Enduring Relationships in an Economy with Capital and Private Information

Latchezar Popov, B Ravikumar and Aubhik Khan
Additional contact information
Latchezar Popov: The University of Virginia

No 1056, 2012 Meeting Papers from Society for Economic Dynamics

Abstract: We introduce capital accumulation into an economy where individuals have private information with respect to productivity shocks. Efficient, incentive-compatible risk-sharing is achieved by conditioning current and future payoffs on the history of productivity reports. We develop a notion of efficiency, similar to that of Atkeson and Lucas (1992). The capital stock in the economy is endogenous in periods after date zero, so our notion of efficiency is minimizing the initial capital stock that is required to attain an initial distribution of promised utility. Under constant relative risk aversion and linear technology, we find that the planner allocates more capital to agents with a history of high productivity reports relative to agents with a history of low productivity reports. This higher allocation of capital occurs despite the fact that the expected marginal product of capital is the same across all agents. In contrast to the unobservable endowment model, the agent's welfare in the private information economy exceeds the value of autarchy in every period. Hence, the contract exhibits voluntary long-term participation by the agent. Risk-sharing does not require net transfers across different wealth groups, so the efficient allocation exhibits scale invariance. The allocation allows a simple decentralization through a sequence of actuarially fair insurance contracts. An alternative, long-run decentralization has implications for the risk-free interest rate in our economy.

Date: 2012
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://red-files-public.s3.amazonaws.com/meetpapers/2012/paper_1056.pdf (application/pdf)

Related works:
Working Paper: Enduring Relationships in an Economy with Capital and Private Information (2020)
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:red:sed012:1056

Access Statistics for this paper

More papers in 2012 Meeting Papers from Society for Economic Dynamics Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA. Contact information at EDIRC.
Bibliographic data for series maintained by Christian Zimmermann ().