Efficient Allocations in Dynamic Private Information Economies with Persistent Shocks: A First-Order Approach
This article studies efficient allocations in a dynamic private information economy with a continuum of idiosyncratic shocks that are persistent. I develop a first-order approach for this environment and show that the problem has a simple recursive structure that relies on only a small number of state variables, making the problem tractable. I find sufficient conditions that guarantee that the first-order approach is valid. To illustrate the first-order approach I numerically compute the efficient allocations in a Mirrleesean economy with productivity shocks that follow a random walk and verify the validity of the first-order approach. I show that persistent shocks create a new trade-off where the social planner decreases the informational rent of the agent today at the cost of providing higher insurance in the future. Copyright 2013, Oxford University Press.
Year of publication: |
2013
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Authors: | Kapicka, Marek |
Published in: |
Review of Economic Studies. - Oxford University Press. - Vol. 80.2013, 3, p. 1027-1054
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Publisher: |
Oxford University Press |
Saved in:
Saved in favorites
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