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Incomplete Markets, Labor Supply and Capital Accumulation

  • Albert Marcet

    (Department of Economics)

  • Francesc Obiols-Homs

    (Universitat Autonoma de Barcelona)

  • Philippe Weil

    (Département d'économie)

Endogenous labor supply decisions are introduced in an equilibrium model of limited insurance against idiosyncratic shocks. Unlike in the standard case with exogenous labor (e.g. [Aiyagari, S.R., 1994. Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109, 659–684; Huggett, M., 1997. The one-sector growth model with idiosyncratic shocks: steady states and dynamics. Journal of Monetary Economics 39, 385–403]), labor supply is likely to be lower than under complete markets. This is due to an ex post wealth effect on labor supply (rich productive agents work fewer hours) that runs counter the precautionary savings motive. As a result, equilibrium savings and output may be lower under incomplete markets. It is also found that long-run savings remain finite even when the interest rate equals the inverse of the discount factor.

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Paper provided by Sciences Po in its series Sciences Po publications with number info:hdl:2441/8623.

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Date of creation: Nov 2007
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Publication status: Published in ICFAI Journal of Monetary Economics, 2007, vol. 54, pp.2621-2635
Handle: RePEc:spo:wpmain:info:hdl:2441/8623
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  1. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  2. 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.
  3. S. Rao Aiyagari, 1994. "Optimal capital income taxation with incomplete markets, borrowing constraints, and constant discounting," Working Papers 508, Federal Reserve Bank of Minneapolis.
  4. Francesc Obiols-Homs, 2003. "Incomplete Unemployment Insurance and Aggregate Fluctuations," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(3), pages 602-636, July.
  5. Christopher D. Carroll & Karen E. Dynan & Spencer D. Krane, 1999. "Unemployment risk and precautionary wealth: evidence from households' balance sheets," Finance and Economics Discussion Series 1999-15, Board of Governors of the Federal Reserve System (U.S.).
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  12. Carroll, Christopher D, 1994. "How Does Future Income Affect Current Consumption?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 111-47, February.
  13. Jappelli, Tullio & Pagano, Marco, 1992. "Saving, Growth and Liquidity Constraints," CEPR Discussion Papers 662, C.E.P.R. Discussion Papers.
  14. S. Rao Aiyagari, 1993. "Uninsured idiosyncratic risk and aggregate saving," Working Papers 502, Federal Reserve Bank of Minneapolis.
  15. Bruce D. Smith, 2003. "Taking intermediation seriously," Proceedings, Federal Reserve Bank of Cleveland, pages 1319-1377.
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  27. Douglas Clement, 2003. "Accounting for the rich," The Region, Federal Reserve Bank of Minneapolis, issue Jun, pages 8-11, 48-52.
  28. Huggett, Mark, 1997. "The one-sector growth model with idiosyncratic shocks: Steady states and dynamics," Journal of Monetary Economics, Elsevier, vol. 39(3), pages 385-403, August.
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  30. Gary Chamberlain & Charles A. Wilson, 2000. "Optimal Intertemporal Consumption Under Uncertainty," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 3(3), pages 365-395, July.
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