Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/284068 
Year of Publication: 
2023
Series/Report no.: 
Working Paper No. WP 2023-27
Publisher: 
Federal Reserve Bank of Chicago, Chicago, IL
Abstract: 
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.
Subjects: 
Adverse selection
risk sharing
private information
social insurance
optimal contracts
heterogeneous agents
JEL: 
D39
D82
D86
E13
Persistent Identifier of the first edition: 
Document Type: 
Working Paper

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