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On the possibility of Krusell-Smith Equilibria

Author

Listed:
  • Tobias Broer

    (PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - ENPC - École des Ponts ParisTech - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement)

  • Alexandre Kohlhas

    (IIES - Institute for International Economic Studies)

  • Kurt Mitman

    (IIES - Institute for International Economic Studies)

  • Kathrin Schlafmann

    (CBS - Copenhagen Business School [Copenhagen])

Abstract
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.

Suggested Citation

  • Tobias Broer & Alexandre Kohlhas & Kurt Mitman & Kathrin Schlafmann, 2022. "On the possibility of Krusell-Smith Equilibria," Post-Print halshs-03758982, HAL.
    • Handle: RePEc:hal:journl:halshs-03758982
    DOI: 10.1016/j.jedc.2022.104391
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    References listed on IDEAS

    as
    1. Boppart, Timo & Krusell, Per & Mitman, Kurt, 2018. "Exploiting MIT shocks in heterogeneous-agent economies: the impulse response as a numerical derivative," Journal of Economic Dynamics and Control, Elsevier, vol. 89(C), pages 68-92.
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    Cited by:

    1. Adams, Jonathan J. & Rojas, Eugenio, 2024. "Household Consumption and Dispersed Information," Journal of Monetary Economics, Elsevier, vol. 147(C).

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    More about this item

    Keywords

    Expectations; Heterogeneity; Information;
    All these keywords.

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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