1998

98-01. Huggett, M., and Ventura, G., "On the Distributional Effects of Social Security Reform"

Abstract: How will the distribution of welfare, consumption and leisure across households be affected by social security reform? This paper addresses this question for social security reforms with a two-tier structure by comparing steady states under a realistic version of the current US system and under the two-tier system. The first tier is a mandatory, defined-contribution pension offering a retirement annuity proportional to the value of taxes paid, whereas the second tier guarantees a minimum retirement income. Our findings, which are summarized in the introduction, do not in general favor the implementation of pay-as-you go versions of the two-tier system for the US economy.


98-02. Huggett, M., and Ospina, S., "On Aggregate Precautionary Saving: When is the Third Derivative Irrelevant?"

Abstract: When does idiosyncratic earnings uncertainty increase aggregate saving? We address this question in the context of a general equilibrium model where infinitely-lived agents receive idiosyncratic labor endowment shocks, hold a risk-free asset to smooth consumption and face a liquidity constraint. We prove that the steady-state capital stock is always larger in any equilibrium with idiosyncratic shocks and a liquidity constraint than without idiosyncratic shocks (i.e. there is aggregate precautionary saving) as long as utility functions are strictly concave. We also prove that aggregate precautionary saving occurs if and only if the liquidity constraint binds for some agents.


98-03. Sharma, T., "Robustness in Contracts: Inferring Strategies from Past Play"

Abstract: It is generally understood that in situations of asymmetric information, the principal is better off committing to long term contracts than committing to short term contracts. The result holds true even when long term contracts are constrained to be renegotiation proof. The paper argues that the longrun renegotiation proof contracts, which the literature uses as benchmarks for comparison, are not robust to the possibility of certain kinds of renegotiation. The renegotiations that we have in mind are those which (potentially)take place after the principal comprehends previous strategies of the agent by using behavioral or statistical techniques. We show that for 'high' discount factors the principal is not strictly better off by committing to longrun contracts that are robust to renegotiations.


98-04. Santos, M., "Numerical Solution of Dynamic Economic Models"

Abstract:This chapter is concerned with numerical simulation of dynamic economic models. We focus on some basic algorithms and study their accuracy and stability properties. This analysis is useful for an optimal implementation and testing of these procedures, as well as to evaluate their performance. Several examples are provided in order to illustrate the functioning and efficiency of these algorithms.


98-05. Johnson, P., Levine, D.K., and Pesendorfer, W., "Evolution and Information in a Prisoner's Dilemma Game"

Abstract: In an environment of anonymous random matching, Kandori [1992] showed that with a sufficiently rich class of simple information systems the folk theorem holds. We specialize to the Prisoner's Dilemma and examine the stochastic stability of a process of learning and evolution in this setting. If the benefit of future cooperation is too small, then there is no cooperation. When the benefit of cooperation is large then only cooperation will survive in the very long run.