CONSTRAINED EFFICIENCY IN THE NEOCLASSICAL GROWTH MODEL WITH UNINSURABLE IDIOSYNCRATIC SHOCKS

• Published in: Econometrica 2012-11, Vol.80 (6), p.2431-2467
• Main Authors: Dávila, Julio, Hong, Jay H., Krusell, Per, Ríos-Rull, José-Víctor
• Format: Article
• Language: English
• Subjects: Calibration; Constrained efficiency; Consumer economics; Consumer equilibrium; Consumption; Economic growth; Economic models; Economic shock; Economic theory; Economics; Economics and Finance; Efficiency; Equilibrium; Growth models; Humanities and Social Sciences; Income distribution; Income inequality; Laissez faire; Market economies; Nationalekonomi; Steady state economies; Studies; Two period model; uninsurable shocks; Wealth; Wealth distribution; Welfare economics
• ISSN: 0012-9682; 1468-0262; 1468-0262
• DOI: 10.3982/ECTA5989

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.