UC San Diego
Asset prices and efficiency in a Krebs economy
- Author(s): Toda, AA
- et al.
Published Web Locationhttps://doi.org/10.1016/j.red.2014.11.003
© 2014 Elsevier Inc. 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.
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