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Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks

Davila, Julio, Jay H., Krusell, Krusell, Per and Ríos-Rull, Jose-Víctor (2012) Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks. Econometrica, 80 (6). pp. 2431-2467. ISSN 0012-9682

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Identification Number: 10.3982/ECTA5989

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.

Item Type: Article
Official URL: http://onlinelibrary.wiley.com/doi/10.3982/ECTA598...
Additional Information: © 2012 The Econometric Society
Divisions: LSE
Subjects: H Social Sciences > H Social Sciences (General)
H Social Sciences > HB Economic Theory
JEL classification: P - Economic Systems > P3 - Socialist Institutions and Their Transitions > P34 - Financial Economics
Date Deposited: 01 Jul 2014 11:28
Last Modified: 08 Oct 2019 11:19
URI: http://eprints.lse.ac.uk/id/eprint/57239

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