Optimal Savings Distortions with Recursive Preferences
35 Pages Posted: 11 Jan 2008 Last revised: 7 Feb 2021
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Optimal Savings Distortions with Recursive Preferences
Date Written: January 2008
Abstract
This paper derives an intertemporal optimality condition for economies with private information, focusing on a class of recursive preferences. By comparing it to the situation where agents can freely save in a risk-free asset market, we derive the optimal savings distortions necessary for constrained optimality. Our recursive preferences are homogeneous and satisfy a balanced growth condition, while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution. We perform some quantitative exercises that disentangle the respective roles played by these two parameters play in opt8imal distortions and the implied welfare gains.
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