Working Paper: NBER ID: w13720
Authors: Emmanuel Farhi; Ivn Werning
Abstract: This paper derives an intertemporal optimality condition for economies with private information, focusing on a class of recursive preferences. By comparing it to the situation where agents can freely save in a risk-free asset market, we derive the optimal savings distortions necessary for constrained optimality. Our recursive preferences are homogeneous and satisfy a balanced growth condition, while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution. We perform some quantitative exercises that disentangle the respective roles played by these two parameters play in opt8imal distortions and the implied welfare gains.
Keywords: No keywords provided
JEL Codes: H0
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| preferences (D11) | optimal savings distortions (H21) |
| specific class of preferences (D11) | optimal savings distortions (H21) |
| constant absolute risk aversion (D11) | constrained efficient allocation (no savings distortions) (D61) |
| homogeneous preferences (D11) | Pareto improvements (D61) |
| golden ratio (C69) | current utility and lifetime utility (D15) |
| welfare gains (D69) | optimal savings distortions (H21) |
| risk aversion (D81) | optimal savings distortions (H21) |
| intertemporal elasticity of substitution (D15) | optimal savings distortions (H21) |
| variance of consumption growth (F62) | optimal savings distortions (H21) |
| idiosyncratic uncertainty (D89) | savings distortions (H31) |