Incomplete market dynamics in a neoclassical production economy
By: George-Marios Angeletos, Laurent-Emmanuel Calvet
Contributors: Calvet, Laurent E.; National Bureau of Economic Research; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 04-41; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 04-41.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2004
Place of publication: Cambridge, Mass
Language: eng
Number of pages: 31
Description: We investigate a neoclassical economy with heterogeneous agents, convex technologies and idiosyncratic production risk. Combined with precautionary savings, investment risk generates rich effects that do not arise in the presence of pure endowment risk. Under a finite horizon, multiple growth paths and endogenous fluctuations can exist even when agents are very patient. In infinite-horizon economies, multiple steady states may arise from the endogeneity of risktaking and interest rates instead of the usual wealth effects. Depending on the economy's parameters, the local dynamics around a steady state are locally unique, totally unstable or locally undetermined, and the equilibrium path can be attracted to a limit cycle. The model generates closed-form expressions for the equilibrium dynamics and easily extends to a variety of environments, including heterogeneous capital types and multiple sectors. Keywords: Entrepreneurial Risk, Precautionary Motive, Endogenous Fluctuations, Poverty Traps. JEL Classifications: D51, D52, D92, E20, E32.
Notes: "November 2004."

Includes bibliographical references (p. 30-31).

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