Self-insurance vs. self-financing: A welfare analysis of the persistence of shocks

@article{Buera2011SelfinsuranceVS,
  title={Self-insurance vs. self-financing: A welfare analysis of the persistence of shocks},
  author={Francisco J. Buera and Yongseok Shin},
  journal={J. Economic Theory},
  year={2011},
  volume={146},
  pages={845-862}
}
We study the welfare cost of market incompleteness in a generalized Bewley model where idiosyncratic risk takes the form of entrepreneurial productivity shocks. Market incompleteness in our framework has two dimensions. First, in the Bewley tradition, only a limited set of instruments for consumption smoothing is available. Second, entrepreneurs’ capital rental is subject to collateral constraints. As is well known, it is harder to self-insure against more persistent shocks, and the welfare… CONTINUE READING

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