Incomplete Markets, Labor Supply and Capital Accumulation

• Authors: Philippe Weil, Francesc Obiols-Homs and Albert Marcet
• BSE Working Paper: 173 | September 15
• Keywords: labor supply , idiosyncratic shocks , incomplete insurance
• JEL codes: D52, D58, J22

In this paper we explore the accumulation of capital in the presence of limited insurance against idiosyncratic shocks, borrowing constraints and endogenous labor supply. As in the exogenous labor supply case (e.g. Aiyagari 1994, Huggett 1997), we find that steady states are characterized with an interest rate smaller than the rate of time preference. However, we also find that when labor supply is endogenous the presence of uncertainty and borrowing limit are not enough to give rise to “aggregate precautionary savings”.