Adverse Selection, Risk Sharing and Business Cycles

54 Pages Posted: 18 Nov 2014

See all articles by Marcelo Veracierto

Marcelo Veracierto

Federal Reserve Bank of Chicago - Research Department

Date Written: October 2014

Abstract

I consider a real business cycle model in which agents have private information about an idiosyncratic shock to their value of leisure. I consider the mechanism design problem for this economy and describe a computational method to solve it. This is an important contribution of the paper since the method could be used to solve a wide class of models with heterogeneous agents and aggregate uncertainty. Calibrating the model to U.S. data I find a striking result: That the information frictions that plague the economy have no effects on business cycle fluctuations.

Keywords: Adverse selection, risk sharing, business cycles, private information, incentives, optimal contracts, computational methods, heterogeneous agents

JEL Classification: C63, C68, D31, D82, E32

Suggested Citation

Veracierto, Marcelo, Adverse Selection, Risk Sharing and Business Cycles (October 2014). FRB of Chicago Working Paper No. 2014-10, Available at SSRN: https://ssrn.com/abstract=2526301 or http://dx.doi.org/10.2139/ssrn.2526301

Marcelo Veracierto (Contact Author)

Federal Reserve Bank of Chicago - Research Department ( email )

230 South LaSalle Street
Chicago, IL 60604-1413
United States
(312) 322-6595 (Phone)

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