Selected Publications

• "Quantifying the cost of risk in consumption", with Sergio Turner, B.E. Journal of Theoretical Economics: (2010) Vol. 10 : Iss. 1 (Contributions), Article 31.

Abstract
Fixing a risky intertemporal, interagent consumption profile, its total cost is the total willingness to pay for smoothing everyone's consumption. It decomposes into a micro cost capturing the inefficiency in the distribution of total consumption, risky as it is, and a macro cost capturing the additional benefit of eliminating the risk in total consumption, once efficiently redistributed.
We consider the risk that an individual experiences income mobility and the consequent consumption mobility. US panel data estimates a consumption proŻle, for which we compute the costs. Total cost is 9-18% of total initial consumption for CRRA parameters 1.25-3.5. Of this, 80-90% is the micro cost and only 10-20% the macro cost. The magnitude of these results, and in particular the relative importance of the micro-cost, is in line with previous empirical evidence.
Motivated by this evidence we develop the theory of micro cost. Moreover, because the micro cost does not admit a closed form, for general preferences, we layout an approximation method.
Keywords: inefficiency, risk in consumption, incomplete markets, willingness to pay, consumption mobility, social welfare function, business cycle.
JEL Classifications: D52, D61, H01, E03


• "A social welfare function characterizing competitive equilibria with incomplete financial markets", with Sergio Turner, Research in Economics, (2010), Volume 64(1): p. 58-65.

Abstract
A classic characterization of competitive equilibria views them as feasible allocations maximizing a weighted sum of utilities. It has been applied to establish fundamental properties of the equilibrium notion, such as existence, determinacy, and computability. However, it fails for economies with missing financial markets. We give such a characterization for economies with missing financial markets, by an amended social welfare function. Its parameters capture both the relative importance of households welfare the classic weights as well as the disagreements among them as to the value of the missing markets. As a by-product, we identify the dimension of the set of interior equilibrium allocations.
Keywords: incomplete markets, social welfare function, manifold
JEL Classifications: D52, D61


• "Constrained inefficiency in GEI: a geometric argument", Journal of Mathematical Economics, (2008) 44: p.1197-1214

Abstract
In this paper we use global analysis to study the welfare properties of general equilibrium economies with incomplete markets (GEI). Our main result is to show that constrained Pareto optimal equilibria are contained in a submanifold of the equilibrium set. This result is explicitly derived for economies with real assets and fixed aggregate resources, of which real nume´raire assets are a special case. As a by product of our analysis, we propose an original global parametrization of the equilibrium set that generalizes to incomplete markets the classical one, first, proposed by Lange [Lange, O., 1942. The foundations of welfare economics. Econometrica 10, 215–228].
JEL classification: D52; D61; D62
Keywords: General equilibrium; Incomplete markets; Optimality; Global analysis


• "Production and financial policies under asymmetric information", with E. Minelli and J. Drčze, Economic Theory, (2008) 35: p.217-231
(PDF)
Abstract
We propose an extension of the standard general equilibrium model with production and incomplete markets to situations in which (i) private investors have limited information on the returns of specific assets, (ii) managers of firms have limited information on the preferences of individual shareholders. The extension is obtained by the assumption that firms are not traded directly but grouped into ‘sectorial’ funds. In our model the financial policy of the firm is not irrelevant. We establish the existence of equilibria and discuss the nature of the inefficiencies introduced by the presence of asymmetric information. We also illustrate the properties of the model in three simple examples.
JEL classification: D52; D81; D82
Keywords: Decision-making under uncertainty - Asymmetric and private information - Incomplete markets - Equilibrium


• "The evaluation of public investments under uncertainty", Research in Economics, (2006) 60: p.188-198.
(PDF)
Abstract
In this paper we revise and extend the theory of the evaluation of public investments under uncertainty. Precisely, we argue that the value of the investments that the public sector would be willing to undertake is never below its market value, and that it can be higher if it provides social insurance.
JEL classification: H43 (Project evaluation; Social discounting), D81 (Criteria for decision-making under risk and uncertainty), D52 (Incomplete markets).
Keywords: Project evaluation; Social discounting; Criteria for decision making under uncertainty; Incomplete markets


• "The taxation of trade in assets", with A. Citanna and H. Polemarchakis, Journal of Economic Theory (2006) 126, pg. 299-313.
(PDF)
Abstract
When the asset market is incomplete, there typically exist taxes on trades in assets that are Pareto improving. This fiscal policy is anonymous, it is fully and correctly anticipated by traders, and it results in ex post Pareto optimal allocations; as such, it improves over previously proposed constrained interventions.
Keywords: Taxes; Pareto improvement; Incomplete asset markets; Competitive equilibrium
JEL classification: D52; D60; H20


• "Income taxation when markets are incomplete", Decisions in Economics and Finance, (2003) 26/2: p. 97-128.
(PDF)
Abstract
We investigate the welfare effects of proportional income taxation in a standard general equilibrium model with incomplete markets (GEI). Formally, our analysis is on the allocative effects of state-contingent income tax reforms. Tax reforms are restricted to be anonymous, publicly and truthfully announced before markets open, and they are required to result in an ex-post constrained efficient allocation. Our main result is to show that there do typically exist contingent tax reforms that are Pareto improving. These reforms, acting directly on the asset span, modify private risk-sharing opportunities. Thus, unlike most of the GEI literature, the type of policy transmission mechanism considered does not rely on second-order, relative spot price effects. Yet, the key welfare effects of our tax reforms are substantially equivalent to those induced through changes in relative spot prices, as, for example, in Geanakoplos and Polemarchakis (1986), Geanakoplos et al. (1990), or in Citanna et al. (2001).
Math Subject Classification (2000): 58E17, 46N10, 93B29
JEL Classification: D52, H21, H24, H25