Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks
(2012) Econometrica — Vol. 80, n° 6, p. 2431-2467 (2012)
Files
Rep2463.pdf
Open Access - Adobe PDF
- 548.82 KB
Details
- Authors
Davila Muro, Julio 
- Abstract
- We investigate the welfare properties of the one-sector neoclassical growth model with uninsurable idiosyncratic shocks. We focus on the notion of constrained efficiency used in the general equilibrium literature. Our characterization of constrained efficiency uses the first-order condition of a constrained planner’s problem. This condition highlights the margins of relevance for whether capital is too high or too low: the factor composition of income of the (consumption-) poor. Using three calibrations commonly considered in the literature, we illustrate that there can be either over- or underaccumulation of capital in steady state and that the constrained optimum may or may not be consistent with a nondegenerate long-run distribution of wealth. For the calibration that roughly matches the income and wealth distribution, the constrained inefficiency of the market outcome is rather striking: it has much too low a steady-state capital stock.
- Affiliations
University of Rochester University of Gothenburg Federal Reserve Bank of Minneapolis
Citations
Davila Muro, J., Hong, J. H., Krusell, P., & Rios-Rull, J.-V. (2012). Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks. Econometrica, 80(6), 2431-2467. https://doi.org/10.3982/ECTA5989 (Original work published 2012)