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Neoclassical Growth with Limited Commitment

Author

Listed:
  • Dirk Krueger

    (University of Pennsylvania, CEPR and NBER)

  • Harald Uhlig

    (University of Chicago, CEPR and NBER)

Abstract

This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which agents can insure against idiosyncratic income risk by trading state-contingent assets, subject to limited commitment constraints that rule out short-selling. For an N-state Poisson labor productivity process we characterize the household consumption-asset allocation, stationary asset distribution and aggregate capital supply. When production is Cobb-Douglas, productivity takes two values, of which one is zero, and agents have log-utility, the equilibrium interest rate, capital stock and consumption distribution is given in closed form. We therefore provide a tractable alternative to the Aiyagari incomplete markets model.

Suggested Citation

  • Dirk Krueger & Harald Uhlig, 2024. "Neoclassical Growth with Limited Commitment," PIER Working Paper Archive 24-021, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:24-021
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Idiosyncratic Risk; Limited Commitment; Stationary Equilibrium;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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