Optimal Allocations in Growth Models with Private Information

Tom Krebs and Martin Scheffel ()

No 15650, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: This paper considers a class of growth models with idiosyncratic human capital risk and private information about individual effort choices (moral hazard). Households are infinitely-lived and have preferences that allow for a time-additive expected utility representation with a one-period utility function that is additive over consumption and effort as well as logarithmic over consumption. Human capital investment is risky due to idiosyncratic shocks that follow a Markov process with transition probabilities that depend on effort choices. The production process is represented by an aggregate production function that uses physical capital and human capital as input factors. We show that constrained optimal allocations are simple in the sense that individual effort levels and individual consumption growth rates are history-independent. Further, constrained optimal allocations are the solutions to a recursive social planner problem that is simple in the sense that exogenous shocks are the only state variables. We also show that constrained optimal allocations can be decentralized as competitive equilibrium allocations of a market economy with a simple tax- and transfer scheme. Finally, it is always optimal to subsidize human capital investment in the market economy.

Keywords: human capital risk; private information; economic growth (search for similar items in EconPapers)
JEL-codes: D51 D82 E20 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2022-10
New Economics Papers: this item is included in nep-gro and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations:

Published - published in: Economic Theory, 2024, 78, 125 - 154

Downloads: (external link)
https://docs.iza.org/dp15650.pdf (application/pdf)

Related works:
Journal Article: Optimal allocations in growth models with private information (2024)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp15650

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().