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Incomplete Markets, Labor Supply and Capital Accumulation

Author

Listed:
  • Albert Marcet
  • Francesc Obiols-Homs

    (UAB - Universitat Autònoma de Barcelona = Autonomous University of Barcelona = Universidad Autónoma de Barcelona)

  • Philippe Weil

    (OFCE - Observatoire français des conjonctures économiques (Sciences Po) - Sciences Po - Sciences Po)

Abstract

We explore the accumulation of capital in the presence of limited insurance against idiosyncratic shocks, borrowing constraints and endogenous labor supply. In the exogenous labor supply case (e.g. Aiyagari 1994, Huggett 1997), the presence of limited insurance increases the demand for savings for precautionary reasons. As a consequence, capital and output are higher under incomplete markets. We show that if labor hours are endogenous, labor supply is likely to be lower under incomplete markets, because those agents who experience a high shock to productivity are ex post richer and they work fewer hours. In some cases, this wealth effect can overcome the "aggregate precautionary savings" and give rise to lower savings and output under incomplete markets.

Suggested Citation

  • Albert Marcet & Francesc Obiols-Homs & Philippe Weil, 2003. "Incomplete Markets, Labor Supply and Capital Accumulation," SciencePo Working papers Main hal-03596961, HAL.
    • Handle: RePEc:hal:spmain:hal-03596961
    Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03596961
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    More about this item

    Keywords

    Idiosyncratic shocks; incomplete markets; labor supply;
    All these keywords.

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • D58 - Microeconomics - - General Equilibrium and Disequilibrium - - - Computable and Other Applied General Equilibrium Models
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply

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