Adverse Selection, Risk Sharing and Business Cycles
Abstract: I consider a real business cycle model in which agents have private information about an idiosyncratic shock to their value of leisure. I consider the mechanism design problem for this economy and describe a computational method to solve it. This is an important contribution of the paper since the method could be used to solve a wide class of models with heterogeneous agents and aggregate uncertainty. Calibrating the model to U.S. data I find a striking result: That the information frictions that plague the economy have no effects on business cycle fluctuations.
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Description: Full text
Provider: Federal Reserve Bank of Chicago
Part of Series: Working Paper Series
Publication Date: 2014-10-22
Pages: 54 pages