Working Paper: CEPR ID: DP17757
Authors: Dirk Krueger; Harald Uhlig
Abstract: This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which agents can insure against idiosyncratic income risk by trading agent-shock contingent assets, subject to limited commitment constraints that rule out selling these assets short. For a general N-state Poisson labor productivity process we characterize the optimal consumption-asset allocation, the stationary asset distribution as well as the aggregate supply of capital by the household sector. For the special case in which production is Cobb-Douglas, agent labor productivity takes two values, one of which is zero, and agents have log-utility, we solve the equilibrium interest rate, capital stock and the consumption distribution in closed form. The paper therefore provides a tractable alternative to the standard incomplete markets general equilibrium model as in Aiyagari (1994).
Keywords: Idiosyncratic risk; Limited commitment; Stationary equilibrium
JEL Codes: E21; D11; D91; G22
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Household productivity (D13) | Consumption insurance (G52) |
| Consumption insurance (G52) | Stationary equilibrium (D50) |
| Income risk (G52) | Equilibrium interest rate (E43) |
| Income risk (G52) | Capital stock (E22) |
| Limited commitment (D86) | Consumption insurance (G52) |
| Limited commitment (D86) | Frontloading of payments (G51) |
| Frontloading of payments (G51) | Insurance against low income realizations (G52) |
| Model parameters (C51) | Stationary equilibrium (D50) |