Constrained Efficiency in the Neoclassical Growth Model With Uninsurable Idiosyncratic Shocks

AuthorCount:4;
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.

Hong, Jay H. (author)
Krusell, PerGothenburg University,Göteborgs universitet,Stockholms universitet,Institutet för internationell ekonomi,Institutionen för nationalekonomi med statistik,Department of Economics(Swepub:gu)xkrupe (author)
Rios-Rull, Jose-Victor (author)
Stockholms universitetInstitutet för internationell ekonomi (creator_code:org_t)

By the author/editor: Davila, Julio; Hong, Jay H.; Krusell, Per; Rios-Rull, Jose- ...

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