On the Possibility of Krusell-Smith Equilibria

Tobias Broer, Alexandre Kohlhas, Kurt Mitman, Kathrin Schlafmann

Publikation: Working paperForskning

Abstrakt

Solutions to macroeconomic models with wealth inequality and aggregate shocks often rely on the assumption of limited but common information among households. We show that this assumption is inconsistent with rational information choice for plausible information costs. To do so, we embed information choice into the workhorse heterogeneous-agent model with aggregate risk (Krusell and Smith, 1998). First, we demonstrate that the benefits of acquiring more precise information about the state of the economy depend crucially on household wealth. Second, we show that such heterogeneous incentives to acquire information combine with the strategic substitutability of savings choices to imply that equilibria in which households acquire the same information do not exist for plausible information costs. Finally, we document that a representative-agent equilibrium may not exist even in the absence of exogenous sources of wealth heterogeneity.
OriginalsprogEngelsk
UdgivelsesstedLondon
UdgiverCentre for Economic Policy Research
Antal sider32
StatusUdgivet - okt. 2021
NavnCentre for Economic Policy Research. Discussion Papers
NummerDP16667
ISSN0265-8003

Emneord

  • Expectations
  • Heterogeneity
  • information

Citationsformater