Incomplete Markets, Labor Supply and Capital Accumulation
UPF Economics and Business Working Paper No. 659
29 Pages Posted: 16 Jun 2003
Date Written: October 2002
In this paper we explore the accumulation of capital in the presence of limited insurance against idiosyncratic shocks, borrowing constraints and endogenous labor supply. As in the exogenous labor supply case (e.g. Aiyagari 1994, Huggett 1997), we find that steady states are characterized with an interest rate smaller than the rate of time preference. However, we also find that when labor supply is endogenous the presence of uncertainty and a borrowing limit are not enough to give rise to "aggregate precautionary savings".
Keywords: Idiosyncratic Shocks, Incomplete Insurance, Labor Supply
JEL Classification: D52, D58, J22
Suggested Citation: Suggested Citation