nep-dge New Economics Papers
on Dynamic General Equilibrium
Issue of 2011‒11‒07
twenty-six papers chosen by
Christian Zimmermann
Federal Reserve Bank of St. Louis

  1. Rising indebtedness and temptation: a welfare analysis By Makoto Nakajima
  2. A New Open Economy Macroeconomic Model with Endogenous Portfolio Diversifi…cation and Firms Entry By Marta Arespa
  3. Collateral Shortages, Asset Price and Investment Volatility with Heterogeneous Beliefs By Dan Cao
  4. State-Dependent Probability Distributions in Non Linear Rational Expectations Models By Barthélemy, J.; Marx, M.
  5. The great escape? A quantitative evaluation of the Fed’s liquidity facilities By Marco Del Negro; Gauti Eggertsson; Andrea Ferrero; Nobuhiro Kiyotaki
  6. Optimal Fiscal Policy in a Small Open Economy with Limited Commitment By Sofia Bauducco; Francesco Caprioli
  7. Fixed-Term and Permanent Employment Contracts: Theory and Evidence By Shutao Cao; Enchuan Shao; Pedro Silos
  8. How applicable are the New Keynesian DSGE models to a typical Low-Income Economy? By Regassa Senbeta S.
  9. Money and Price Posting under Private Information By Mei Dong; Janet Hua Jiang
  10. What Explains Schooling Differences Across Countries? By Juan Carlos Cordoba; Marla Ripoll
  11. Long-run Welfare under Externalities in Consumption, Leisure, and Production: A Case for Happy Degrowth vs. Unhappy Growth By Ennio Bilancini; Simone D'Alessandro
  12. Liquidity and the threat of fraudulent assets By Yiting Li; Guillaume Rocheteau; Pierre-Olivier Weill
  13. An efficient minimum distance estimator for DSGE models By Theodoridis, Konstantinos
  14. On-the-job Search and Cyclical Unemployment: Crowding Out vs. Vacancy Effects By Daniel Martin; Olivier Pierrard
  15. The Effect of Job Flexibility on Female Labor Market Outcomes: Estimates from a Search and Bargaining Model By Luca Flabbi and Andrea Moro
  16. The welfare effect of access to credit. By Rojas Breu, Mariana
  17. Contracting Institutions and Economic Growth By Álvaro Aguirre
  18. Public Expenditures, Taxes, Federal Transfers, and Endogenous Growth By Liutang Gong; Heng-fu Zou
  19. How important is intra-household risk sharing for savings and labor supply? By Salvador Ortigueira; Nawid Siassi
  20. Fertility and Consumption when Having a Child is a Risky Investment By Pedro Gete and Paolo Porchia
  21. Housing and the Macroeconomy: The Role of Bailout Guarantees for Government Sponsored Enterprises By Karsten Jeske; Dirk Krueger; Kurt Mitman
  22. In Search of a Theory of Debt Management By Elisa Faraglia; Albert Marcet; Andrew Scott
  23. Sources of Lifetime Inequality By Mark Huggett; Gustavo Ventura; Amir Yaron
  24. Severance Pay or Pension Funds? By Devis Geron
  25. Disease and Development: The Role of Human Capital By Rodolfo Manuelli
  26. On the Dual Approach to Recursive Optimization By Matthias Messner; Nicola Pavoni; Christopher Sleet

  1. By: Makoto Nakajima
    Abstract: Is the observed large increase in consumer indebtedness since 1970 beneficial for U.S. consumers? This paper quantitatively investigates the macroeconomic and welfare implications of relaxing borrowing constraints using a model with preferences featuring temptation and self-control. The model can capture two contrasting views: the positive view, which links increased indebtedness to financial innovation and thus better consumption smoothing, and the negative view, which is associated with consumers' over-borrowing. The author finds that the latter is sizable: the calibrated model implies a social welfare loss equivalent to a 0.4 percent decrease in per-period consumption from the relaxed borrowing constraint consistent with the observed increase in indebtedness. The welfare implication is strikingly different from the standard model without temptation, which implies a welfare gain of 0.7 percent, even though the two models are observationally similar. Naturally, the optimal level of the borrowing limit is significantly tighter according to the temptation model, as a tighter borrowing limit helps consumers by preventing over-borrowing.
    Keywords: Equilibrium (Economics)
    Date: 2011
  2. By: Marta Arespa (CREB, Universitat de Barcelona.)
    Abstract: This paper provides a new benchmark for the analysis of the international diversi…cation puzzle in a tractable new open economy macroeconomic model. Building on Cole and Obstfeld (1991) and Heathcote and Perri (2009), this model speci…es an equilibrium model of perfect risk sharing in incomplete markets, with endogenous portfolios and number of varieties. Equity home bias may not be a puzzle but a perfectly optimal allocation for hedging risk. In contrast to previous work, the model shows that: (i) optimal international portfolio diversi…cation is driven by home bias in capital goods, independently of home bias in consumption, and by the share of income accruing to labour. The model explains reasonably well the recent patterns of portfolio allocations in developed economies; and (ii) optimal portfolio shares are independent of market dynamics.
    Keywords: Subsidies; Home bias, equity puzzle, New open economy macroeconomics, NOEM, extensive margin.
    JEL: F41 G11
    Date: 2011–10
  3. By: Dan Cao (Department of Economics, Georgetown University)
    Abstract: The recent economic crisis highlights the role of financial markets in allowing economic agents, including prominent banks, to speculate on the future returns of different financial assets, such as mortgage-backed securities. This paper in troduces a dynamic general equilibrium model with aggregate shocks, potentially incomplete markets and heterogeneous agents to investigate this role of financial markets. In addition to their risk aversion and endowments, agents differ in their beliefs about the future exogenous states (aggregate and idiosyncratic) of the economy. This difference in beliefs induces them to take large bets under frictionless complete financial markets, which enable agents to leverage their future wealth. Consequently, as hypothesized by Friedman (1953), under complete markets, agents with incorrect beliefs will eventually be driven out of the markets. In this case, they also have no influence on asset prices and real investment in the long run. In contrast, I show that under incomplete markets generated by collateral constraints, agents with heterogeneous (potentially incorrect) beliefs survive in the long run and their speculative activities permanently drive up asset price volatility and real investment volatility. I also show that collateral constraints are always binding even if the supply of collateral assets endogenously responds to their price. I use this framework to study the effects of different types of regulations and the distribution of endowments on leverage, asset price volatility and investment. Lastly, the analytical tools developed in this framework enable me to prove the existence of the "generalized" recursive equilibrium in Krusell and Smith (1998) with a finite number of agents. Classification-JEL Codes:
    Date: 2011–11–01
  4. By: Barthélemy, J.; Marx, M.
    Abstract: In this paper, we provide solution methods for non-linear rational expectations models in which regime-switching or the shocks themselves may be "endogenous", i.e. follow state-dependent probability distributions. We use the perturbation approach to find determinacy conditions, i.e. conditions for the existence of a unique stable equilibrium. We show that these conditions directly follow from the corresponding conditions in the exogenous regime-switching model. Whereas these conditions are difficult to check in the general case, we provide for easily verifiable and sufficient determinacy conditions and first-order approximation of the solution for purely forward-looking models. Finally, we illustrate our results with a Fisherian model of inflation determination in which the monetary policy rule may change across regimes according to a state-dependent transition probability matrix.
    Keywords: Perturbation methods, monetary policy, indeterminacy, regime switching, DSGE.
    JEL: E32 E43
    Date: 2011
  5. By: Marco Del Negro; Gauti Eggertsson; Andrea Ferrero; Nobuhiro Kiyotaki
    Abstract: We introduce liquidity frictions into an otherwise standard DSGE model with nominal and real rigidities, explicitly incorporating the zero bound on the short-term nominal interest rate. Within this framework, we ask: Can a shock to the liquidity of private paper lead to a collapse in short-term nominal interest rates and a recession like the one associated with the 2008 U.S. financial crisis? Once the nominal interest rate reaches the zero bound, what are the effects of interventions in which the government exchanges liquid government assets for illiquid private paper? We find that the effects of the liquidity shock can be large, and we show some numerical examples in which the liquidity facilities prevented a repeat of the Great Depression in 2008-09.
    Keywords: Federal Reserve System ; Interest rates ; Liquidity (Economics) ; Private equity
    Date: 2011
  6. By: Sofia Bauducco; Francesco Caprioli
    Abstract: We introduce limited commitment into a standard optimal fiscal policy model in small open economies. We consider the problem of a benevolent government that signs a risk-sharing contract with the rest of the world, and that has to choose optimally distortionary taxes on labor income, domestic debt and international debt. Both the home country and the rest of the world may have limited commitment, which means that they can leave the contract if they find it convenient. The contract is designed so that, at any point in time, neither party has incentives to exit. We define a small open emerging economy as one where the limited commitment problem is active in equilibrium. Conversely, a small open developed economy is an economy with full commitment. Our model is able to rationalize two stylized facts about fiscal policy in emerging economies: i) the volatility of tax revenues over GDP is higher in emerging economies than in developed ones; ii) the volatility of tax revenues over GDP is positively correlated with sovereign default risk.
    Date: 2011–09
  7. By: Shutao Cao; Enchuan Shao; Pedro Silos
    Abstract: This paper constructs a theory of the coexistence of fixed-term and permanent employment contracts in an environment with ex-ante identical workers and employers. Workers under fixed-term contracts can be dismissed at no cost while permanent employees enjoy labor protection. In a labor market characterized by search and matching frictions, firms find it optimal to discriminate by offering some workers a fixedterm contract while offering other workers a permanent contract. Match-specific quality between a worker and a firm determines the type of contract offered. We analytically characterize the firm’s hiring and firing rules. Using matched employer-employee data from Canada, we estimate the model’s parameters. Increasing the level of firing costs increases wage inequality and decreases the unemployment rate. The increase in inequality results from a larger fraction of temporary workers and not from an increase in the wage premium earned by permanent workers.
    Keywords: Labour markets; Potential output; Productivity
    JEL: H29 J23 J38
    Date: 2011
  8. By: Regassa Senbeta S.
    Abstract: This paper assesses the applicability of new Keynesian DSGE models to low income economies similar to those in Sub Saharan Africa. To this e¤ect, we ?rst review the development, criticisms and recent advances in DSGE modeling. Then we assess the implications that emanate from the assumptions of the standard small open economy New Keynesian DSGE model within the context of the economic environment of a typical low income economy. Our assessment shows the following two points. First, though there are many criticisms to these models, most recent advances seem to have addressed most of them. However, there are still some outstanding criticisms that seriously challenge not only the DSGE models but also all conventional economic models. Second, the current tendency of applying these models to explain or predict economic phenomena in low income countries without incorporating the structural speci?cities of these countries cannot be justi?ed. Instead, for these models to be helpful to understand the economic events in low income countries, most of their components must be changed or modi?ed. In this study we identify some of these components and suggest the possible changes or modi?cations.
    Date: 2011–10
  9. By: Mei Dong; Janet Hua Jiang
    Abstract: We study price posting with undirected search in a search-theoretic monetary model with divisible money and divisible goods. Ex ante homogeneous buyers experience match specific preference shocks in bilateral trades. The shocks follow a continuous distribution and the realization of the shocks is private information. We show that generically there exists a unique price posting monetary equilibrium. In equilibrium, each seller posts a continuous pricing schedule that exhibits quantity discounts. Buyers spend only when they have high enough preferences. As their preferences are higher, they spend more till they become cash constrained. Since inflation reduces the future purchasing power of money and the value of retaining money, buyers tend to spend their money faster in response to higher inflation. In particular, more buyers choose to spend money and buyers spend on average a higher fraction of their money. The model naturally captures the hot potato effect of inflation along both the intensive margin and the extensive margin.
    Keywords: Economic models; Inflation and prices
    JEL: D82 D83 E31
    Date: 2011
  10. By: Juan Carlos Cordoba (Iowa State University); Marla Ripoll (University of Pittsburgh)
    Abstract: This paper provides a theory that explains the cross-country distribution of average years of schooling, as well as the so called human capital premium puzzle. In our theory, credit frictions as well as differences in access to public education, fertility and mortality turn out to be the key reasons why schooling differs across countries. Differences in growth rates and in wages are second order.
    Keywords: human capital, per capita income differences, life expectancy, public education spending, life cycle model
    JEL: I22 J24 O11
    Date: 2011–05
  11. By: Ennio Bilancini; Simone D'Alessandro
    Abstract: In this paper we contribute to the debate on the relationship between growth and well-being by examining an endogenous growth model where we allow for externalities in consumption, leisure, and production. We analyze three regimes: a decentralized economy where each household makes isolated choices without considering their external effects, a planned economy where a myopic planner fails to recognize both leisure and consumption externalities but recognizes production externalities, and a planned economy with a fully informed planner. We first compare the balanced growth paths under the three regimes and then we numerically investigate the transition to the optimal balanced growth path. We provide a number of ndings. First, in a decentralized economy growth or labor (or both) are greater than in the regime with a fully informed planner, and hence are sub-optimal from a welfare standpoint. Second, a myopic intervention which overlooks consumption and leisure externalities leads to more growth and labor than in both the decentralized and the fully informed regime. Third, we provide a case for happy degrowth: a transition to the optimal balanced growth path that is associated with downscaling of production, a reduction in private consumption, and an ongoing increase in leisure and well-being.
    Keywords: degrowth; endogenous growth; consumption externalities; leisure externalities; production externalities
    JEL: Q13 E62 H21 H23
    Date: 2011–11
  12. By: Yiting Li; Guillaume Rocheteau; Pierre-Olivier Weill
    Abstract: We study an over-the-counter (OTC) market with bilateral meetings and bargaining where the usefulness of assets, as means of payment or collateral, is limited by the threat of fraudulent practices. We assume that agents can produce fraudulent assets at a positive cost, which generates endogenous upper bounds on the quantity of each asset that can be sold, or posted as collateral in the OTC market. Each endogenous, asset-specific, resalability constraint depends on the vulnerability of the asset to fraud, on the frequency of trade, and on the current and future prices of the asset. In equilibrium, the set of assets can be partitioned into three liquidity tiers, which differ in their resalability, their prices, their sensitivity to shocks, and their responses to policy interventions. The dependence of an asset’s resalability on its price creates a pecuniary externality, which leads to the result that some policies commonly thought to improve liquidity can be welfare reducing.
    Keywords: Liquidity (Economics) ; Fraud ; Asset pricing
    Date: 2011
  13. By: Theodoridis, Konstantinos (Bank of England)
    Abstract: Recent studies illustrate that under some conditions dynamic stochastic general equilibrium models can be expressed as structural vector autoregressive models of infinite order. Based on this mapping and the theoretical results about vector autoregressive models of infinite order this paper proposes a minimum distance estimator that: A) matches the k-period responses of the whole vector of the observable variables described by the structural model – caused after a small perturbation to the entire vector of the structural errors – with those observed in the historical data, which have been recovered through the use of a structurally identified vector autoregressive model, and B) minimises the distance between the reduced-form error covariance matrix implied by the structural model and the one estimated in the data. This estimator encompasses those in the literature, is asymptotically consistent, normally distributed and efficient. The J-type overidentifying restrictions statistic that results from this methodology can be used for the evaluation of the structural model. Finally, this study also develops the theory of the bootstrapped version of the estimator and the statistic introduced here. Monte Carlo simulation evidences based on a medium-scale DSGE model reveal very encouraging results for the proposed estimator when it is compared against modern – Bayesian maximum likelihood – and less modern – maximum likelihood and non-efficient IR matching – DSGE estimators.
    Keywords: Minimum distance estimation; asymptotic efficiency; DSGE model estimation and evaluation; SVAR; IRFs
    JEL: C50 C51 C52
    Date: 2011–10–31
  14. By: Daniel Martin; Olivier Pierrard
    Abstract: We incorporate on-the-job search (OTJS) into a real business cycle model in order to study whether OTJS increases the cyclical volatility of unemployment and vacancies. The increased search of employed workers during expansions has two effects on the unemployed: it induces firms to openmore vacancies, but employedworkers also crowd out unemployed workers in the job search. The overall effect of OTJS on unemployment volatility is thus ambiguous. We showanalytically and numerically that the difference between the (employer?s share of the) surplus ofmatchwith a previously employed versus a previously unemployed job seeker determines the degree to which OTJS increases unemployment volatility. We use this result to re-consider some related papers of OTJS and explain the amplification of volatility they obtain.
    Keywords: on-the-job search, cyclical properties
    JEL: E24 E32 J64
    Date: 2011–10
  15. By: Luca Flabbi and Andrea Moro (Department of Economics, Georgetown University)
    Abstract: In this article, we develop a search model of the labor market in which jobs are characterized by work-hours flexibility. Workers value flexibility, which is costly for employers to provide. We estimate the model on a sample of women extracted from the CPS. The model parameters are empirically identified because the accepted wage distributions of flexible and non-flexible jobs are directly related to the preference for flexibility parameters. Results show that more than one-third of women place a small, positive value on flexibility. Women with a college degree value flexibility more than women with only a high school degree. Counterfactual experiments show that flexibility has a substantial impact on the wage distribution but a negligible impact on the unemployment rate. These results suggest that wage and schooling differences between males and females may be importantly related to flexibility.
    Date: 2011–01–04
  16. By: Rojas Breu, Mariana
    Abstract: I present a model in which credit and outside money can be used as means of payment in order to analyze how access to credit a§ects welfare when credit markets feature limited participation. Allowing more agents to use credit has an ambiguous effect on welfare because it may make consumption-risk sharing more ine¢ cient. I calibrate the model using U.S. data on credit-card transactions and show that the increase in access to credit from 1990 to the near present has had a slightly negative impact on welfare.
    Keywords: Money; credit; risk sharing; limited participation;
    JEL: E51 E41
    Date: 2011–09
  17. By: Álvaro Aguirre
    Abstract: This paper studies the effects of contracting institutions on economic development. A growth model is presented with endogenous incomplete markets, where financial frictions generated by the imperfect enforcement of contracts depend on the future growth of the economy, which determines the costs of being excluded from financial markets after defaulting. As the economy approaches its balanced growth path, frictions and their effect on income become more important because the net benefits of honoring contracts decrease. Therefore, as the economy approaches its steady state, the effect of contracting institutions on GDP per capita increases. This effect is due not only to a slower accumulation of capital, but also to a misallocation of resources toward labor-intensive productive sectors, where self-enforcing incentives are stronger. To validate the model empirically, the paper modifies previous specifications of cross-country regressions to estimate the effect of contracting institutions on per capita GDP. In line with the main predictions of the model, the econometric evidence shows that this effect is larger in economies that were relatively close to their steady states in 1950. Unlike contracting institutions, the evidence shows that property-rights institutions, included in an extension to the model, have an effect on income per capita throughout the development process.
    Date: 2011–09
  18. By: Liutang Gong (Guanghua School of Management, Peking University); Heng-fu Zou (CEMA, Central University of Finance and Economics; Shenzhen University; Wuhan University; The World Bank)
    Abstract: This paper extends the Barro (1990) model with single aggregate government spending and one flat income tax to include public expenditures and taxes by multiple levels of government. It derives the rate of endogenous growth and, with both simulations and special examples, examines how that rate changes with respect to federal income tax, local taxes, and federal transfers. It also discusses the growth and welfare-maximizing choices of taxes and federal transfers.
    Keywords: Public expenditures, Taxes, Federal transfers, Endogenous growth
    JEL: E0 H2 H4 H5 H7 O4 R5
    Date: 2011
  19. By: Salvador Ortigueira; Nawid Siassi
    Abstract: While it is recognized that the family is primarily an institution for risk sharing, little is known about the quantitative effects of this informal source of insurance on savings and labor supply. In this paper, we present a model where workers (females and males) are subject to idiosyncratic employment risk and where capital markets are incomplete. A household is formed by a female and a male, who make collective decisions on consumption, savings and labor supplies. We find that intra-household risk sharing has its largest impact among wealthpoor households. While the wealth-rich use mainly savings to smooth consumption across unemployment spells, wealth-poor households rely on spousal labor supply. For instance, for low-wealth households, average hours worked by wives of unemployed husbands are 8% higher than those worked by wives of employed husbands. This response in wives’ hours makes up 9% of lost family income. We also study the crowding out effects of public unemployment insurance on other sources of private insurance, and consumption losses upon an unemployment spell
    Keywords: Intra-household risk sharing, Collective household model, Idiosyncratic unemployment risk, Incomplete markets, Precautionary motive
    JEL: D13 D91 E21
    Date: 2011–09
  20. By: Pedro Gete and Paolo Porchia (Department of Economics, Georgetown University)
    Abstract: This paper studies children as a risky asset associated to an investment option. Children provide utility but have a stochastic maintenance cost. We obtain several new results relative to models where children are deterministic goods, among which: i) Higher child risks diminish fertility and consumption. ii) Risk aversion speeds up fertility as households use the safe utility derived from a child as insurance against fluctuations in consumption. iii) Fertility is increasing in the correlation between income and child cost shocks. The household is reluctant to have children when positive cost shocks come together with bad income shocks. The opposite result happens when children hedge income shocks. iv) The sign of the correlation determines whether higher income volatility speeds up or delays fertility.
    Date: 2011–01–03
  21. By: Karsten Jeske; Dirk Krueger; Kurt Mitman
    Abstract: This paper evaluates the macroeconomic and distributional effects of government bailout guarantees for Government Sponsored Enterprises (such as Fannie Mae and Freddy Mac) in the mortgage market. In order to do so we construct a model with heterogeneous, infinitely lived households and competitive housing and mortgage markets. Households have the option to default on their mortgages, with the consequence of having their homes foreclosed. We model the bailout guarantee as a government provided and tax-financed mortgage interest rate subsidy. We find that eliminating this subsidy leads to substantially lower equilibrium mortgage origination and increases aggregate welfare, but has little effect on foreclosure rates and housing investment. The interest rate subsidy is a regressive policy: eliminating it benefits low-income and low-asset households who did not own homes or had small mortgages, while lowering the welfare of high-income, high-asset households.
    JEL: E21 G11 R21
    Date: 2011–10
  22. By: Elisa Faraglia; Albert Marcet; Andrew Scott
    Abstract: A growing literature integrates debt management into models of optimal fiscal policy. One promising theory argues the composition of government debt should be chosen so that fluctuations in its market value offsets changes in expected future deficits. This complete market approach to debt management is valid even when governments only issue non-contingent bonds. Because bond returns are highly correlated it is known this approach implies asset positions which are large multiples of GDP. We show, analytically and numerically, across a wide range of model specifications (habits, productivity shocks, capital accumulation, persistent shocks, etc) that this is only one of the weaknesses of this approach. We find evidence of large fluctuations in positions, enormous changes in portfolios for minor changes in maturities issued and no presumption it is always optimal to issue long term debt and invest in short term assets. We show these extreme, volatile and unstable features are undesirable from a practical perspective for two reasons. Firstly the fragility of the optimal portfolio to small changes in model specification means it is frequently better for fear of model misspecification to follow a balanced budget rather than issue the optimal debt structure. Secondly we show for even miniscule levels of transaction costs governments would prefer a balanced budget rather than the large and volatile positions the complete market approach recommends. We conclude it is difficult to insulate fiscal policy from shocks using the complete markets approach. Due to the yield curve's limited variability maturities are a poor way to substitute for state contingent debt. As a result the recommendations of this approach conflict with a number of features we believe are integral to bond market incompleteness e.g. allowing for transaction costs, liquidity effects, robustness etc. Our belief is that market imperfections need to be explicitly introduced into the model and incorporated into the portfolio problem. Failure to do so means that the complete market approach applied in an incomplete market setting can be seriously misleading.
    Keywords: Complete markets, debt management, government debt, maturity structure, yield curve
    JEL: E43 E62
    Date: 2011–10
  23. By: Mark Huggett (Georgetown University); Gustavo Ventura (University of Iowa); Amir Yaron (The Wharton School, University of Pennsylvania)
    Abstract: Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime? We answer this question within a model that features idiosyncratic shocks to human capital, estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth. We find that, as of age 23, differences in initial conditions account for more of the variation in lifetime earnings, lifetime wealth and lifetime utility than do differences in shocks received over the working lifetime.
    Keywords: Lifetime Inequality, Human Capital, Idiosyncratic Risk
    JEL: E21 D3 D91
    Date: 2010–11
  24. By: Devis Geron (University of Padova)
    Abstract: The paper aims to analyze the determinants of the individual choice of con- tributing to pension funds, particularly by focusing on individual preferences towards the annuitization of the accumulated pension capital. The analysis is performed in the light of the latest reform of social security in Italy, convert- ing the severance pay scheme (the so-called TFR) into a fully funded scheme of pension funds. The model describes the behavior of a representative agent belonging to a representative generation in steady state, in a partial equilibrium setting with mortality risk as well as uncertainty on wages and financial market returns. Investing in riskier but potentially more rewarding pension funds, paying out annuities from retirement onwards, turns out to be slightly welfare improving with respect to contributing to a severance pay scheme eventually paying out a lump-sum amount. Nonetheless, the welfare-based value of insurance provided by private annuities from pension funds is relatively low, mainly due to a) the pre-existence of (sizeable) public annuities, and b) constraints imposed by annuitization on both saving and consumption behavior after retirement. These findings provide further insights into the Òannuity puzzleÓ issue.
    Keywords: Social Security Reforms; Uncertainty; Fully Funded Pension Schemes.
    JEL: E62 G23 H31 H55
    Date: 2011–10
  25. By: Rodolfo Manuelli (Department of Economics, Washington University in St. Louis and Federal Reserve Bank of St. Louis)
    Abstract: This paper presents a model of human capital accumulation that allows for feedback effects between the consequences and the likelihood of suffering from particular diseases and the decisions to invest in knowledge, both in the form of schooling and on-the-job training. I use a calibrated version of the model to estimate the long run impact of eradicating HIV/AIDS and malaria for a number of Sub- Saharan African countries. I find that the effect on output per worker can be substantial.
    Date: 2011–06
  26. By: Matthias Messner; Nicola Pavoni; Christopher Sleet
    Abstract: We bring together the theories of duality and dynamic programming. We show that the dual of an additively separable dynamic optimization problem can be recursively decomposed using summaries of past Lagrange multipliers as state variables. Analogous to the Bellman decomposition of the primal problem, we prove equality of values and solution sets for recursive and sequential dual problems. In nonadditively separable settings, the equivalence of the recursive and sequential dual is not guaranteed. We relate recursive dual and recursive primal problems. If the Lagrangian associated with a constrained optimization problem admits a saddle then, even in nonadditively separable settings, the values of the recursive dual and recursive primal problems are equal. Additionally, the recursive dual method delivers necessary conditions for a primal optimum. If the problem is strictly concave, the recursive dual method delivers necessary and sufficient conditions for a primal optimum. When a saddle exists, states on the optimal dual path are subdifferentials of the primal value function evaluated at states on the optimal primal path and vice versa.
    Date: 2011

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