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Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies.
2012 (English)In: Econometrica, ISSN 0012-9682, E-ISSN 1468-0262, Vol. 80, no 6, 2431-2467 p.Article in journal (Refereed) Published
Abstract [en]

We investigate the welfare properties of the one-sector neoclassical growth model with uninsurable idiosyncratic shocks. We focus on the notion of constrained efficiency used in the general equilibrium literature. Our characterization of constrained efficiency uses the first-order condition of a constrained planner's problem. This condition highlights the margins of relevance for whether capital is too high or too low: the factor composition of income of the (consumption-)poor. Using three calibrations commonly considered in the literature, we illustrate that there can be either over- or underaccumulation of capital in steady state and that the constrained optimum may or may not be consistent with a nondegenerate long-run distribution of wealth. For the calibration that roughly matches the income and wealth distribution, the constrained inefficiency of the market outcome is rather striking: it has much too low a steady-state capital stock.

Place, publisher, year, edition, pages
2012. Vol. 80, no 6, 2431-2467 p.
Keyword [en]
Constrained efficiency, uninsurable shocks
National Category
Economics and Business
URN: urn:nbn:se:su:diva-84778DOI: 10.3982/ECTA5989ISI: 000311612700002OAI: diva2:582013


Available from: 2013-01-03 Created: 2013-01-02 Last updated: 2013-01-03Bibliographically approved

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