We show how the method of endogenous gridpoints can be extended to solve models with occasionally binding constraints among endogenous variables very efficiently. We present the method for a consumer problem with occasionally binding collateral constraints and non-separable utility in durable and non-durable consumption. This problem allows for a joint analysis of durable and non-durable consumption in models with uninsurable income risk which is important to understand patterns of consumption, saving and collateralized debt. We illustrate the algorithm and its efficiency by calibrating the model to US data. JEL classification: C63, E21, D91.

No abstract

This paper investigates the economic relevance of the large differences in homestead exemptions across US states. We build a structural model for an equilibrium analysis of debt-portfolio choices over the life cycle. Our analysis captures key patterns from the observed cross-sectional distributions of secured debt, unsecured debt, and of home equity. The model predicts that harmonizing the amount of home equity exempt in bankruptcy procedures has quantitatively negligible effects on the interest rate of unsecured debt and on welfare, unless the exemption is eliminated. The small welfare effect may rationalize why the differences in homestead exemptions are so persistent. (JEL D14, D91, E21, G11, H71, R31)

No abstract

This paper suggests a resolution to what has come to be known as the 'private equity premium puzzle' (Am. Econom. Rev. 92(4) (2002) 745-778). We interpret occupational choice as a dynamic portfolio choice problem of a life-cycle investor facing a borrowing constraint, stock market participation costs and imperfect information about the profitability of potential businesses. Information is imperfect, because only entrepreneurs observe their own business risk realizations and there is a fixed cost of starting a business. Using numerical techniques we find that the model generates the empirically observed return structure for private and public equity with standard CRRA-preferences and fully rational expectations. r 2004 Elsevier B.V. All rights reserved. JEL classification: G11; D91

No abstract

This paper suggests a solution to what has become known as the "private equity premium puzzle" (Moskowitz and Vissing-Jorgensen (2002)). We interpret occupational choice as a dynamic portfolio choice problem of a life-cycle investor facing a liquidity constraint and imperfect information about the profitability of potential businesses. In this setting, becoming an entrepreneur is equivalent to investing in non-traded private equity capital subject to transaction costs. We model the return on private equity as the sum of two components, the individual ability of the entrepreneur and idiosyncratic business risk. Information is imperfect, because only entrepreneurs observe their own business risk realizations. Using numerical techniques we find that the model generates the observed return structure for private equity using standard CRRA-preferences and fully rational expectations.

Asset trading, Complete markets, Production economies, C61, D50, E20, G11,