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Efficient Allocations with Hidden Income and Hidden Storage

Harold L. Cole and Narayana R. Kocherlakota
The Review of Economic Studies
Vol. 68, No. 3 (Jul., 2001), pp. 523-542
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/2695895
Page Count: 20
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Efficient Allocations with Hidden Income and Hidden Storage
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Abstract

We consider an environment in which individuals receive income shocks that are unobservable to others and can privately store resources. We provide a simple characterization of the unique efficient allocation of consumption in cases in which the rate of return on storage is sufficiently high or, alternatively, in which the worst possible outcome is sufficiently dire. We show that, unlike in environments without unobservable storage, the symmetric efficient allocation of consumption is decentralizable through a competitive asset market in which individuals trade risk-free bonds among themselves.

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