Incomplete market dynamics and cross-sectional distributions

Alexis Akira Toda

Journal of Economic Theory, 2014, vol. 154, issue C, 310-348

Abstract: The size distributions of many economic variables seem to obey the double power law, that is, the power law holds in both the upper and the lower tails. I explain this emergence of the double power law—which has important economic, econometric, and social implications—using a tractable dynamic stochastic general equilibrium model with heterogeneous agents subject to aggregate and idiosyncratic investment risks. I establish theoretical properties such as existence, uniqueness, and constrained efficiency of equilibrium, and provide a numerical algorithm that is guaranteed to converge. The model is widely applicable: it allows for arbitrary homothetic CRRA recursive preferences, an arbitrary Markov process governing aggregate shocks, and an arbitrary number of technologies and assets with arbitrary portfolio constraints.

Keywords: Applied general equilibrium analysis; Emergence; Inequality; Power law; Robustness (search for similar items in EconPapers)
JEL-codes: D31 D52 D58 E21 G11 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (44)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jetheo:v:154:y:2014:i:c:p:310-348

DOI: 10.1016/j.jet.2014.09.015

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