Adverse Selection, Risk Sharing and Business Cycles

Marcelo Veracierto


2018-02-22 - I consider a real business cycle model in which agents have private information about their stochastic value of leisure. For the case of logarithmic preferences I provide an analytical characterization of the solution to the associated mechanism design problem. Moreover, I show a striking irrelevance result: That the stationary behavior of all aggregate variables are exactly the same in the private information economy as in the full information case. I then introduce a new computational method to show that the irrelevance result holds numerically for more general CRRA preferences.