University of Rochester - Center for Economic Research (RCER).
- Magill,Michael & Quinzii,Martine, 1992.
"Infinite horizon,Incomplete markets,"
Discussion Paper Serie A
384, University of Bonn, Germany.
- Magill, M. & Quinzii, M., 1992. "Infinite Horizon Incomplete Markets," DELTA Working Papers 92-26, DELTA (Ecole normale supérieure).
- Magill, M. & Quinzii, M., 1992. "Infinite Horizon Incomplete Markets," Papers 413a, California Davis - Institute of Governmental Affairs.
- Magill, M. & Quinzii, M., 1993. "Infinite Horizon Incomplete Markets," Papers 9320, Southern California - Department of Economics.
- David K Levine & William R Zame, 2000. "Risk Sharing and Market Incompleteness," Levine's Working Paper Archive 2080, David K. Levine.
- David K. Levine & William R. Zame, 1992.
"Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets,"
UCLA Economics Working Papers
666, UCLA Department of Economics.
- Levine, David K. & Zame, William R., 1996. "Debt constraints and equilibrium in infinite horizon economies with incomplete markets," Journal of Mathematical Economics, Elsevier, vol. 26(1), pages 103-131.
- David K. Levine & William Zame, 1996. "Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets," Levine's Working Paper Archive 1954, David K. Levine.
- David K. Levine & William R. Zame, 1993. "Debt Constraints and Equilibrium in Infinite Horizon Economies with Incomplete Markets," UCLA Economics Working Papers 703, UCLA Department of Economics.
- Dilip Abreu & Paul Milgrom & David Pearce, 1997.
"Information and timing in repeated partnerships,"
Levine's Working Paper Archive
636, David K. Levine.
- Constantinides, George M & Duffie, Darrell, 1996.
"Asset Pricing with Heterogeneous Consumers,"
Journal of Political Economy,
University of Chicago Press, vol. 104(2), pages 219-240, April.
- Den Haan, Wouter J., 2001.
"The importance of the number of different agents in a heterogeneous asset-pricing model,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 25(5), pages 721-746, May.
- Wouter J. Denhaan, 2000. "The Importance Of The Number Of Different Agents In A Heterogeneous Asset-Pricing Model," Computing in Economics and Finance 2000 349, Society for Computational Economics.
- 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.
- David K. Levine & William Zame, 2001.
"Does Market Incompleteness Matter,"
Levine's Working Paper Archive
78, David K. Levine.
- Judd, Kenneth L. & Kubler, Felix & Schmedders, Karl, 2000. "Computing equilibria in infinite-horizon finance economies: The case of one asset," Journal of Economic Dynamics and Control, Elsevier, vol. 24(5-7), pages 1047-1078, June.
- Heaton, John & Lucas, Deborah J, 1996.
"Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing,"
Journal of Political Economy,
University of Chicago Press, vol. 104(3), pages 443-487, June.
- John Heaton & Deborah Lucas, 1993. "Evaluating the Effects of Incomplete Markets on Risk Sharing and Asset Pricing," NBER Working Papers 4249, National Bureau of Economic Research, Inc.
- S. Rao Aiyagari, 1994.
"Uninsured Idiosyncratic Risk and Aggregate Saving,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 109(3), pages 659-684.
- Lucas, Robert E, Jr, 1978. "Asset Prices in an Exchange Economy," Econometrica, Econometric Society, vol. 46(6), pages 1429-1445, November.
- Kubler, Felix & Schmedders, Karl, 2002. "Recursive Equilibria In Economies With Incomplete Markets," Macroeconomic Dynamics, Cambridge University Press, vol. 6(02), pages 284-306, April.
- Manuel Santos, 1998. "Numerical Solution of Dynamic Economic Models," Working Papers 9804, Centro de Investigacion Economica, ITAM.
- van Wincoop, Eric, 1999.
"How big are potential welfare gains from international risksharing?,"
Journal of International Economics,
Elsevier, vol. 47(1), pages 109-135, February.
- Eric Van Wincoop, 1998. "How big are potential welfare gains from international risksharing?," Staff Reports 37, Federal Reserve Bank of New York.
When requesting a correction, please mention this item's handle: RePEc:sce:scecf0:130. 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: (Christopher F. Baum)
If references are entirely missing, you can add them using this form.