TY  - JOUR
AU  - Farhi,Emmanuel
AU  - Werning,Iván
TI  - Optimal Savings Distortions with Recursive Preferences
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 13720
PY  - 2008
Y2  - January 2008
UR  - http://www.nber.org/papers/w13720
L1  - http://www.nber.org/papers/w13720.pdf
N1  - Author contact info:
Emmanuel Farhi
Harvard University
Department of Economics
Littauer Center
Cambridge, MA 02138
Tel: 617/496-1835
Fax: 617/495-8570
E-Mail: efarhi@harvard.edu

Ivan Werning
Department of Economics
MIT
50 Memorial Drive, E51-251a
Cambridge, MA 02142-1347
Tel: 617/452-3662
Fax: 617/253-1330
E-Mail: iwerning@mit.edu
AB  - This paper derives an intertemporal optimality condition for economies with private information, focusing on a class of recursive preferences.  By comparing it to the situation where agents can freely save in a risk-free asset market, we derive the optimal savings distortions necessary for constrained optimality.  Our recursive preferences are homogeneous and satisfy a balanced growth condition, while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution.  We perform some quantitative exercises that disentangle the respective roles played by these two parameters play in opt8imal distortions and the implied welfare gains.
ER  -