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on Dynamic General Equilibrium |
| By: | Bruce Preston; Mauro Roca |
| Abstract: | This paper solves a real business cycle model with heterogeneous agents and uninsurable income risk using perturbation methods. A second order accurate characterization of agent's optimal decision rules is given, which renders the implications of aggregation for macroeconomic dynamics transparent. The role of cross-sectional holdings of capital in determining equilibrium dynamics can be directly assessed. Analysis discloses that an individual's optimal saving decisions are almost linear in their own capital stock giving rise to permanent income consumption behavior. This provides an explanation for the approximate aggregation properties of this model documented by Krusell and Smith (1998): the distribution of capital does not affect aggregate dynamics. While the variance-covariance properties of endogenous variables are almost entirely determined by first order dynamics, the second order dynamics, which capture properties of the wealth distribution, are nonetheless important for an individual's mean consumption and saving decisions and therefore the mean equilibrium capital stock. Policy evaluation exercises therefore need to take account of these higher order terms. |
| JEL: | C6 D52 E21 E32 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13260&r=dge |
| By: | Sullivan, Paul |
| Abstract: | This paper examines career choices using a dynamic structural model that nests a job search model within a human capital model of occupational and educational choices. Individuals in the model decide when to attend school and when to move between firms and occupations over the course of their career. Workers search for suitable wage and non-pecuniary match values at firms across occupations given their heterogeneous skill endowments and preferences for employment in each occupation. Over the course of their careers workers endogenously accumulate firm and occupation specific human capital that affects wages differently across occupations. The parameters of the model are estimated with simulated maximum likelihood using data from the 1979 cohort of the National Longitudinal Survey of Youth. The structural parameter estimates reveal that both self-selection in occupational choices and mobility between firms account for a much larger share of total earnings and utility than the combined effects of firm and occupation specific human capital. Eliminating the gains from matching between workers and occupations would reduce total wages by 31%, eliminating the gains from job search would reduce wages by 19%, and eliminating the effects of firm and occupation specific human capital on wages would reduce wages by only 2.8%. |
| Keywords: | occupational choice; job search; human capital; dynamic programming models |
| JEL: | J24 J62 I21 |
| Date: | 2006–09 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:3896&r=dge |
| By: | Rui Albuquerque; Neng Wang |
| Abstract: | The separation of ownership and control allows controlling shareholders to pursue private benefits. We develop an analytically tractable dynamic stochastic general equilibrium model to study asset pricing and welfare implications of imperfect investor protection. Consistent with empirical evidence, the model predicts that countries with weaker investor protection have more incentives to overinvest, lower Tobin's q, higher return volatility, larger risk premium, and higher interest rate. Calibrating the model to the Korean economy reveals that perfecting investor protection increases the stock market's value by 22 percent, a gain for which outside shareholders are willing to pay 11 percent of their capital stock. |
| JEL: | E44 G1 G3 O4 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13251&r=dge |
| By: | Cervellati, Matteo; Sunde, Uwe |
| Abstract: | This paper provides a unified theory of the economic and demographic transition. Individuals make optimal decisions about fertility, education of their children and the type and intensity of the investments in their own education. These decisions are affected by different dimensions of mortality and technological progress which change endogenously during the process of development. The model generates an endogenous transition from a regime characterized by limited human capital formation, little longevity, high child mortality, large fertility and a sluggish income and productivity growth to a modern growth regime in which lower net fertility is associated with the acquisition of human capital and improved living standards. Unlike previous models, the framework emphasizes the education composition of the population in terms of the equilibrium share of educated individuals, and differential fertility related to education. The framework explores the roles of different dimensions of mortality, wages and schooling in triggering the transition. The dynamics of the model are consistent with empirical observations and stylized facts that have been difficult to reconcile so far. For illustration we simulate the model and discuss the novel predictions using historical and cross-country data. |
| Keywords: | child mortality; demographic transition; endogenous life expectancy; heterogeneous human capital; Long-term development |
| JEL: | E10 J10 O10 O40 O41 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6384&r=dge |
| By: | John Donaldson; Rajnish Mehra |
| Abstract: | This essay reviews the family of models that seek to provide aggregate risk based explanations for the empirically observed equity premium. Theories based on non-expected utility preference structures, limited financial market participation, model uncertainty and the small probability of enormous losses are detailed. We impose the additional requirements that candidate models yield consistent inter temporal portfolio choice and that a representative agent can be constructed which is independent of the underlying heterogeneous economy's initial wealth distribution. While many models are able to replicate a wide variety of financial statistics including the premium, few satisfy these latter criteria as well. |
| JEL: | D10 D11 D50 D52 D90 D91 E30 G00 G11 G12 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13220&r=dge |
| By: | Assenza, Tiziana |
| Abstract: | The appealing feature of Kiyotaki and Moore's Financial Accelerator model (Kiyotaki and Moore, 1997, 2002) is the linkage of asset price changes and borrowing constraints. This framework therefore is the natural vehicle to explore the net worth channel of the monetary transmission mechanism. In the original model, however, all the variables, credit included, are in real terms. In order to assess the impact of monetary policy the model must be reformulated to fit a monetary economy. In the present paper we model a monetary economy with financing constraints adopting the Money In the Utility function (MIU) approach.The occurrence of multiple equilibria is a likely outcome of the dynamics generated by the model. A change in the growth rate of money supply can affect real out- put through the impact of inflation on net worth. In a sense the monetary transmission mechanism we are focusing on consists of a combination of the inflation tax effect and the net worth channel. Contrary to the traditional view, at least for some parameter restrictions, an increase of the inflation tax can bring about an increase of aggregate output. |
| JEL: | E52 E31 E44 E32 |
| Date: | 2007 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:4049&r=dge |
| By: | Andrew Postlewaite (Department of Economics, University of Pennsylvania); Larry Samuelson (Department of Economics, University of Wisconsin and Yale University); Dan Silverman (Department of Economics, University of Michigan) |
| Abstract: | We examine an economy in which the cost of consuming some goods can be reduced by making commitments that reduce flexibility. We show that such consumption commitments can induce consumers with risk-neutral underlying utility functions to be risk averse over small variations in income, but sometimes to seek risk over large variations. As a result, optimal employment contracts will smooth wages conditional on being employed, but may incorporate a possibility of unemployment. |
| Keywords: | Unemployment, consumption commitments, optimal contracts |
| JEL: | D21 D31 D81 |
| Date: | 2006–12–07 |
| URL: | http://d.repec.org/n?u=RePEc:pen:papers:07-020&r=dge |
| By: | Jianjun Miao; Neng Wang |
| Abstract: | Entrepreneurs often face undiversifiable idiosyncratic risks from their business investments. We extend the standard real options approach to an incomplete markets environment and analyze the joint decisions of business investments, consumption/savings, and portfolio selection. For a lump-sum investment payoff and an agent with a sufficiently strong precautionary savings motive, an increase in volatility can accelerate investment, contrary to the standard real options analysis. When the agent can trade the market portfolio to partially hedge against investment risk, the systematic volatility is compensated via the standard CAPM argument, and the idiosyncratic volatility generates a private equity premium. Finally, when the investment payoff is a series of flows, the agent's idiosyncratic risk exposure alters both the implied option value and the implied project value, causing a reversal of the results in the lump-sum payoff case. |
| JEL: | E2 G11 G31 |
| Date: | 2007–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:13250&r=dge |