On the Possibility of Krusell-Smith Equilibria

Tobias Broer, Alexandre Kohlhas, Kurt Mitman and Kathrin Schlafmann

No 16667, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Solutions to macroeconomic models with wealth inequality and aggregate shocks often rely on the assumption of limited but common information among households. We show that this assumption is inconsistent with rational information choice for plausible information costs. To do so, we embed information choice into the workhorse heterogeneous-agent model with aggregate risk (Krusell and Smith, 1998). First, we demonstrate that the benefits of acquiring more precise information about the state of the economy depend crucially on household wealth. Second, we show that such heterogeneous incentives to acquire information combine with the strategic substitutability of savings choices to imply that equilibria in which households acquire the same information do not exist for plausible information costs. Finally, we document that a representative-agent equilibrium may not exist even in the absence of exogenous sources of wealth heterogeneity.

Keywords: Expectations; Heterogeneity; Information (search for similar items in EconPapers)
JEL-codes: C53 D83 E30 (search for similar items in EconPapers)
Date: 2021-10
References: Add references at CitEc
Citations:

Downloads: (external link)
https://cepr.org/publications/DP16667 (application/pdf)

Related works:
Journal Article: On the possibility of Krusell-Smith Equilibria (2022)
Working Paper: On the possibility of Krusell-Smith Equilibria (2022)
Working Paper: On the possibility of Krusell-Smith Equilibria (2022)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:16667

Ordering information: This working paper can be ordered from
https://cepr.org/publications/DP16667

Access Statistics for this paper

More papers in CEPR Discussion Papers from Centre for Economic Policy Research 33 Great Sutton Street, London EC1V 0DX, UK.
Bibliographic data for series maintained by CEPR ().