Research Database

This paper studies efficient insurance arrangements in village economies when there is complete information but limited commitment. Commitment is limited because only limited penalties can be imposed on households which renege on their promises. Any efficient insurance arrangement must therefore take into account the fact that households will renege if the benefits from doing so outweigh the costs. We study a general model which admits aggregate and idiosyncratic risk as well as serial correlation of incomes. It is shown that in the case of two households and no storage the efficient insurance arrangement is characterized by a simple updating rule. An example illustrates the similarity of the efficient arrangement to a simple debt contract with occasional debt forgiveness. The model is then extended to multiple households and a simple storage technology. We use data from the ICRISAT survey of three villages in southern India to test the theory against three alternative models: autarky, full insurance, and a static model of limited commitment due to Coate and Ravallion (1993). Overall, the model we develop does a significantly better job of explaining the data than does any of these alternatives.

A cash-in-advance model with sequential markets is constructed, where unanticipated monetary injections are nonneutral and can potentially produce large liquidity effects. However, if the monetary authority adheres to an optimal money rule, money should not respond to unanticipated shocks, so that a Friedman rule is suboptimal and the monetary authority does not exploit the liquidity effect. Quantitatively, the model can generate variability in money and nominal interest rates close to what is observed, and can produce data with no obvious evidence of the existence of liquidity effects.

This paper presents a model in which a country's average propensity to save tends to rise endogenously over time. The paper uses a two-sector neoclassical framework to model the transition from agriculture to manufacturing which typically accompanies economic development. Key assumptions are that only the agricultural sector uses land and a simple version of Engel's law. When a country's income per capita is low, agricultural consumption is important; consequently, land is valuable and capital gains on it may account for most wealth accumulation, making the NIPA APS appear low. If exogenous technological progress raises incomes over time, Engel's law shifts demand to manufactured goods. Then land's importance in portfolios relative to reproducible capital diminishes and the measured average propensity to save can rise.

We incorporate the consumption-ability relationship of static "efficiency wage" models into a dynamic general equilibrium model. We show that for many aggregate land stocks, there is a continuum of unemployment rates which could persist indefinitely as part of a stationary equilibrium. For many of these aggregate land stocks, both unemployment and full employment are distrinct possibilities. Broadly speaking, more unemployment corresponds to more undernourishment and more inequality in land distribution. Thus our results suggest that the market mechanism is less efficacious than land reform in reducing unemployment and undernourishment.