Asymmetric Information in Economic Policy. Noah Williams
|
|
- Lucy Knight
- 5 years ago
- Views:
Transcription
1 Asymmetric Information in Economic Policy Noah Williams University of Wisconsin - Madison Williams Econ 899
2 Asymmetric Information Risk-neutral moneylender. Borrow and lend at rate R = 1/β. Strictly risk-averse household Maximize E T t τ=t βτ t u(c τ ). u has decreasing absolute risk aversion (DARA). u is differentiable. i.i.d. unobservable stochastic endowment. No storage technology. Finite horizon game. In each period, household reports endowment. moneylender makes transfer. 1
3 Notation: States s = 1, 2,..., S. Endowment in state s is e s, e 1 < < e S. Probability of state s is π s. Transfer if individual reports states is s is b s. States are i.i.d. 2
4 Simplest Case: 2 states, 1 period Value for planner as a function of value v for household: P (v) = max b 1,b 2 π 1 b 1 π 2 b 2 s.t. π 1 u(e 1 + b 1 ) + π 2 u(e 2 + b 2 ) = v u(e 1 + b 1 ) u(e 1 + b 2 ) u(e 2 + b 2 ) u(e 2 + b 1 ) (PK) (IC1) (IC2) IC1 implies b 1 b 2. IC2 implies b 2 b 1. So b 1 = b 2. So the static problem is not very interesting. 3
5 Note P (v) is decreasing and strictly concave. P (v) = max b b s.t. π 1 u(e 1 + b) + π 2 u(e 2 + b) = v Lagrangian: L(b, λ) = b + λ(eu(e + b) v). To show P (v) is decreasing: Envelope condition: P (v) = λ. First order condition: λeu (e + b) = 1. So P 1 (v) = Eu (e + b). To show P (v) is strictly concave: Higher v requires higher b, hence lower u (e + b), lower P (v). Or it can be done directly: P (v) = Eu (e + b) ( Eu (e + b) ) 3. 4
6 Simplest Interesting Case: 2 states, 2 periods The second period looks just like the one period model. P 2 (v) = max b 2 b 2 s.t. Eu(e + b 2 ) = v P 2 (v) is decreasing and strictly concave, with P 2 (v) = 1 Eu (e + b 2 ). In the first period, things get more interesting: P 1 (v) = max π ( 1 b1 + βp 2 (w 1 ) ) ( + π 2 b2 + βp 2 (w 2 ) ) {b,w} subject to π 1 ( u(e1 + b 1 ) + βw 1 ) + π2 ( u(e2 + b 2 ) + βw 2 ) = v u(e 1 + b 1 ) + βw 1 u(e 1 + b 2 ) + βw 2 u(e 2 + b 2 ) + βw 2 u(e 2 + b 1 ) + βw 1 5
7 Claim: b 1 b 2 and w 1 w 2. Proof: Add the incentive compatibility constraints together: u(e 2 + b 2 ) u(e 1 + b 2 ) u(e 2 + b 1 ) u(e 1 + b 1 ) u concave implies u(e 2 + b) u(e 1 + b) is decreasing, so b 2 b 1. (IC2) then requires w 2 w 1. Note that b 1 = b 2 w 1 = w 2. 6
8 Claim: (IC2) binds. Proof: Suppose not, i.e. u(e 2 + b 2 ) + βw 2 > u(e 2 + b 1 ) + βw 1. b 1 b 2 implies w 2 > w 1. Reduce w 2 to w 2 and raise w 1 to w 1, keeping constant Note that still w 2 w 1. π 1 w 1 + π 2 w 2 = π 1 w 1 + π 2 w 2, until u(e 2 + b 2 ) + βw 2 = u(e 2 + b 1 ) + βw 1. w is a mean preserving spread of w. This makes (IC1) easier to satisfy. Since P 2 (v) is concave, this raises the moneylender s payoff. 7
9 Claim: The household and moneylender prefer high endowments. Household: From (IC2), u(e 2 + b 2 ) + βw 2 = u(e 2 + b 1 ) + βw 1 > u(e 1 + b 1 ) + βw 1 Note that we don t really need to use (IC2) binding. Moneylender: Suppose not, b 1 + βp 2 (w 1 ) > b 2 + βp 2 (w 2 ). Switch from {b 1, b 2, w 1, w 2 } to {b 1, b 1, w 1, w 1 }. This trivially satisfies the IC constraints. Household utility is unchanged since (IC2) binds: u(e 2 + b 2 ) + βw 2 = u(e 2 + b 1 ) + βw 1 But the moneylender does strictly better, a contradiction. 8
10 Claim: The household s expected marginal utility rises over time. Proof: Write the Lagrangian, ignoring (IC1): ( P 1 (v) = π 1 b1 + βp 2 (w 1 ) ) ( + π 2 b2 + βp 2 (w 2 ) ) ( ) ( ) ) + λ (π 1 u(e1 + b 1 ) + βw 1 + π2 u(e2 + b 2 ) + βw 2 v ) + µ (u(e 2 + b 2 ) + βw 2 u(e 2 + b 1 ) βw 1 The other first order conditions are b 1 : π 1 + λπ 1 u (e 1 + b 1 ) µu (e 2 + b 1 ) = 0 (1) b 2 : π 2 + λπ 2 u (e 2 + b 2 ) + µu (e 2 + b 2 ) = 0 (2) w 1 : π 1 P 2(w 1 ) + λπ 1 µ = 0 (3) w 2 : π 2 P 2(w 2 ) + λπ 2 + µ = 0 (4) 9
11 Kuhn-Tucker implies µ 0. If µ = 0: Equations (1) and (2) imply e 1 + b 1 = e 2 + b 2 or b 1 > b 2. Equations (3) and (4) imply w 1 = w 2. This contradicts earlier argument that b 1 = b 2 w 1 = w 2. So µ > 0, i.e. (IC2) binds. Equation (3) implies λπ 1 > µ, since P 2 (w 1) < 0. Equations (2) and (4) imply u (e 2 + b 2 ) = π 2 λπ 2 + µ = 1 P 2 (w 2) = Eu (e + b 2 (w 2 )) i.e. when the endowment is high, the Euler equation holds. 10
12 Equations (1) and (3) imply λπ 1 u (e 1 + b 1 ) µu (e 2 + b 1 ) λπ 1 µ = π 1 λπ 1 µ = 1 P 2 (w 1) = Eu (e+b 2 (w 1 )) e 1 < e 2 implies u (e 1 + b 1 ) > u (e 2 + b 1 ). Since λπ 1 > µ > 0, u (e 1 + b 1 ) < λπ 1u (e 1 + b 1 ) µu (e 2 + b 1 ) λπ 1 µ Combining these gives u (e 1 + b 1 ) < Eu (e + b 2 (w 1 )). i.e. when the endowment is low, b 1 is low relative to b 2 (w 1 ). Putting this together, E 1 u (e + b 1 ) < E 1 u (e + b 2 ). Marginal utility grows over time with βr = 1. Contrast this with exogenous incomplete markets. 11
13 What happens with more than 2 periods? The recursive structure suggests an inductive argument. For this to work, P 1 (v) must be strictly concave and differentiable. Differentiability is easy. The envelope theorem implies P 1 (v) = λ. Add together (3) and (4) to get π 1 P 2 (w 1) + π 2 P 2 (w 2) + λ = 0. So P 1 (v) = EP 2 (w), which exists. Strict concavity is harder... 12
14 T period model It is possible to work through all the main arguments inductively. Conclusions: Eu (e + b) is a super-martingale. Since u > 0, super-martingale convergence theorem applies. Expected marginal utility converges to infinity. EP t(v) is a martingale. Note that over long-time horizons, P t (v) P (v). P (v) (strictly?) concave implies v is a sub-martingale. The household s expected utility falls (without bound?). 16
15 Lower bound on the Pareto frontier P (v): A constant transfer b in every period is feasible: P (v) b 1 β P a(v) s.t. π 1u(e 1 + b)+π 2 u(e 2 + b) 1 β = v For example, if u(c) =logc and π 1 = π 2 = 1 2, this becomes b = 1 ( ) (e2 e 1 ) exp(2(1 β)v) e 1 e 2 So a lower bound on the moneylender s profit is (e2 e 1 ) P a (v) = 2 +4exp(2(1 β)v) e 1 e 2. 2(1 β) In this case, P a ( ) =e 1 /(1 β) andp a ( ) =. 1
16 Upper bound on Pareto frontier P (v): Constant consumption e + b in every state is cheapest: P (v) π 1b 1 π 2 b 2 1 β P c (v) s.t. u(e 1 + b 1 ) 1 β = u(e 2 + b 2 ) 1 β = v For example, if u(c) =logc and π 1 = π 2 = 1 2, this becomes b 1 = e 1 + exp((1 β)v) andb 2 = e 2 + exp((1 β)v). So an upper bound on the moneylender s profit is P c (v) = e 1 + e 2 2 exp((1 β)v). 2(1 β) In this case, P c ( ) = e 1 + e 2 2(1 β) and P c( ) =. 2
17 Upper and lower bound functions: u(c) =logc, β =0.9, e 1 =0,e 2 =1,π 1 = π 2 =
18 Pareto Frontier: u(c) =logc, β =0.9, e 1 =0,e 2 =1,π 1 = π 2 =
19 Does v? We know P (v) is a nonpositive Martingale, and hence converges. We hope P (v) isstrictly concave, so there is a one-to-one mapping between v and P (v). We know any finite v cannot be a limit, since w 1 (v) <w 2 (v). We conclude that v or v. L-S assume utility is bounded above, hence preclude v. Atkeson and Lucas (1992) prove v in some special cases. 8
20 Optimal Unemployment Insurance Preferences over consumption c and job search effort a: E β t (u(c t ) a t ) t=0 with c t 0anda t 0. Standard assumptions on u: increasing, concave, twice differentiable. All jobs pay a wage of w and last forever. Probability of finding a job: p(a), increasing, concave, differentiable. p(0) = 0. lim a p(a) =1. p (0) = 9
21 Autarky: Consumes w once employed: V e = u(w)+βv e = u(w) 1 β Consumes 0 and searches a while unemployed V aut =max a u(0) a + β ( p(a)v e +(1 p(a))v aut ) Note that search effort a is time-invariant. The first order condition is βp (a)(v e V aut )=1 Combining with the Bellman equations gives u(w) u(0) = 10 1 β(1 p(a)) βp (a) a
22 Full Information: How much does it cost to deliver utility V>V aut to unemployed? Insurance agency controls c and a for unemployed. Formulate cost minimization problem recursively: ( ) C(V )= min c + β(1 p(a))c(w ) c,a,w where V = u(c) a + β ( p(a)v e +(1 p(a))w ) Note V e is unchanged. No taxes once employed. Claim: C(V ) is strictly convex. 11
23 Write this problem as a Lagrangian: C(V )=maxl = c + β(1 p(a))c(w ) θ ( u(c) a + β ( p(a)v e +(1 p(a))w ) V ) Envelope condition: C (V )=θ. F.O.C. w.r.t. W : C (W )=θ. So C (V )=C (W )orequivalentlyv = W. Induction establishes c and a are constant during unemployment. 12
24 Restate the dual problem: subject to V =max c,a u(c) a + β( p(a)v e +(1 p(a))v ) C = c + β(1 p(a))c The first order conditions from the Lagrangian are u (c) =λ. 1+βp (a)(v e V )= λβp (a)c. Using Bellman equations, we can rewrite this as ( ) 1 u(w) u(c) =(1 β(1 p(a))) βp (a) u (c)c or u(w) = 1 β(1 p(a)) βp (a) +(u(c) u (c)c) 13
25 u(w) = 1 β(1 p(a)) βp (a) +(u(c) u (c)c) This describes a decreasing relationship between c and a. The level of c and a is chosen to satisfy promise-keeping. Higher V requires higher c and lower a. So c is higher and a is lower than under autarky. But suppose the worker could change a taking c as given: Replicating the earlier argument, she sets u(w) = 1 β(1 p(a)) βp (a) + u(c). 1 β(1 p(a)) This reduces βp, or equivalently reduces a. (a) So there is an incentive problem. 14
26 Asymmetric Information The insurer chooses a time path for c while unemployed. The worker chooses a, taking the consumption path as given. Formulate cost minimization problem recursively: ( ) C(V )= min c + β(1 p(a))c(w ) c,a,w where and V = u(c) a + β ( p(a)v e +(1 p(a))w ) 1=βp (a)(v e W ). 15
27 Write as a Lagrangian: C(V )=L = c + β(1 p(a))c(w ) θ ( u(c) a + β ( p(a)v e +(1 p(a))w ) V ) Envelope condition is C (V )=θ. η ( βp (a)(v e W ) 1 ) First order condition for W is C (W )=θ ηp (a) 1 p(a). So C (V ) >C (W )orv>w(assuming C is convex). Worker s utility must decline while unemployed. The optimal choice of c implies θ =1/u (c). Since θ declines over time, c must fall as well. Worker s first order condition implies a increases. 16
28
29
30
31
32
Hidden information. Principal s payoff: π (e) w,
Hidden information Section 14.C. in MWG We still consider a setting with information asymmetries between the principal and agent. However, the effort is now perfectly observable. What is unobservable?
More information(a) Write down the Hamilton-Jacobi-Bellman (HJB) Equation in the dynamic programming
1. Government Purchases and Endogenous Growth Consider the following endogenous growth model with government purchases (G) in continuous time. Government purchases enhance production, and the production
More informationUNIVERSITY OF WISCONSIN DEPARTMENT OF ECONOMICS MACROECONOMICS THEORY Preliminary Exam August 1, :00 am - 2:00 pm
UNIVERSITY OF WISCONSIN DEPARTMENT OF ECONOMICS MACROECONOMICS THEORY Preliminary Exam August 1, 2017 9:00 am - 2:00 pm INSTRUCTIONS Please place a completed label (from the label sheet provided) on the
More informationSlides II - Dynamic Programming
Slides II - Dynamic Programming Julio Garín University of Georgia Macroeconomic Theory II (Ph.D.) Spring 2017 Macroeconomic Theory II Slides II - Dynamic Programming Spring 2017 1 / 32 Outline 1. Lagrangian
More informationLecture 7: Stochastic Dynamic Programing and Markov Processes
Lecture 7: Stochastic Dynamic Programing and Markov Processes Florian Scheuer References: SLP chapters 9, 10, 11; LS chapters 2 and 6 1 Examples 1.1 Neoclassical Growth Model with Stochastic Technology
More informationUniversity of Warwick, EC9A0 Maths for Economists Lecture Notes 10: Dynamic Programming
University of Warwick, EC9A0 Maths for Economists 1 of 63 University of Warwick, EC9A0 Maths for Economists Lecture Notes 10: Dynamic Programming Peter J. Hammond Autumn 2013, revised 2014 University of
More informationSimple Consumption / Savings Problems (based on Ljungqvist & Sargent, Ch 16, 17) Jonathan Heathcote. updated, March The household s problem X
Simple Consumption / Savings Problems (based on Ljungqvist & Sargent, Ch 16, 17) subject to for all t Jonathan Heathcote updated, March 2006 1. The household s problem max E β t u (c t ) t=0 c t + a t+1
More informationEcon 504, Lecture 1: Transversality and Stochastic Lagrange Multipliers
ECO 504 Spring 2009 Chris Sims Econ 504, Lecture 1: Transversality and Stochastic Lagrange Multipliers Christopher A. Sims Princeton University sims@princeton.edu February 4, 2009 0 Example: LQPY The ordinary
More informationGraduate Macroeconomics 2 Problem set Solutions
Graduate Macroeconomics 2 Problem set 10. - Solutions Question 1 1. AUTARKY Autarky implies that the agents do not have access to credit or insurance markets. This implies that you cannot trade across
More informationStochastic Problems. 1 Examples. 1.1 Neoclassical Growth Model with Stochastic Technology. 1.2 A Model of Job Search
Stochastic Problems References: SLP chapters 9, 10, 11; L&S chapters 2 and 6 1 Examples 1.1 Neoclassical Growth Model with Stochastic Technology Production function y = Af k where A is random Let A s t
More informationEconomics 2450A: Public Economics Section 8: Optimal Minimum Wage and Introduction to Capital Taxation
Economics 2450A: Public Economics Section 8: Optimal Minimum Wage and Introduction to Capital Taxation Matteo Paradisi November 1, 2016 In this Section we develop a theoretical analysis of optimal minimum
More informationDynamic Optimization Problem. April 2, Graduate School of Economics, University of Tokyo. Math Camp Day 4. Daiki Kishishita.
Discrete Math Camp Optimization Problem Graduate School of Economics, University of Tokyo April 2, 2016 Goal of day 4 Discrete We discuss methods both in discrete and continuous : Discrete : condition
More informationDYNAMIC LECTURE 5: DISCRETE TIME INTERTEMPORAL OPTIMIZATION
DYNAMIC LECTURE 5: DISCRETE TIME INTERTEMPORAL OPTIMIZATION UNIVERSITY OF MARYLAND: ECON 600. Alternative Methods of Discrete Time Intertemporal Optimization We will start by solving a discrete time intertemporal
More informationDynamic Principal Agent Models
Dynamic Principal Agent Models Philipp Renner Hoover Institution Stanford University phrenner@gmail.com Karl Schmedders Universität Zürich and Swiss Finance Institute karl.schmedders@business.uzh.ch April
More informationMacroeconomic Theory II Homework 2 - Solution
Macroeconomic Theory II Homework 2 - Solution Professor Gianluca Violante, TA: Diego Daruich New York University Spring 204 Problem The household has preferences over the stochastic processes of a single
More informationThis is designed for one 75-minute lecture using Games and Information. October 3, 2006
This is designed for one 75-minute lecture using Games and Information. October 3, 2006 1 7 Moral Hazard: Hidden Actions PRINCIPAL-AGENT MODELS The principal (or uninformed player) is the player who has
More informationRecursive Contracts and Endogenously Incomplete Markets
Recursive Contracts and Endogenously Incomplete Markets Mikhail Golosov, Aleh Tsyvinski and Nicolas Werquin January 2016 Abstract In this chapter we study dynamic incentive models in which risk sharing
More informationLecture 6: Discrete-Time Dynamic Optimization
Lecture 6: Discrete-Time Dynamic Optimization Yulei Luo Economics, HKU November 13, 2017 Luo, Y. (Economics, HKU) ECON0703: ME November 13, 2017 1 / 43 The Nature of Optimal Control In static optimization,
More information"A Theory of Financing Constraints and Firm Dynamics"
1/21 "A Theory of Financing Constraints and Firm Dynamics" G.L. Clementi and H.A. Hopenhayn (QJE, 2006) Cesar E. Tamayo Econ612- Economics - Rutgers April 30, 2012 2/21 Program I Summary I Physical environment
More informationu(c t, x t+1 ) = c α t + x α t+1
Review Questions: Overlapping Generations Econ720. Fall 2017. Prof. Lutz Hendricks 1 A Savings Function Consider the standard two-period household problem. The household receives a wage w t when young
More informationMacroeconomic Theory and Analysis Suggested Solution for Midterm 1
Macroeconomic Theory and Analysis Suggested Solution for Midterm February 25, 2007 Problem : Pareto Optimality The planner solves the following problem: u(c ) + u(c 2 ) + v(l ) + v(l 2 ) () {c,c 2,l,l
More informationMacroeconomics Qualifying Examination
Macroeconomics Qualifying Examination August 2015 Department of Economics UNC Chapel Hill Instructions: This examination consists of 4 questions. Answer all questions. If you believe a question is ambiguously
More informationECON 582: Dynamic Programming (Chapter 6, Acemoglu) Instructor: Dmytro Hryshko
ECON 582: Dynamic Programming (Chapter 6, Acemoglu) Instructor: Dmytro Hryshko Indirect Utility Recall: static consumer theory; J goods, p j is the price of good j (j = 1; : : : ; J), c j is consumption
More informationComprehensive Exam. Macro Spring 2014 Retake. August 22, 2014
Comprehensive Exam Macro Spring 2014 Retake August 22, 2014 You have a total of 180 minutes to complete the exam. If a question seems ambiguous, state why, sharpen it up and answer the sharpened-up question.
More informationMicroeconomic Theory. Microeconomic Theory. Everyday Economics. The Course:
The Course: Microeconomic Theory This is the first rigorous course in microeconomic theory This is a course on economic methodology. The main goal is to teach analytical tools that will be useful in other
More informationUncertainty Per Krusell & D. Krueger Lecture Notes Chapter 6
1 Uncertainty Per Krusell & D. Krueger Lecture Notes Chapter 6 1 A Two-Period Example Suppose the economy lasts only two periods, t =0, 1. The uncertainty arises in the income (wage) of period 1. Not that
More informationMacroeconomic Theory and Analysis V Suggested Solutions for the First Midterm. max
Macroeconomic Theory and Analysis V31.0013 Suggested Solutions for the First Midterm Question 1. Welfare Theorems (a) There are two households that maximize max i,g 1 + g 2 ) {c i,l i} (1) st : c i w(1
More informationCompetitive Equilibrium and the Welfare Theorems
Competitive Equilibrium and the Welfare Theorems Craig Burnside Duke University September 2010 Craig Burnside (Duke University) Competitive Equilibrium September 2010 1 / 32 Competitive Equilibrium and
More informationMacroeconomics Qualifying Examination
Macroeconomics Qualifying Examination January 2016 Department of Economics UNC Chapel Hill Instructions: This examination consists of 3 questions. Answer all questions. If you believe a question is ambiguously
More informationOptimal Insurance of Search Risk
Optimal Insurance of Search Risk Mikhail Golosov Yale University and NBER Pricila Maziero University of Pennsylvania Guido Menzio University of Pennsylvania and NBER November 2011 Introduction Search and
More informationMortenson Pissarides Model
Mortenson Pissarides Model Prof. Lutz Hendricks Econ720 November 22, 2017 1 / 47 Mortenson / Pissarides Model Search models are popular in many contexts: labor markets, monetary theory, etc. They are distinguished
More informationIn the Ramsey model we maximized the utility U = u[c(t)]e nt e t dt. Now
PERMANENT INCOME AND OPTIMAL CONSUMPTION On the previous notes we saw how permanent income hypothesis can solve the Consumption Puzzle. Now we use this hypothesis, together with assumption of rational
More informationNeoclassical Business Cycle Model
Neoclassical Business Cycle Model Prof. Eric Sims University of Notre Dame Fall 2015 1 / 36 Production Economy Last time: studied equilibrium in an endowment economy Now: study equilibrium in an economy
More informationOptimization. A first course on mathematics for economists
Optimization. A first course on mathematics for economists Xavier Martinez-Giralt Universitat Autònoma de Barcelona xavier.martinez.giralt@uab.eu II.3 Static optimization - Non-Linear programming OPT p.1/45
More informationDiamond-Mortensen-Pissarides Model
Diamond-Mortensen-Pissarides Model Dongpeng Liu Nanjing University March 2016 D. Liu (NJU) DMP 03/16 1 / 35 Introduction Motivation In the previous lecture, McCall s model was introduced McCall s model
More informationLecture Notes 10: Dynamic Programming
University of Warwick, EC9A0 Maths for Economists Peter J. Hammond 1 of 81 Lecture Notes 10: Dynamic Programming Peter J. Hammond 2018 September 28th University of Warwick, EC9A0 Maths for Economists Peter
More informationLabor Economics, Lecture 11: Partial Equilibrium Sequential Search
Labor Economics, 14.661. Lecture 11: Partial Equilibrium Sequential Search Daron Acemoglu MIT December 6, 2011. Daron Acemoglu (MIT) Sequential Search December 6, 2011. 1 / 43 Introduction Introduction
More informationG5212: Game Theory. Mark Dean. Spring 2017
G5212: Game Theory Mark Dean Spring 2017 Adverse Selection We have now completed our basic analysis of the adverse selection model This model has been applied and extended in literally thousands of ways
More informationDepartment of Agricultural Economics. PhD Qualifier Examination. May 2009
Department of Agricultural Economics PhD Qualifier Examination May 009 Instructions: The exam consists of six questions. You must answer all questions. If you need an assumption to complete a question,
More informationA simple macro dynamic model with endogenous saving rate: the representative agent model
A simple macro dynamic model with endogenous saving rate: the representative agent model Virginia Sánchez-Marcos Macroeconomics, MIE-UNICAN Macroeconomics (MIE-UNICAN) A simple macro dynamic model with
More informationPermanent Income Hypothesis Intro to the Ramsey Model
Consumption and Savings Permanent Income Hypothesis Intro to the Ramsey Model Lecture 10 Topics in Macroeconomics November 6, 2007 Lecture 10 1/18 Topics in Macroeconomics Consumption and Savings Outline
More informationHOMEWORK #3 This homework assignment is due at NOON on Friday, November 17 in Marnix Amand s mailbox.
Econ 50a second half) Yale University Fall 2006 Prof. Tony Smith HOMEWORK #3 This homework assignment is due at NOON on Friday, November 7 in Marnix Amand s mailbox.. This problem introduces wealth inequality
More informationNeoclassical Growth Model / Cake Eating Problem
Dynamic Optimization Institute for Advanced Studies Vienna, Austria by Gabriel S. Lee February 1-4, 2008 An Overview and Introduction to Dynamic Programming using the Neoclassical Growth Model and Cake
More informationECON607 Fall 2010 University of Hawaii Professor Hui He TA: Xiaodong Sun Assignment 1 Suggested Solutions
ECON607 Fall 200 University of Hawaii Professor Hui He TA: Xiaodong Sun Assignment Suggested Solutions The due date for this assignment is Thursday, Sep. 23.. Consider an stochastic optimal growth model
More informationLecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti)
Lecture 3: Growth with Overlapping Generations (Acemoglu 2009, Chapter 9, adapted from Zilibotti) Kjetil Storesletten September 5, 2014 Kjetil Storesletten () Lecture 3 September 5, 2014 1 / 56 Growth
More informationLecture 15. Dynamic Stochastic General Equilibrium Model. Randall Romero Aguilar, PhD I Semestre 2017 Last updated: July 3, 2017
Lecture 15 Dynamic Stochastic General Equilibrium Model Randall Romero Aguilar, PhD I Semestre 2017 Last updated: July 3, 2017 Universidad de Costa Rica EC3201 - Teoría Macroeconómica 2 Table of contents
More informationAn adaptation of Pissarides (1990) by using random job destruction rate
MPRA Munich Personal RePEc Archive An adaptation of Pissarides (990) by using random job destruction rate Huiming Wang December 2009 Online at http://mpra.ub.uni-muenchen.de/203/ MPRA Paper No. 203, posted
More information1 Two elementary results on aggregation of technologies and preferences
1 Two elementary results on aggregation of technologies and preferences In what follows we ll discuss aggregation. What do we mean with this term? We say that an economy admits aggregation if the behavior
More informationECON FINANCIAL ECONOMICS
ECON 337901 FINANCIAL ECONOMICS Peter Ireland Boston College Spring 2018 These lecture notes by Peter Ireland are licensed under a Creative Commons Attribution-NonCommerical-ShareAlike 4.0 International
More informationEconomics th April 2011
Economics 401 8th April 2011 Instructions: Answer 7 of the following 9 questions. All questions are of equal weight. Indicate clearly on the first page which questions you want marked. 1. Answer both parts.
More informationDynamic Programming Theorems
Dynamic Programming Theorems Prof. Lutz Hendricks Econ720 September 11, 2017 1 / 39 Dynamic Programming Theorems Useful theorems to characterize the solution to a DP problem. There is no reason to remember
More informationA Theory of Financing Constraints and Firm Dynamics by Clementi and Hopenhayn - Quarterly Journal of Economics (2006)
A Theory of Financing Constraints and Firm Dynamics by Clementi and Hopenhayn - Quarterly Journal of Economics (2006) A Presentation for Corporate Finance 1 Graduate School of Economics December, 2009
More informationLecture 5: Labour Economics and Wage-Setting Theory
Lecture 5: Labour Economics and Wage-Setting Theory Spring 2017 Lars Calmfors Literature: Chapter 7 Cahuc-Carcillo-Zylberberg: 435-445 1 Topics Weakly efficient bargaining Strongly efficient bargaining
More informationLecture 1: Labour Economics and Wage-Setting Theory
ecture 1: abour Economics and Wage-Setting Theory Spring 2015 ars Calmfors iterature: Chapter 1 Cahuc-Zylberberg (pp 4-19, 28-29, 35-55) 1 The choice between consumption and leisure U = U(C,) C = consumption
More informationDifferentiable Welfare Theorems Existence of a Competitive Equilibrium: Preliminaries
Differentiable Welfare Theorems Existence of a Competitive Equilibrium: Preliminaries Econ 2100 Fall 2017 Lecture 19, November 7 Outline 1 Welfare Theorems in the differentiable case. 2 Aggregate excess
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Comprehensive Examination: Macroeconomics Fall, 202 Answer Key to Section 2 Questions Section. (Suggested Time: 45 Minutes) For 3 of
More informationDynamic Problem Set 1 Solutions
Dynamic Problem Set 1 Solutions Jonathan Kreamer July 15, 2011 Question 1 Consider the following multi-period optimal storage problem: An economic agent imizes: c t} T β t u(c t ) (1) subject to the period-by-period
More informationModels of Wage Dynamics
Models of Wage Dynamics Toshihiko Mukoyama Department of Economics Concordia University and CIREQ mukoyama@alcor.concordia.ca December 13, 2005 1 Introduction This paper introduces four different models
More informationproblem. max Both k (0) and h (0) are given at time 0. (a) Write down the Hamilton-Jacobi-Bellman (HJB) Equation in the dynamic programming
1. Endogenous Growth with Human Capital Consider the following endogenous growth model with both physical capital (k (t)) and human capital (h (t)) in continuous time. The representative household solves
More informationGame Theory and Economics of Contracts Lecture 5 Static Single-agent Moral Hazard Model
Game Theory and Economics of Contracts Lecture 5 Static Single-agent Moral Hazard Model Yu (Larry) Chen School of Economics, Nanjing University Fall 2015 Principal-Agent Relationship Principal-agent relationship
More informationImpatience vs. Incentives
Impatience vs. Incentives Marcus Opp John Zhu University of California, Berkeley (Haas) & University of Pennsylvania, Wharton January 2015 Opp, Zhu (UC, Wharton) Impatience vs. Incentives January 2015
More informationGeneral idea. Firms can use competition between agents for. We mainly focus on incentives. 1 incentive and. 2 selection purposes 3 / 101
3 Tournaments 3.1 Motivation General idea Firms can use competition between agents for 1 incentive and 2 selection purposes We mainly focus on incentives 3 / 101 Main characteristics Agents fulll similar
More informationMicroeconomic Theory (501b) Problem Set 10. Auctions and Moral Hazard Suggested Solution: Tibor Heumann
Dirk Bergemann Department of Economics Yale University Microeconomic Theory (50b) Problem Set 0. Auctions and Moral Hazard Suggested Solution: Tibor Heumann 4/5/4 This problem set is due on Tuesday, 4//4..
More informationSTATIC LECTURE 4: CONSTRAINED OPTIMIZATION II - KUHN TUCKER THEORY
STATIC LECTURE 4: CONSTRAINED OPTIMIZATION II - KUHN TUCKER THEORY UNIVERSITY OF MARYLAND: ECON 600 1. Some Eamples 1 A general problem that arises countless times in economics takes the form: (Verbally):
More informationThe Principal-Agent Problem
Andrew McLennan September 18, 2014 I. Introduction Economics 6030 Microeconomics B Second Semester Lecture 8 The Principal-Agent Problem A. In the principal-agent problem there is no asymmetric information
More informationMacroeconomics Qualifying Examination
Macroeconomics Qualifying Examination August 2016 Department of Economics UNC Chapel Hill Instructions: This examination consists of 4 questions. Answer all questions. If you believe a question is ambiguously
More informationMacroeconomics I. University of Tokyo. Lecture 12. The Neo-Classical Growth Model: Prelude to LS Chapter 11.
Macroeconomics I University of Tokyo Lecture 12 The Neo-Classical Growth Model: Prelude to LS Chapter 11. Julen Esteban-Pretel National Graduate Institute for Policy Studies The Cass-Koopmans Model: Environment
More information4- Current Method of Explaining Business Cycles: DSGE Models. Basic Economic Models
4- Current Method of Explaining Business Cycles: DSGE Models Basic Economic Models In Economics, we use theoretical models to explain the economic processes in the real world. These models de ne a relation
More informationDevelopment Economics (PhD) Intertemporal Utility Maximiza
Development Economics (PhD) Intertemporal Utility Maximization Department of Economics University of Gothenburg October 7, 2015 1/14 Two Period Utility Maximization Lagrange Multiplier Method Consider
More informationNotes on the Thomas and Worrall paper Econ 8801
Notes on the Thomas and Worrall paper Econ 880 Larry E. Jones Introduction The basic reference for these notes is: Thomas, J. and T. Worrall (990): Income Fluctuation and Asymmetric Information: An Example
More informationChapter 4. Applications/Variations
Chapter 4 Applications/Variations 149 4.1 Consumption Smoothing 4.1.1 The Intertemporal Budget Economic Growth: Lecture Notes For any given sequence of interest rates {R t } t=0, pick an arbitrary q 0
More informationThe representative agent model
Chapter 3 The representative agent model 3.1 Optimal growth In this course we re looking at three types of model: 1. Descriptive growth model (Solow model): mechanical, shows the implications of a given
More informationDynamic Optimization Using Lagrange Multipliers
Dynamic Optimization Using Lagrange Multipliers Barbara Annicchiarico barbara.annicchiarico@uniroma2.it Università degli Studi di Roma "Tor Vergata" Presentation #2 Deterministic Infinite-Horizon Ramsey
More informationThe Kuhn-Tucker and Envelope Theorems
The Kuhn-Tucker and Envelope Theorems Peter Ireland ECON 77200 - Math for Economists Boston College, Department of Economics Fall 207 The Kuhn-Tucker and envelope theorems can be used to characterize the
More informationRisk Sharing, Inequality, and Fertility
Risk Sharing, Inequality, and Fertility Supplementary Appendix Roozbeh Hosseini ASU rhossein@asu.edu Larry E. Jones UMN lej@umn.edu Ali Shourideh UMN shour004@umn.edu Contents Resetting Property for a
More informationThe economy is populated by a unit mass of infinitely lived households with preferences given by. β t u(c Mt, c Ht ) t=0
Review Questions: Two Sector Models Econ720. Fall 207. Prof. Lutz Hendricks A Planning Problem The economy is populated by a unit mass of infinitely lived households with preferences given by β t uc Mt,
More informationSecond Welfare Theorem
Second Welfare Theorem Econ 2100 Fall 2015 Lecture 18, November 2 Outline 1 Second Welfare Theorem From Last Class We want to state a prove a theorem that says that any Pareto optimal allocation is (part
More informationEconomics 501B Final Exam Fall 2017 Solutions
Economics 501B Final Exam Fall 2017 Solutions 1. For each of the following propositions, state whether the proposition is true or false. If true, provide a proof (or at least indicate how a proof could
More informationECON 581: Growth with Overlapping Generations. Instructor: Dmytro Hryshko
ECON 581: Growth with Overlapping Generations Instructor: Dmytro Hryshko Readings Acemoglu, Chapter 9. Motivation Neoclassical growth model relies on the representative household. OLG models allow for
More informationSession 4: Money. Jean Imbs. November 2010
Session 4: Jean November 2010 I So far, focused on real economy. Real quantities consumed, produced, invested. No money, no nominal in uences. I Now, introduce nominal dimension in the economy. First and
More informationPractice Questions for Mid-Term I. Question 1: Consider the Cobb-Douglas production function in intensive form:
Practice Questions for Mid-Term I Question 1: Consider the Cobb-Douglas production function in intensive form: y f(k) = k α ; α (0, 1) (1) where y and k are output per worker and capital per worker respectively.
More informationChapter 3 Task 1-4. Growth and Innovation Fridtjof Zimmermann
Chapter 3 Task 1-4 Growth and Innovation Fridtjof Zimmermann Recept on how to derive the Euler-Equation (Keynes-Ramsey-Rule) 1. Construct the Hamiltonian Equation (Lagrange) H c, k, t, μ = U + μ(side Condition)
More information1 Recursive Competitive Equilibrium
Feb 5th, 2007 Let s write the SPP problem in sequence representation: max {c t,k t+1 } t=0 β t u(f(k t ) k t+1 ) t=0 k 0 given Because of the INADA conditions we know that the solution is interior. So
More informationLecture Notes - Dynamic Moral Hazard
Lecture Notes - Dynamic Moral Hazard Simon Board and Moritz Meyer-ter-Vehn October 23, 2012 1 Dynamic Moral Hazard E ects Consumption smoothing Statistical inference More strategies Renegotiation Non-separable
More informationAJAE appendix for Risk rationing and wealth effects in credit markets: Theory and implications for agriculture development
AJAE appendix for Risk rationing and wealth effects in credit markets: Theory and implications for agriculture development Stephen R. Boucher Agricultural and Resource Economics UC-Davis boucher@primal.ucdavis.edu
More informationGovernment 2005: Formal Political Theory I
Government 2005: Formal Political Theory I Lecture 11 Instructor: Tommaso Nannicini Teaching Fellow: Jeremy Bowles Harvard University November 9, 2017 Overview * Today s lecture Dynamic games of incomplete
More informationDynamic stochastic general equilibrium models. December 4, 2007
Dynamic stochastic general equilibrium models December 4, 2007 Dynamic stochastic general equilibrium models Random shocks to generate trajectories that look like the observed national accounts. Rational
More informationMathematical Preliminaries for Microeconomics: Exercises
Mathematical Preliminaries for Microeconomics: Exercises Igor Letina 1 Universität Zürich Fall 2013 1 Based on exercises by Dennis Gärtner, Andreas Hefti and Nick Netzer. How to prove A B Direct proof
More informationStagnation Traps. Gianluca Benigno and Luca Fornaro
Stagnation Traps Gianluca Benigno and Luca Fornaro May 2015 Research question and motivation Can insu cient aggregate demand lead to economic stagnation? This question goes back, at least, to the Great
More informationFinal Exam - Math Camp August 27, 2014
Final Exam - Math Camp August 27, 2014 You will have three hours to complete this exam. Please write your solution to question one in blue book 1 and your solutions to the subsequent questions in blue
More informationSTATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics. Ph. D. Preliminary Examination: Macroeconomics Fall, Partial Answer Key
STATE UNIVERSITY OF NEW YORK AT ALBANY Department of Economics Ph. D. Preliminary Examination: Macroeconomics Fall, 2008 Partial Answer Key Section. (Suggested Time: 45 Minutes) For 3 of the following
More informationDynamic Risk-Sharing with Two-Sided Moral Hazard
Dynamic Risk-Sharing with Two-Sided Moral Hazard Rui R. Zhao Department of Economics University at Albany - SUNY Albany, NY 12222, USA Tel: 518-442-4760 Fax: 518-442-4736 E-mail: rzhao@albany.edu November
More informationNotes on Alvarez and Jermann, "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica 2000
Notes on Alvarez Jermann, "Efficiency, Equilibrium, Asset Pricing with Risk of Default," Econometrica 2000 Jonathan Heathcote November 1st 2005 1 Model Consider a pure exchange economy with I agents one
More informationNotes on Recursive Utility. Consider the setting of consumption in infinite time under uncertainty as in
Notes on Recursive Utility Consider the setting of consumption in infinite time under uncertainty as in Section 1 (or Chapter 29, LeRoy & Werner, 2nd Ed.) Let u st be the continuation utility at s t. That
More informationLecture 2 The Centralized Economy
Lecture 2 The Centralized Economy Economics 5118 Macroeconomic Theory Kam Yu Winter 2013 Outline 1 Introduction 2 The Basic DGE Closed Economy 3 Golden Rule Solution 4 Optimal Solution The Euler Equation
More informationThe Kuhn-Tucker and Envelope Theorems
The Kuhn-Tucker and Envelope Theorems Peter Ireland EC720.01 - Math for Economists Boston College, Department of Economics Fall 2010 The Kuhn-Tucker and envelope theorems can be used to characterize the
More informationAdvanced Economic Growth: Lecture 3, Review of Endogenous Growth: Schumpeterian Models
Advanced Economic Growth: Lecture 3, Review of Endogenous Growth: Schumpeterian Models Daron Acemoglu MIT September 12, 2007 Daron Acemoglu (MIT) Advanced Growth Lecture 3 September 12, 2007 1 / 40 Introduction
More informationBasic Deterministic Dynamic Programming
Basic Deterministic Dynamic Programming Timothy Kam School of Economics & CAMA Australian National University ECON8022, This version March 17, 2008 Motivation What do we do? Outline Deterministic IHDP
More information1 With state-contingent debt
STOCKHOLM DOCTORAL PROGRAM IN ECONOMICS Helshögskolan i Stockholm Stockholms universitet Paul Klein Email: paul.klein@iies.su.se URL: http://paulklein.se/makro2.html Macroeconomics II Spring 2010 Lecture
More informationGovernment The government faces an exogenous sequence {g t } t=0
Part 6 1. Borrowing Constraints II 1.1. Borrowing Constraints and the Ricardian Equivalence Equivalence between current taxes and current deficits? Basic paper on the Ricardian Equivalence: Barro, JPE,
More information