387hw5a - cient Allocations with Hidden Income and Hidden...

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Economics 387. Banking and Financial Intermediation. Spring 2002. Department of Economics, University of Texas Instructor: Dean Corbae, BRB 3.118, (o) 512-475-8530 Homework #5 - Due 3/27/02 Consider the two period hidden informat ionprob lemstud iedinc lassand problem sets 1 and 3 based on R. Townsend (1982). Now suppose that agents are able to privately store goods in period t = 0 (denoted s θ 0s incethe ir savings can potentially di f er across states). They enter period 0 with no storage and there is constant returns to scale, so 1 unit of storage at date t =0yields R> 0 units of goods at t =1 . Show how the possibility of private
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Unformatted text preview: cient Allocations with Hidden Income and Hidden Storage, Review of Economic Studies, 68, p. 523-42. To proceed, given that the problem is only two periods, there will be no storage in period t = 1 since preferences are strictly increasing in con-sumption. Also, as before, incentive compatibility at t = 1 implies that the transfer cannot be contingent on the t = 1 report. Thus, the constraint set for the problem is given by the following promise keeping and incentive compatibility constraint at t = 0 : s.t. X { H,L } u y + T s + X { H,L } u y + T 1 + Rs = u y + T s + X { H,L } u y + T 1 + Rs u y + T e s + X { H,L } u y + T e 1 + Rs , , e 1...
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This note was uploaded on 08/06/2008 for the course ECON 387 taught by Professor Corbae during the Spring '07 term at University of Texas at Austin.

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