Neoclassical Growth with Limited Commitment
We characterize the stationary equilibrium of a continuous-time neoclassical production economy with capital accumulation in which agents can insure against idiosyncratic income risk by trading state-contingent assets, subject to limited commitment constraints that rule out short-selling. For an N-state Poisson labor productivity process we provide the household consumption-asset allocation, stationary asset distribution and aggregate capital supply. When production is Cobb-Douglas, when productivity takes two values, of which one is zero, and when agents have log-utility, we calculate the equilibrium interest rate, capital stock and consumption distribution in closed form, including its comparative statics change with respect to idiosyncratic income risk.
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