Using the Uganda National Panel Survey, I document that farmers face a trade-off between crop yields and risk, that most grow both high- and low-yield crops, and that poorer farmers concentrate on the low-yield, low-risk ones. I then develop an incomplete-markets model with a crop-portfolio choice, in which households trade off income returns against consumption smoothing. Wealth-poor households optimally under-invest in intermediates and shift toward safer crops. Crop portfolios, intermediate input use, and the wealth distribution are jointly determined in equilibrium. The model also reproduces the low pass-through of both income inequality and income volatility into consumption. Calibrated to rural Uganda, it implies that completing markets raises agricultural productivity by 12.8%, with 15.8% of the gain coming from eliminating the misallocation of inputs across farmers and crops. Consumption rises by 17.6% and welfare by 17.4%, with income inequality rising slightly and consumption inequality unchanged.
We provide a theorem on the role of risk and risk attitudes in macroeconomic models that clarifies and extends the Tallarini (2000) separation result. Under (1) separation of intertemporal and risk preferences, (2) separation of drivers of first and higher moments in the model primitives, and (3) approximate linearity of constraints, risk aversion and time-varying risk are irrelevant for the elasticity of any endogenous variable with respect to state variables that don’t drive variation in higher moments. We discuss how models generate a more prominent role for risk by “breaking” or “adapting” to the assumptions in the theorem.
This paper develops a macroeconomic model that combines an incomplete‐markets overlapping‐generations economy with a job ladder featuring sequential wage bargaining, endogenous search effort of employed and non‐employed workers, and differences in match quality. With these ingredients, our model provides a joint microfoundation for the three main inputs in aggregate production: capital, employment, and labor efficiency. The calibrated model offers a good fit to the empirical age profiles of search activity, job‐finding rates, wages, and savings. We use the model to analyze the impact of tax and transfer policies for labor market dynamics and aggregate economic activity via capital, employment, and labor efficiency channels. Lower unemployment benefits and a less progressive tax schedule bring about welfare losses for a newborn worker which are mainly driven by higher consumption risk and costlier search effort; both policies have differential effects along the age, income, and wealth dimensions.
In this paper we construct a stochastic overlapping-generations general equilibrium model in which households are subject to aggregate shocks that affect both wages and asset prices.We use a calibrated version of the model to quantify how the welfare costs of severe recessions are distributed across different household age groups.The model predicts that younger cohorts fare better than older cohorts when the equilibrium decline in asset prices is large relative to the decline in wages, as observed in the data.Asset price declines hurt the old, who rely on asset sales to finance consumption, but benefit the young, who purchase assets at depressed prices.In our preferred calibration, asset prices decline more than twice as much as wages, consistent with the experience of the US economy in the Great Recession.A model recession is approximately welfare-neutral for households in the 20-29 age group, but translates into a large welfare loss of around 10% of lifetime consumption for households aged 70 and over.