Asset Prices and Efficiency in a Krebs Economy

32 Pages Posted: 18 Apr 2014 Last revised: 5 Dec 2015

See all articles by Alexis Akira Toda

Alexis Akira Toda

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

Date Written: November 18, 2014

Abstract

I study the asset pricing implications and the efficiency of a tractable dynamic stochastic general equilibrium model with heterogeneous agents and incomplete markets along the lines of Krebs (2003a). Contrary to previous applications of these types of models, I find that generically the distribution of idiosyncratic shocks affects the risk premia of aggregate shocks and that the equilibrium is constrained inefficient in the sense that a planner can Pareto improve the equilibrium outcome by assigning different portfolio choices to agents. The inefficiency is caused by a 'portfolio externality': the average portfolio of the economy affects the portfolio return of each agent. The constrained efficient outcome can be achieved through linear taxes and subsidies that I characterize in closed-form.

Keywords: AK models, constrained efficiency, externality, idiosyncratic risk, incomplete markets, optimal taxation

JEL Classification: D52, D58, E21, E22, G11, H21, H23

Suggested Citation

Toda, Alexis Akira, Asset Prices and Efficiency in a Krebs Economy (November 18, 2014). Review of Economic Dynamics, Vol. 18, No. 4, pp. 957-978, 2015, Available at SSRN: https://ssrn.com/abstract=2425816 or http://dx.doi.org/10.2139/ssrn.2425816

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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