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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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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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