Dynamic efficiency and the two-part golden rule with heterogeneous agents

Kuhle, Wolfgang

doi:10.1016/j.jmacro.2012.05.001

Cited by 3 publications

(9 citation statements)

References 31 publications

(40 reference statements)

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“…In our model, however, there is also a dispersion of consumption around the mean that is induced by different idiosyncratic shock histories. Therefore, from the ex post perspective, households may gain or lose from a decrease of the capital stock because—depending on each idiosyncratic shock history and resulting asset position—either the negative aggregate wage or the positive aggregate return effect dominates; see, for example, Kuhle (). From the ex ante perspective, the question of whether there is too much or too little capital in the economy then depends on the weight a household receives in the respective welfare criterion; see Davila et al.…”

Section: The Quantitative Modelmentioning

confidence: 99%

Idiosyncratic Risk, Aggregate Risk, and the Welfare Effects of Social Security

Harenberg

Ludwig

2018

Int Economic Review

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We ask whether a pay-as-you-go financed social security system is welfare improving in an economy with idiosyncratic and aggregate risk. We show that the whole welfare benefit from insurance against both risks is greater than the sum of benefits from insurance against the isolated risks. One reason is the convexity of the welfare gain. The other reason is a direct risk interaction amplifying the utility losses from risk. Our quantitative evaluation shows that introducing a minimum pension leads to sizeable welfare gains, despite substantial crowding out. About 60% of these gains would be missing from summing up the isolated benefits. * Manuscript

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Section: The Quantitative Modelmentioning

confidence: 99%

Idiosyncratic Risk, Aggregate Risk, and the Welfare Effects of Social Security

Harenberg

Ludwig

2018

Int Economic Review

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“…The lack of robustness of the Golden Rule to the introduction of heterogeneity in fertility behaviors should be contrasted with its robustness to the introduction of heterogeneity in labor endowments and in preferences (Kuhle, 2012). Given that the Golden Rule focuses on the capital that maximizes steady-state average consumption, heterogeneity along these two dimensions was shown to have no effect on the Golden Rule capital.…”

Section: Discussionmentioning

confidence: 99%

“…Although Phelps' (1961) Golden Rule has been reexamined in the context of heterogeneous agents, the existing literature has mainly focused on two dimensions of heterogeneity: (i) heterogeneity in labor endowments and (ii) heterogeneity in preferences. As underlined by Kuhle (2012), Phelps' Golden Rule continues to maximize the society's consumption possibilities (i.e., consumption per capita) under these sources of heterogeneity. The intuition underlying that robustness result is that Phelps' Golden Rule is obtained from maximizing consumption per capita defined from the economy's aggregate resource constraint, which aggregates type-specific labor quantities in total output and type-specific consumptions in total consumption, and, as such, is robust to introducing these sources of heterogeneity.…”

Section: Introductionmentioning

confidence: 99%

“…But the main conclusion of the paper-the general relationship between Golden 1 As such, our framework allows for (potential) differences in productivity and/or in labor supply across types of workers. The relation between the Golden Rule and heterogeneous labor endowments being studied in detail in Kuhle (2012), we will leave it aside here and focus instead on heterogeneity in fertility differentials. 2 It should also be stressed here that, in the absence of mobility across types, the long-run partition of the population into subpopulations would generally take the form of a corner case (one type, with a higher fertility, leading the other type to extinction in the long run), making heterogeneity disappear de facto at the stationary equilibrium.…”

Section: Introductionmentioning

confidence: 99%

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Fertility, heterogeneity, and the Golden Rule

Ponthiere

2023

J Public Economic Theory

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According to Phelps' Golden Rule, a rise in fertility decreases the optimal capital intensity, because a higher fertility increases the investment required to sustain a given capital intensity (the capital dilution effect). Using a matrix population model embedded in a two‐period overlapping generation setting, we examine the robustness of that relationship to the partitioning of the population into two subpopulations having distinct fertility behaviors and entering the production process as distinct inputs. We show that, unlike what prevails under a homogeneous population, a rise in fertility (caused by a change in type‐specific fertility) does not necessarily reduce the Golden Rule capital intensity. The intuition is that changes in type‐specific fertility modify the composition of the labor force, which affects the marginal productivity of capital and the capital dilution effect. When the composition effect induced by the fertility change outweighs the standard capital dilution effect prevailing under a fixed partition of the population, a rise in fertility increases the optimal capital intensity. These results are robust to a finer description of heterogeneity, that is, a partitioning of the population into a larger number of subpopulations.

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“…In heterogeneous agent models, the golden rule of capital formation cannot be applied to discriminate between efficient and inefficient steady states. This is emphasized byDavila, Hong, Krusell, and Ríos-Rull (2012) in a model with idiosyncratic income shocks and byKuhle (2012) in a model with heterogeneous types. In our economy, the same opposing effects as inDavila, Hong, Krusell, and Ríos-Rull (2012) are at work.…”

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confidence: 99%

Social Security and the Interactions between Aggregate and Idiosyncratic Risk

Harenberg

Ludwig

2014

SSRN Journal

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractWe ask whether a PAYG-financed social security system is welfare improving in an economy with idiosyncratic and aggregate risk. We argue that interactions between the two risks are important for this question. One is a direct interaction in the form of a countercyclical variance of idiosyncratic income risk. The other indirectly emerges over a household's life-cycle because retirement savings contain the history of idiosyncratic and aggregate shocks. We show that this leads to risk interactions, even when risks are statistically independent. In our quantitative analysis, we find that introducing social security with a contribution rate of two percent leads to welfare gains of 2.2% of lifetime consumption in expectation, despite substantial crowding out of capital. This welfare gain stands in contrast to the welfare losses documented in the previous literature, which studies one risk in isolation. We show that jointly modeling both risks is crucial: 60% of the welfare benefits from insurance result from the interactions of risks. JEL classification: C68; E27; E62; G12; H55

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Dynamic efficiency and the two-part golden rule with heterogeneous agents

Cited by 3 publications

References 31 publications

Idiosyncratic Risk, Aggregate Risk, and the Welfare Effects of Social Security

Idiosyncratic Risk, Aggregate Risk, and the Welfare Effects of Social Security

Fertility, heterogeneity, and the Golden Rule

Social Security and the Interactions between Aggregate and Idiosyncratic Risk

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