Insuring uninsurable income
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arXiv
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| Format: | Preprint |
| Published: |
2022
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| _version_ | 1866918392080891904 |
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| author | Ogaku, Michiko |
| author_facet | Ogaku, Michiko |
| contents | We study dynamic mechanism design in a pure-exchange economy with privately observed idiosyncratic income. In the standard infinitely lived hidden-income benchmark of Green (1987) and Thomas-Worrall (1990), constrained-efficient allocations exhibit immiseration. We propose a simple recursive mechanism -- adapted from Marcet-Marimon (1992) -- that shifts each income shock forward by one period, keeps promised utilities in a bounded set, and, under a transparent ``moderate risk-aversion'' condition, delivers sequential efficiency. In a stationary \emph{overlapping-generations} setting, we further show that under additional symmetry and curvature assumptions, a second-order approximation yields a sufficient condition for period-by-period budget balance; early cohorts pre-fund later transfers; for suitable initial promises, all cohorts are better off than under autarky. Our analysis uses a single state (promised utility), closed-form transfers, and a Bellman verification. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2204_00347 |
| institution | arXiv |
| publishDate | 2022 |
| record_format | arxiv |
| spellingShingle | Insuring uninsurable income Ogaku, Michiko Theoretical Economics We study dynamic mechanism design in a pure-exchange economy with privately observed idiosyncratic income. In the standard infinitely lived hidden-income benchmark of Green (1987) and Thomas-Worrall (1990), constrained-efficient allocations exhibit immiseration. We propose a simple recursive mechanism -- adapted from Marcet-Marimon (1992) -- that shifts each income shock forward by one period, keeps promised utilities in a bounded set, and, under a transparent ``moderate risk-aversion'' condition, delivers sequential efficiency. In a stationary \emph{overlapping-generations} setting, we further show that under additional symmetry and curvature assumptions, a second-order approximation yields a sufficient condition for period-by-period budget balance; early cohorts pre-fund later transfers; for suitable initial promises, all cohorts are better off than under autarky. Our analysis uses a single state (promised utility), closed-form transfers, and a Bellman verification. |
| title | Insuring uninsurable income |
| topic | Theoretical Economics |
| url | https://arxiv.org/abs/2204.00347 |