Asset Prices and Efficiency in a Krebs Economy

Alexis Akira Toda

Review of Economic Dynamics, 2015, vol. 18, issue 4, 957-978

Abstract: I study the asset pricing implications and the efficiency of a tractable dynamic stochastic general equilibrium model with heterogeneous agents and incomplete markets along the lines of Krebs [Krebs, T., 2003. Human Capital Risk and Economic Growth. Quarterly Journal of Economics 118(2), 709-744]. Contrary to previous applications of these types of models, I find that generically the distribution of idiosyncratic shocks affects the risk premia of aggregate shocks and that the equilibrium is constrained inefficient in the sense that a planner can Pareto improve the equilibrium outcome by assigning different portfolio choices to agents. The inefficiency is caused by a 'portfolio externality': the average portfolio of the economy affects the portfolio return of each agent. The constrained efficient outcome can be achieved through linear taxes and subsidies that I characterize in closed-form. (Copyright: Elsevier)

Keywords: AK models; Constrained efficiency; Externality; Idiosyncratic risk; Incomplete markets; Optimal taxation (search for similar items in EconPapers)
JEL-codes: D52 D58 E21 E22 G11 H21 H23 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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DOI: 10.1016/j.red.2014.11.003

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