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Working Paper, No. 2014-10, October 2014
Adverse Selection, Risk Sharing and Business Cycles (Revised October 2017)
I consider a real business cycle model in which agents have private information about the stochastic realization of their value of leisure. For the case of logarithmic preferences I provide an analytical characterization to the solution of the mechanism design problem for this economy. Moreover, I show a striking irrelevance result: That the stationary behavior of all aggregate variables are exactly the same in the private information economy as in the full information case. I then use a new computational method to show that the irrelevance result holds numerically for more general CRRA preferences.
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