Neoclassical Growth with Limited Commitment

Dirk Krueger and Harald Uhlig ()
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Dirk Krueger: University of Pennsylvania, CEPR and NBER

PIER Working Paper Archive from Penn Institute for Economic Research, Department of Economics, University of Pennsylvania

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 state-contingent assets, subject to limited commitment constraints that rule out short-selling. For an N-state Poisson labor productivity process we characterize the household consumption-asset allocation, stationary asset distribution and aggregate capital supply. When production is Cobb-Douglas, productivity takes two values, of which one is zero, and agents have log-utility, the equilibrium interest rate, capital stock and consumption distribution is given in closed form. We therefore provide a tractable alternative to the Aiyagari incomplete markets model.

Keywords: Idiosyncratic Risk; Limited Commitment; Stationary Equilibrium (search for similar items in EconPapers)
JEL-codes: D11 D91 E21 G22 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2024-08-09
New Economics Papers: this item is included in nep-dge, nep-gro and nep-upt
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Related works:
Working Paper: Neoclassical Growth with Limited Commitment (2024)
Working Paper: Neoclassical Growth with Limited Commitment (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:pen:papers:24-021

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