This paper studies optimal fiscal and monetary policies in a stochastic economy with imperfectly competitive product markets. Presuming that the government cannot commit to past policy plans, we characterize time-consistent policies in both flexible and sticky price environments.
The economy we consider features dynamic inconsistency, and the properties of optimal policies, therefore, generally depend on whether the government is assumed to have access to a commitment technology that binds its future actions. Assuming commitment, and hence adopting a Ramsey approach, both the long-run and the cyclical properties of optimal macroeconomic policies have been studied extensively in the literature and are by now well-understood. In this paper, we seek to learn about the properties of optimal policies absent a commitment technology. Under this alternative assumption, existing studies so far have focused on the long-run properties of optimal policies within the context of relatively simple economies. In particular, attention has largely been restricted to deterministic settings. Consequently, our knowledge about the cyclical properties of optimal time-consistent policies in the face of macroeconomic shocks is limited. By analyzing optimal policies without commitment in a stochastic economy, our paper tries to address this gap in the literature.
Following the seminal work by Arrow (1963), the notion of information asymmetry have by now been recognized as a cornerstone of modern insurance theory. Two focal cases have so far attracted particular attention from insurance economists. The concept of adverse selection refers to situations where, before the contract is signed, one party (in general the insured agent) has an information advantage upon the other. In most models, it is assumed that clients know better their own risk than insurance companies; the latter may then use deductible as a way of separating individuals with different riskiness. Moral hazard, on the other hand, occurs when the outcome of the relationship (here, the occurrence of an accident or a claim) depends, in a stochastic way, on a decision that is privately made by one party and not observable by the other. Typically, the insured party may choose to make an effort that is costly to her, but reduces her risk. In this context, full insurance generally leads to suboptimal outcomes, because it provides no incentive to reduce accident probabilities.
The effects of asymmetric information upon competition between insurers have been investigated in a number of papers, following the seminal contributions by Akerlof (1970), Rothschild and Stiglitz (1976) and Wilson (1977). Under adverse selection, equilibria a la Rothschild-Stiglitz may fail to exist; moreover, when they do, they may not be Pareto efficient, even among the subset of contracts that are compatible with the existing information asymmetry (second best efficiency). The properties of competitive equilibria under moral hazard, on the other hand, strongly depend on whether contracts are exclusive (i.e., the insurer may prohibit the acquisition of another contract by his clients) or not. With exclusivity, equilibria do exist in general, and are second best efficient, at least in a one commodity setting (see for instance Prescott and Townsend (1984)).
Understanding the processes that change the amount of carbon stored in the ocean and in the land biota, with their implications for future climate and ecology, is a fundamental goal of earth-system science. I have developed, refined, and applied several approaches that combine data analysis and modeling to better understand processes affecting carbon fluxes.
