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Federal Reserve Bank of Chicago
Working Paper Series
Adverse Selection, Risk Sharing and Business Cycles
Marcelo Veracierto
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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Marcelo Veracierto, Adverse Selection, Risk Sharing and Business Cycles, Federal Reserve Bank of Chicago, Working Paper Series WP-2014-10, 22 Oct 2014.
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Keywords: Adverse selection; risk sharing; business cycles; private information; incentives; optimal contracts; computational methods; heterogeneous agents
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