Incomplete Market Dynamics and Cross-Sectional Distributions

41 Pages Posted: 10 Sep 2013 Last revised: 9 Sep 2015

See all articles by Alexis Akira Toda

Alexis Akira Toda

University of California, San Diego (UCSD) - Department of Economics

Date Written: September 15, 2014

Abstract

The size distributions of many economic variables seem to obey the double power law, that is, the power law holds in both the upper and the lower tails. I explain the emergence of the double power law - which has important economic, econometric, and social implications - using a tractable dynamic stochastic general equilibrium model with heterogeneous agents subject to aggregate and idiosyncratic investment risks. I establish theoretical properties such as existence, uniqueness, and constrained efficiency of equilibrium, and provide a numerical algorithm that is guaranteed to converge. The model is widely applicable: it allows for arbitrary homothetic CRRA recursive preferences, an arbitrary Markov process governing aggregate shocks, and an arbitrary number of technologies and assets with arbitrary portfolio constraints.

Keywords: applied general equilibrium analysis, emergence, incomplete markets, inequality, power law, robustness, wealth distribution

JEL Classification: D31, D52, D58, E21, G11

Suggested Citation

Toda, Alexis Akira, Incomplete Market Dynamics and Cross-Sectional Distributions (September 15, 2014). Journal of Economic Theory, Vol. 154, 2014, Available at SSRN: https://ssrn.com/abstract=2322845 or http://dx.doi.org/10.2139/ssrn.2322845

Alexis Akira Toda (Contact Author)

University of California, San Diego (UCSD) - Department of Economics ( email )

9500 Gilman Drive
Mail Code 0508
La Jolla, CA 92093-0508
United States

HOME PAGE: http://https://sites.google.com/site/aatoda111/

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