Dirk Krueger, University of Pennsylvania
Department seminar. Dirk Krueger is a Professor at the University of Pennsylvania. He will present a paper entitled "Neoclassical Growth with Long-Term One-Sided Commitment Contracts", co-authored by Harald Uhlig.
This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which households seek to insure against idiosyncratic income risk through long-term insurance contracts. Insurance companies operating in perfectly competitive markets can commit to future contractual obligations, whereas households cannot. For the case in which household income takes two values, one of which is zero, and where households have CRRA preferences we provide a complete analytical characterization of the optimal consumption insurance contract as well as the stationary consumption distribution. Under parameter restrictions, we show that there is a unique stationary equilibrium with partial consumption insurance if households have log-preferences, and that there are two equilibria with non-log CRRA preferences. We also demonstrate analytically that the stationary consumption distribution has a Pareto form, truncated by a lower and an upper mass point. For the logarithmic case the unique equilibrium interest rate (capital stock) is strictly decreasing (increasing) in income risk. Thus the paper provides an analytically
tractable alternative to the standard incomplete markets general equilibrium model developed in Aiyagari (1994) by retaining its physical structure, but substituting the assumed incomplete asset markets structure with one in which limits to consumption
insurance emerge endogenously, as in Krueger and Uhlig (2006). Thus our model provides an alternative, analytically tractable stationary general equilibrium model with idiosyncratic income income risk.
Host: Hans Holter