Incomplete markets, labor supply and capital accumulation

Albert Marcet; Francesc Obiols-Homs; Philippe Weil

doi:10.1016/j.jmoneco.2006.12.011

Incomplete markets, labor supply and capital accumulation

Albert Marcet, Francesc Obiols-Homs, Philippe Weil

Research output: Contribution to journal › Article › Research › peer-review

18 Citations (Scopus)

Abstract

Endogenous labor supply decisions are introduced in an equilibrium model of limited insurance against idiosyncratic shocks. Unlike in the standard case with exogenous labor (e.g. [Aiyagari, S.R., 1994. Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109, 659-684; Huggett, M., 1997. The one-sector growth model with idiosyncratic shocks: steady states and dynamics. Journal of Monetary Economics 39, 385-403]), labor supply is likely to be lower than under complete markets. This is due to an ex post wealth effect on labor supply (rich productive agents work fewer hours) that runs counter the precautionary savings motive. As a result, equilibrium savings and output may be lower under incomplete markets. It is also found that long-run savings remain finite even when the interest rate equals the inverse of the discount factor.

Original language	English
Pages (from-to)	2621-2635
Number of pages	15
Journal	Journal of Monetary Economics
Volume	54
Issue number	8
DOIs	https://doi.org/10.1016/j.jmoneco.2006.12.011
Publication status	Published - 1 Nov 2007

Keywords

Idiosyncratic shocks
Incomplete markets
Labor supply

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10.1016/j.jmoneco.2006.12.011

Efectes reals de la política monetària
Caballé, J., Erosa Etchebehere, A., Guaitoli ., D., Rodriguez Mendizabal, H., Jarque Ribera, X., Panadès Martí, J., Pappa , E., Petith , H. C., Sorolla Amat, V. & Raurich Puigdevall, F. X.
10/12/03 → 19/11/06
Project: Research Projects and Other Grants

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@article{4f1efbc2f6d54bd5a32c61563c149292,

title = "Incomplete markets, labor supply and capital accumulation",

abstract = "Endogenous labor supply decisions are introduced in an equilibrium model of limited insurance against idiosyncratic shocks. Unlike in the standard case with exogenous labor (e.g. [Aiyagari, S.R., 1994. Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109, 659-684; Huggett, M., 1997. The one-sector growth model with idiosyncratic shocks: steady states and dynamics. Journal of Monetary Economics 39, 385-403]), labor supply is likely to be lower than under complete markets. This is due to an ex post wealth effect on labor supply (rich productive agents work fewer hours) that runs counter the precautionary savings motive. As a result, equilibrium savings and output may be lower under incomplete markets. It is also found that long-run savings remain finite even when the interest rate equals the inverse of the discount factor. ",

keywords = "Idiosyncratic shocks, Incomplete markets, Labor supply",

author = "Albert Marcet and Francesc Obiols-Homs and Philippe Weil",

note = "A. Marcet acknowledges support from CREI, DGES (Spanish Ministry of Science and Technology) and DURSI (Generalitat de Catalunya). F. Obiols-Homs acknowledges financial support from the European Commission through the TMR Programme (Contract ERBFMBICT 961835), the Spanish Ministry of Education and Science and FEDER through Grant SEC2003-00306, and Grant 2005SGR00447, and the support of CIE-ITAM, to which he was affiliated during early phases of this project. ",

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TY - JOUR

T1 - Incomplete markets, labor supply and capital accumulation

AU - Marcet, Albert

AU - Obiols-Homs, Francesc

AU - Weil, Philippe

N1 - A. Marcet acknowledges support from CREI, DGES (Spanish Ministry of Science and Technology) and DURSI (Generalitat de Catalunya). F. Obiols-Homs acknowledges financial support from the European Commission through the TMR Programme (Contract ERBFMBICT 961835), the Spanish Ministry of Education and Science and FEDER through Grant SEC2003-00306, and Grant 2005SGR00447, and the support of CIE-ITAM, to which he was affiliated during early phases of this project.

PY - 2007/11/1

Y1 - 2007/11/1

N2 - Endogenous labor supply decisions are introduced in an equilibrium model of limited insurance against idiosyncratic shocks. Unlike in the standard case with exogenous labor (e.g. [Aiyagari, S.R., 1994. Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109, 659-684; Huggett, M., 1997. The one-sector growth model with idiosyncratic shocks: steady states and dynamics. Journal of Monetary Economics 39, 385-403]), labor supply is likely to be lower than under complete markets. This is due to an ex post wealth effect on labor supply (rich productive agents work fewer hours) that runs counter the precautionary savings motive. As a result, equilibrium savings and output may be lower under incomplete markets. It is also found that long-run savings remain finite even when the interest rate equals the inverse of the discount factor.

AB - Endogenous labor supply decisions are introduced in an equilibrium model of limited insurance against idiosyncratic shocks. Unlike in the standard case with exogenous labor (e.g. [Aiyagari, S.R., 1994. Uninsured idiosyncratic risk and aggregate saving. Quarterly Journal of Economics 109, 659-684; Huggett, M., 1997. The one-sector growth model with idiosyncratic shocks: steady states and dynamics. Journal of Monetary Economics 39, 385-403]), labor supply is likely to be lower than under complete markets. This is due to an ex post wealth effect on labor supply (rich productive agents work fewer hours) that runs counter the precautionary savings motive. As a result, equilibrium savings and output may be lower under incomplete markets. It is also found that long-run savings remain finite even when the interest rate equals the inverse of the discount factor.

KW - Idiosyncratic shocks

KW - Incomplete markets

KW - Labor supply

U2 - 10.1016/j.jmoneco.2006.12.011

DO - 10.1016/j.jmoneco.2006.12.011

M3 - Article

SN - 0304-3932

VL - 54

SP - 2621

EP - 2635

JO - Journal of Monetary Economics

JF - Journal of Monetary Economics

IS - 8

ER -

Incomplete markets, labor supply and capital accumulation

Abstract

Keywords

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Efectes reals de la política monetària

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