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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

We explore the accumulation of capital in the presence of limited insurance against idiosyncratic shocks, borrowing constraints and endogenous labor supply. In the exogenous labor supply case (e.g. Aiyagari 1994, Huggett 1997), the presence of limited insurance increases the demand for savings for precautionary reasons. As a consequence, capital and output are higher under incomplete markets. We show that if labor hours are endogenous, labor supply is likely to be lower under incomplete markets, because those agents who experience a high shock to productivity are ex post richer and they work fewer hours. In some cases, this wealth effect can overcome the “aggregate precautionary savings” and give rise to lower savings and output under incomplete markets.

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Paper provided by Sciences Po in its series Sciences Po publications with number 659.

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Date of creation: 29 Jan 2003
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Handle: RePEc:spo:wpmain:info:hdl:2441/8713
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  9. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
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  14. Bruce D. Smith, 2003. "Taking intermediation seriously," Proceedings, Federal Reserve Bank of Cleveland, pages 1319-1377.
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  16. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  17. Rios-Rull, Jose-Victor, 1994. "On the quantitative importance of market completeness," Journal of Monetary Economics, Elsevier, vol. 34(3), pages 463-496, December.
  18. Christopher D Carroll & Karen E Dynan & Spencer D Krane, 1999. "Unemployment Risk and Precautionary Wealth: Evidence from Households' Balance Sheets," Economics Working Paper Archive 416, The Johns Hopkins University,Department of Economics.
  19. 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.
  20. Finn E. Kydland, 1993. "Business cycles and aggregate labor-market fluctuations," Working Paper 9312, Federal Reserve Bank of Cleveland.
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