106 research outputs found

    INDIVISIBLE LABOR, LOTTERIES AND IDIOSYNCRATIC PRODUCTIVITY SHOCKS

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    This paper extends the indivisible-labor model by Hansen (1985) and Rogerson (1988) to include multiple consumers who differ in initial wealth and whose labor productivities are subject to idiosyncratic shocks. In the presence of idiosyncratic uncertainty, the optimal allocations for the individual employment probabilities are at corners: agents work with probability one (zero) when their productivities are high (low). As in Hansen (1985), each agent in our indivisible-labor economy behaves as if her labor choice was divisible and her utility function was linear in hours worked. However, the quasi-linearity of the social preferences, established in Hansen (1985) for the homogeneous-agent case, does not survive after the introduction of idiosyncratic shocks.indivisible labor, lotteries, idiosyncratic shocks, neoclassical growth model

    QUASI-LINEAR PREFERENCES IN THE MACROECONOMY: INDETERMINACY, HETEROGENEITY ANDTHE REPRESENTATIVE CONSUMER

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    We use aggregation theory to investigate the link between one-consumer and multi-consumer economies under a quasi-linear class of preferences. Our study is carried out in the context of the neoclassical growth model. The quasi-linear preferences considered are additive in consumption and leisure and linear in leisure. We first show that in a homogeneous agents economy, the individual hours worked are not uniquely determined. We then demonstrate that the indeterminacy can be resolved by introducing heterogeneity. For example, idiosyncratic shocks to productivities or imperfect substitutability of labor restore the uniqueness of equilibrium. As a special case, our analysis includes the indivisible labor model by Hansen (1985).Quasi-linear preferences

    INDETERMINACY IN A LOG-LINEARIZED NEOCLASSICAL ROWTH MODEL WITH QUASI-GEOMETRIC DISCOUNTING

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    This paper studies the properties of solutions to a log-linearized version of the neoclassical growth model with quasi-geometric discounting. We show that after the log-linearization, the model has indeterminacy and multiplicity of equilibria even though the original non-linear model has a unique interior solution. Specifically, in both the deterministic and stochastic cases, the log-linearized model has a continuum of steady states. In the deterministic case, there is a unique log-linear policy function leading to each steady state, while in the stochastic case, there is a continuum of log-linear policy functions, associated with each steady state. Hence, the standard log-linearization method cannot be applied for solving models with quasi-geometric discounting.quasi-geometric (quasi-hyperbolic) discounting, time inconsistency, neoclassical growth model

    HETEROGENEITY IN THE DEGREE OF QUASI-GEOMETRIC DISCOUNTING: THE DISTRIBUTIONAL IMPLICATIONS

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    This paper modifies the standard one-sector growth model with uninsurable idiosyncratic risk and liquidity constraints to include multiple types of quasi-geometric consumers. For a calibrated version of the model, we show that a modest difference between the quasi-geometric discounting parameters of types can lead to large differences in their marginal propensities to consume. Unlike the standard one-sector growth model, the model with heterogeneous quasi-geometric consumers can generate realistic degrees of wealth inequality.Time inconsistency, quasi-geometric discounting, hyperbolic discounting

    SOLVING THE NEOCLASSICAL GROWTH MODEL WITH QUASI-GEOMETRIC DISCOUNTING: NON-LINEAR EULER-EQUATION MODELS

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    The neoclassical growth model with quasi-geometric discounting is shown by Krusell and Smith (2000) to have multiple solutions. As a result, value-iterative methods fail to converge. The set of equilibria is however reduced if we restrict our attention to the interior (satisfying the Euler equation) solution. We study the performance of the grid-based and the simulation-based Euler-equation methods in the given context. We find that both methods converge to an interior solution in a wide range of parameter values, not only in the ''test'' model with the closed-form solution but also in more general settings, including those with uncertainty.quasi-geometric (hyperbolic) discounting, time-inconsistency,

    SOLVING NONLINEAR DYNAMIC STOCHASTIC MODELS: AN ALGORITHM COMPUTING VALUE FUNCTIONS BY SIMULATIONS

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    This paper presents an algorithm for solving nonlinear dynamic stochastic models that computes value function by simulations. We argue that the proposed algorithm can be a useful alternative to the existing methods in some applications.Nonlinear stochastic models; Value function; Parameterized expectations; Monte Carlo simulations; Numerical solutions

    CAPITAL-SKILL COMPLEMENTARITY AND STEADY-STATE GROWTH

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    We construct a general-equilibrium version of Krusell, Ohanian, Ríos-Rulland Violante’s (2000) model with capital-skill complementarity. To account forgrowth patterns observed in the data, we assume several sources of growthsimultaneously, specifically, exogenous growth of skilled and unskilled labor,equipment-specific technological progress, skilled and unskilled labor-augmentingtechnological progress and Hicks-neutral technological progress. We deriverestrictions that make our model consistent with steady-state growth. A calibratedversion of our model is able to account for the key growth patterns in the U.S. data,including those for capital equipment and structures, skilled and unskilled laborand output, but it fails to explain the long-run behavior of the skill premium.capital-skill complementarity, steady state growth, skill premium, growth model.

    - DIFFERENTIAL RESPONSES OF LABOR SUPPLY ACROSS PRODUCTIVITY GROUPS

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    There is a substantial amount of microeconomic evidence documenting diferential responses oflabor supply across productivity groups. In partic-ular, more productive individuals: (i) enjoy ahigher employment rate, (ii) have a lower volatility of employment and (iii) spend less time workingat home. This paper constructs a real business cycle model with permanent heterogeneity inindividual productivity. We calibrate the model with five productivity groups to match keyaggregate features of the U.S. economy. We find that the model delivers most of the properties ofthe data.Ex-ante heterogeneity, Indivisible labor, Home production

    PARAMETRIZED EXPECTATIONS ALGORITHM AND THE MOVING BOUNDS

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    Parametrized Expectation Algorithm (PEA) is a powerful tool for solving nonlinear stochastic dynamic models. However, it has an important shortcoming: it is not a contraction mapping technique and thus, does not guarantee finding the solution. We suggest a simple modification that enhances the convergence property of the algorithm. The idea is to rule out the possibility of (ex)implosive behavior by artificially restricting the simulated series within certain bounds. As the solution is refined along the iterations, the bounds are gradually removed. The modified PEA can systematically converge to the stationary solution starting from the nonstochastic steady state.Parametrized expectations algorithm; Nonlinear models;

    THE REPRESENTATIVE CONSUMER IN THE NEOCLASSICAL GROWTH MODEL WITH IDIOSYNCRATIC SHOCKS

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    This paper studies a complete-market version of the neoclassical growth model, where agents face idiosyncratic shocks to earnings. We show that if agents possess identical preferences of either the CRRA or the addilog type, then the heterogeneous-agent economy behaves as if there was a representative consumer who faces three kinds of shocks, to preferences, to technology and to labor. We calibrate and simulate the constructed representative-consumer models. We find that idiosyncratic uncertainty can have a non-negligible effect on aggregate labor-market fluctuations.neoclassical growth model, heterogeneous agents, aggregation
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