Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks

Julio Dávila, Jay H. Hong (), Per Krusell and José-Victor Rios Rull ()
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Jay H. Hong: University of Pennsylvania
José-Victor Rios Rull: University of Pennsylvania, CAERP - Centro Atlantico de Estudios Rios Perez
Authors registered in the RePEc Author Service: José-Víctor Ríos-Rull

Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) from HAL

Abstract: We investigate the welfare properties of the one-sctor neoclassic growth model with uninsurable idiosyncratic shocks. We focus on the constrained efficiency notion of the general equiibrium literature, and we demonstrate constrained inefficiency for our model. We provide a characterization of constrained efficiency that uses the first-order condition of a constrained planner's problem that points to the margins of relevance for whether capital is too high or too low: the income composition of the (consumption) poor. We calibrate our benchmark model parameters governing idiosyncratic risks to the U.S. earnings and wealth distribution, and for this distribution the income of the poor is mainly composed of labor earnings. We compute the constrained-efficient allocations -including transition dynamics- for our model economy, and we conclude that the long-run capital stock in a laissez faire world is not only too low, but much too low. We also show that one can find parameterizations with different qualitative features: in one case, the steady-state capital stock is too high, and in another case no steady state exists.

Keywords: Constrained efficiency; idiosyncratic risk; neoclassical growth model; Efficacité restreinte; risques idiosyncrasiques; modèle néoclassique de croissance (search for similar items in EconPapers)
Date: 2005-07
Note: View the original document on HAL open archive server: https://shs.hal.science/halshs-00196183
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Citations: View citations in EconPapers (16)

Published in 2005

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Related works:
Journal Article: Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks (2012)
Working Paper: Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks (2012)
Working Paper: Constrainted efficiency in the neoclassical growth model with uninsurable idiosyncratic skocks (2012)
Working Paper: Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks (2012)
Working Paper: Constrainted efficiency in the neoclassical growth model with uninsurable idiosyncratic skocks (2012)
Working Paper: Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks (2012)
Working Paper: Constrainted efficiency in the neoclassical growth model with uninsurable idiosyncratic skocks (2012)
Working Paper: Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks (2005)
Working Paper: Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks (2005)
Working Paper: Constrained efficiency in the neoclassical growth model with uninsurable idiosyncratic shocks (2005)
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