Federal Reserve Bank of Chicago
Working Paper Series
Adverse Selection, Risk Sharing and Business Cycles
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.
Cite this item
Marcelo Veracierto, Adverse Selection, Risk Sharing and Business Cycles, Federal Reserve Bank of Chicago, Working Paper Series WP-2014-10, 22 Oct 2014.
- C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
- C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
- D31 - Microeconomics - - Distribution - - - Personal Income and Wealth Distribution
- D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
- E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
Keywords: Adverse selection; risk sharing; business cycles; private information; incentives; optimal contracts; computational methods; heterogeneous agents
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