Optimal savings distortions with recursive preferences
By: [by] Emmanuel Farhi [and] Ivǹ Werning
Contributors: Werning, Ivǹ; Massachusetts Institute of Technology. Dept. of Economics
Series: Working paper series / Massachusetts Institute of Technology, Dept. of Economics -- working paper 07-30; Working paper (Massachusetts Institute of Technology. Dept. of Economics) -- no. 07-30.
Publisher: Massachusetts Institute of Technology, Dept. of Economics
Published: 2007
Place of publication: Cambridge, MA
Language: eng
Number of pages: 34
Description: This paper derives an intertemporal optimality condition for economies with private information, focusing on a class of recursive preferences. By comparing it to the situation where agents can freely save in a risk-free asset market, we derive the optimal savings distortions necessary for constrained optimality. Our recursive preferences are homogeneous and satisfy a balanced growth condition, while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution. We perform some quantitative exercises that disentangle the respective roles played by these two parameters play in optimal distortions and the implied welfare gains.
Notes: "December 7, 2007."

Includes bibliographical references (p. 34).

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