On the Possibility of Krusell-Smith Equilibria

Tobias Broer, Alexandre Kohlhas, Kurt Mitman and Kathrin Schlafmann

No 16667, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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
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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)
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