• Print
  • Email

Working Papers, No. 2023-27, August 2023 Crossref
Aggregate Dynamics in Mirrlees Economies: The Case of Persistent Shocks

I consider a neoclassical growth model with endogenous labor supply in which agents have private information about their idiosyncratic value of leisure. A key assumption is that these shocks follow a persistent stochastic process over time. For this economy I solve the economy-wide mechanism design problem of a social planner that seeks to maximize the welfare of agents, subject to incentive compatibility, promise-keeping, threat-keeping, and aggregate feasibility constraints. When preferences over consumption and leisure are logarithmic, I obtain a strong analytical result: All macroeconomic variables are exactly the same under private and full information. However, when the stochastic shocks follow a stochastic process that closely resembles a random walk and there is a constant Frisch elasticity of labor supply I find large quantitative effects of the information frictions in a calibrated version of the model: output, investment, consumption, capital, and labor are all 9.5% lower in the steady-state of the private information economy compared to the full information case.

Working papers are not edited, and all opinions and errors are the responsibility of the author(s). The views expressed do not necessarily reflect the views of the Federal Reserve Bank of Chicago or the Federal Reserve System.

Having trouble accessing something on this page? Please send us an email and we will get back to you as quickly as we can.

Federal Reserve Bank of Chicago, 230 South LaSalle Street, Chicago, Illinois 60604-1413, USA. Tel. (312) 322-5322

Copyright © 2024. All rights reserved.

Please review our Privacy Policy | Legal Notices