# 1996

1. Cragg, M., and M. Epelbaum, ** "Why has Wage Dispersion Grown in Mexico? Is it the Incidence of Reforms or the Growing Demand for Skills,"** Journal of Development Economics,

**51**(1996): 99-116.

**Absctract: **

In the mid-1980s, Mexico undertook major trade reform, privatization and deregulation. This coincided with a rapid expansion in wages and employment that led to a rise in a wage dispersion. This paper examines the role of industry- and occupation-specific effects in explaining the growing dispersion. We find that despite the magnitude and pace of the reforms, industry-specific effects explain almost half of the growing wage dispersion. Finally, we find that the economy became more skill-intensive and that this effect was larger for the traded sector because this sector experienced much smaller low-skilled employment growth. We therefore suggest that competition from imports had an important role in the fall of the relative demand for less-skilled workers.

2. Goldstein, R., and F. Zapatero,** "General Equilibrium with Constant Relative Risk Aversion and Vasicek Interest Rates," **Mathematical Finance,

**26**(1996): 331-340.

**Absctract: **

We consider a pure exchange economy consisting of a single risky asset whose dividend drift rate is modeled as an Ornstein-Uhlenbeck process, and a representative agent with power-utility who, in equilibrium, consumes the dividend paid by the risky asset. Endogenously determined interest rates are found to be of the Vasicek (1977) type. The mean and variance of the equilibrium stock price are stochastic and have mean-reverting components. a closed-form solution for a standard call option is determined for the case of log-utility. Equilibrium values have interesting implications for the equity premium puzzle observed by Mehra and Prescott (1985).

3. Hernández, A., and M. Santos, ** "Competitive Equilibria for Infinite-Horizon Economies with Incomplete Markets," **Journal of Economic Theory,

**71**(1996): 102-130.

**Absctract: **

In this paper we consider a sequential trading economy with incomplete financial markets and a finite number of infinitely lived agents. We propose a specification of agents' budget sets and show that such specification features several desirable properties. We then establish the existence of an equilibrium for a regular class of economies. JEL Classification: C62, D52, D90.

4. Huggett, M., ** "Wealth Distribution in Life-Cycle Economies," ** Journal of Monetary Economics,

**38**(1996): 469-494.

**Absctract: **

This paper compares the age-wealth distribution produced in life-cycle economies to the corresponding distribution in the US economy. The idea is to calibrate the model economies to match features of the US earnings distribution and then examine the wealth distribution implications of the model economies. The findings are that the calibrated model economies with earnings and lifetime uncertainty can replicate measures of both aggregate wealth and transfer wealth in the US. Furthermore, the model economies produce the US wealth Gini and a significant fraction of the wealth inequality within age groups. However, the model economies produce less than half the fraction of wealth held by the top 1 percent of US households. JEL Classification: E13, D30.

5. Martínez-Legaz, E., and M. Santos, ** "On Expenditure Functions," ** Journal of Mathematical Economics,

**25**(1996): 143-163.

**Absctract: **

In this paper we present complete characterizations of the expenditure functions for both utility representations and preference structures. Building upon these results, we also establish under minimal assumptions duality theorems for expenditure functions and utility representations, and for expenditure functions and preference structures. These results apply indistinctly to finite- and infinite-dimensional spaces; moreover, in the case of preference structures they are valid for non-complete preorders.

JEL Classification: C61, D11.

6. Santos, M., and J. Vigo, ** "Error Bounds for a Numerical Solution for Dynamic Economic Models," **Applied Mathematic Letters,

**9**(1996): 41-45.

**Absctract: **

In this paper, we analyze a discretized version of the dynamic programming algorithm for a parameterized family of infinite-horizon economic models, and derive error bounds for the approximate value and policy functions. If h is the mesh size of the discretization, then the approximation error for the value function is bounded by Mh2, and the approximation error for the policy function is bounded by Nh, where the constants M and N can be estimated from primitive data of the model.