A Note On Optimal Insurance in an Information Constrained Federal Economy with Incomplete Degree of Enforceability and Negotiation Costs

This paper studies the constrained efficient intergovernmental transfer contract between the central government and the states in a federal economy. We consider an environment with moral hazard, incomplete enforceability and date 0 negotiation costs. The interaction of moral hazard and incomplete enforceability may imply that when the state’s resources are ”low enough”, it is constrained efficient that the state gets a lower utility level than in autarky. When negotiation costs are considered, the state might not accept the contract. More importantly, the possibility of whether accepting or not is not monotonically determined by the state’s fiscal situation.

Risk sharing, investment, and incentives in the neoclassical growth model

We first study growth and risk sharing in a stochastic growth model with preference shocks and two risk-averse agents. In periods in which one of the agents needs extra consumption (insurance), it is socially optimal to reduce the consumption of the other agent (redistribution) and also to accumulate fewer resources for the future (disinvestment). The latter hurts growth while the former only affects the distribution of aggregate consumption. Then, to analyze if information matters, we study if the same allocation would be implementable under private information. We find that it depends on the state of the economy. The provision of insurance that is implemented by reducing capital accumulation deteriorates the prospects of all agents in the economy and thus helps to alleviate informational frictions. The size of redistribution versus disinvestment and the outlook of economic growth at the time of disinvestment affects the possibilities of implementing the best possible allocation when the preference shock is private information. Therefore, we conjecture that under private information the best allocation compatible with incentives would tend to hurt growth and to concentrate resources in agents with private information in order to provide incentives to report the shock truthfully.Business cycles ; Economic growth

Too good to be true : asset pricing implications of pessimism

We evaluate whether the introduction of pessimistic homogeneous beliefs in the frictionless Lucas-Mehra-Prescott model and the Kehoe-Levine-Alvarez-Jermann model with endogenous bor- rowing constraints, helps explain the equity premium, the risk-free rate and the equity volatility puzzles as well as the short-term momentum and long-term reversal of excess returns. We cal- ibrate the model to U.S. data as in Alvarez and Jermann [4] and we find that the data does not contradict the qualitative predictions of the models. When the preferences parameters are disciplined to match both the average annual risk-free rate and equity premium, the Lucas-Mehra- Prescott model gives a more quantitatively accurate explanation for short-term momentum than the Kehoe-Levine-Alvarez-Jermann model but the latter gives a more quantitatively accurate ex- planation for the equity volatility puzzle. Long-term reversal remains quantitatively unexplained in both models

Equilibrium Portfolios in the Neoclassical Growth Model

This paper studies equilibrium portfolios in the standard neoclassical growth model under uncertainty with heterogeneous agents and dynamically complete markets. Preferences are purposely restricted to be quasi-homothetic. The main source of heterogeneity across agents is due to different endowments of shares of the representative firm at date 0. Fixing portfolios is the optimal strategy in stationary endowment economies with dynamically complete markets. Whenever an environment displays changing degrees of heterogeneity across agents, the trading strategy of fixed portfolios cannot be optimal in equilibrium. Very importantly, our framework can generate changing heterogeneity if and only if either minimum consumption requirements are not zero or labor income is not zero and the value of human and non-human wealth are linearly independentNeoclassical Growth Model, Equilibrium Portfolios, Complete Markets

Unemployment insurance in high informality countries

Providing unemployment insurance is particularly problematic in countries with high informality because workers can claim unemployment benefits and work in the informal sector at the same time. This paper proposes a method to evaluate alternative schemes to provide insurance for unemployed individuals. First, it presents an economy that can be calibrated to reproduce key features of the economy for which the reform will be evaluated. Then, it shows how the implementation of an unemployment insurance savings account (UISA) scheme can be evaluated. The method is applied to Mexico, and the results show how the UISA scheme would eliminate incentives for participation in the informal sector. The implementation of the UISA would imply large welfare gains from the ex-ante perspective

On the Implications of Taxation for Investment, Savings and Growth: Evidence from Brazil, Chile and Mexico

This paper explores the qualitative and quantitative implications of taxation for growth and savings in three Latin American countries: Brazil, Chile and Mexico, studying a small open economy in the context of an endogenous growth model where the domestic interest rate depends on the level of domestic debt. The model's parameters are calibrated to the Brazilian, Chilean and Mexican economies. The findings suggest that, in order to implement the optimal tax regime, Brazil must tax capital at a considerably lower rate than at present. Consumption should be heavily taxed in Brazil and Mexico and optimal labor taxes should be lower than actual taxes in Brazil and Chile. However, while sub-optimal taxes seem to imply lower long-run growth in these three countries, low saving rates do not seem to be a direct consequence of sub-optimal taxation

A note on optimal insurance in an information constrained federal economy with incomplete degree of enforceability and negotiation costs

This paper studies the optimal insurance contract between a state and the central government in a federal economy with moral hazard, risk of repudiation (given some enforceability technology) and aggregate uncertainty. Also, it considers date 0 negotiation costs to implement this contract. The distribution of the fiscal resources locally collected by the province at t+1 are affected by period t state´s effort to collect taxes. Also, every period a state has the right to get a fixed proportion of the taxes nationally collected by the central government. These resources are identically and independently distributed across time. Using a recursive formulation of the allocation problem (following Atkeson (1991)), some basic properties of the optimal insurance contract are discussed showing when, in particular, it is actually optimal just to give up any attempt to provide insurance to the province.Departamento de Economí

On Ramsey's Conjecture: Efficient Allocations in the Neoclassical Growth Model with Private Information

In his seminal paper of 1928, Ramsey conjectured that if agents discounted the future differently, in the long run all agents except the most patient would live at the subsistence level. The validity of this conjecture was investigated in different environments. In particular, it has been confirmed in the neoclassical growth model with dynamically complete markets. This paper studies this conjecture in a version of this model that includes private information and heterogeneous agents. A version of Bayesian Implementation is introduced and a recursive formulation of the original allocation problem is established. Efficient allocations are renegotiation-proof and the expected utility of any agent cannot go to zero with positive probability if the economy does not collapse. If the economy collapses all agents will get zero consumption forever. Thus, including any degree of private information in the neoclassical growth model will deny Ramsey's conjecture, if efficient allocations are considered.Dynamic contracts, Capital accumulation, Private information