This paper characterizes the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which agents can insure against idiosyncratic income risk by trading agent-shock contingent assets, subject to limited commitment constraints that rule out selling these assets short. For a general N-state Poisson labor productivity process we characterize the optimal consumption-asset allocation, the stationary asset distribution as well as the aggregate supply of capital by the household sector. For the special case in which production is Cobb-Douglas, agent labor productivity takes two values, one of which is zero, and agents have log-utility, we solve the equilibrium interest rate, capital stock and the consumption distribution in closed form. The paper therefore provides a tractable alternative to the standard incomplete markets general equilibrium model as in Aiyagari (1994).

More on this topic

BFI Working Paper·Feb 20, 2025

Non est Disputandum de Generalizability? A Glimpse into The External Validity Trial

John List
Topics: Uncategorized
BFI Working Paper·Feb 18, 2025

How Costly Are Business Cycle Volatility and Inflation? A Vox Populi Approach

Dimitris Georgarakos, Kwang Hwan Kim, Olivier Coibion, Myungkyu Shim, Myunghwan Andrew Lee, Yuriy Gorodnichenko, Geoff Kenny, Seowoo Han, and Michael Weber
Topics: Uncategorized
BFI Working Paper·Feb 14, 2025

Decisions Under Risk are Decisions Under Complexity: Comment

Daniel Banki, Uri Simonsohn, Robert Walatka, and George Wu
Topics: Uncategorized