Working Paper: NBER ID: w30518
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: neoclassical growth; insurance contracts; income risk
JEL Codes: E10; E21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| long-term insurance contracts (G22) | accumulation of capital stock (E22) |
| long-term insurance contracts (G22) | distribution of consumption among households (D10) |
| limited commitment (D10) | partial consumption insurance (G52) |
| partial consumption insurance (G52) | equilibrium in the model (C62) |
| income risk (G52) | capital accumulation (E22) |
| financial market structure (G10) | partial consumption insurance (G52) |
| savings behavior (D14) | aggregate capital stock (E22) |
| unique equilibrium interest rate (E43) | capital stock (E22) |