ECN 741: Public Economics Fall 2008 2. Nature draw individual shocks θ T ∈ Θ T according to π θ ( θ T | z T ) . These draws are i.i.d across individuals conditional on z T . By law of large number, given z T , the fraction of population with shocks θ T is π θ ( θ T | z T ) . We impose the following restriction: Assumption 1 For all θ T ∈ Θ T , π θ ( θ t | z T ) = ∑ ( θ t +1 ,...,θ T ) π θ ( θ t ,θ t +1 ,...,θ T | z T ) is indepen-dent of z t +1 ,...,z T . This assumption implies that conditional on z t , ( θ t +1 ,...,θ T ) and ( z t +1 ,...,z T ) are inde-pendent. Remarks: Note that in this setup we are not imposing any restriction on time series prop-erties of θ t and z t . However, our assumption implies that by observing history of private shocks up to date t the individuals cannot infer anything about future aggregate shocks. As before, we assume that agents learn
This is the end of the preview. Sign up
access the rest of the document.