Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks
2012 (English)In: Econometrica, ISSN 0012-9682, E-ISSN 1468-0262, Vol. 80, no 6, 2431-2467 p.Article in journal (Refereed) Published
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.
Constrained efficiency, uninsurable shocks
Economics and Business
IdentifiersURN: urn:nbn:se:su:diva-84778DOI: 10.3982/ECTA5989ISI: 000311612700002OAI: oai:DiVA.org:su-84778DiVA: diva2:582013