Recent papers
(with F. Martins-da-Rocha and Y. Vailakis)
In convex economic environments, it is a common practice to characterize efficient distributions by means of a social planner program: a benevolent planner maximizes the weighted sum of agents’ utilities subject to feasibility constraints; by varying welfare weights, these social optima exhaust the entire Pareto frontier. This method fatally fails in several nonconvex economic environments that naturally arise due to market imperfections, price rigidities, asymmetric information, limited com- mitment and, in general, externalities. We argue that, subject to minor technical qualifications, the first-order conditions of the conventional planning program still locally characterize robustly efficient distributions even under nonconvexity. Robustness requires the presence of an unambiguous Pareto improvement conditional on a slightly inaccurate knowledge of the primitives of the economy or, alternatively, subject to small trembles in the implementation of a policy. We thus provide a rigorous foundation to the widespread use of a Ramsey-type planning program both in macroeconomics and microeconomics. We illustrate the significance of our characterization through an extended application to macroprudential policies.
(with C. LeVan and Y. Vailakis)
We study stochastic dynamic programming with recursive utility in settings where multiplicity of values is only attributed to unbounded returns. That is, we consider Koopmans aggregators that, when artificially restricted to be bounded, satisfy the traditional Blackwell's discounting condition (as it certainly happens with linear aggregators). We argue that, when the truncation is removed, the sequence of truncated values converges to the relevant fixed point of the untruncated Bellman operator, whenever it exists, and diverges otherwise. The experiment provides a natural selection criterion, corresponding to an extension of the recursive utility from bounded to unbounded aggregators.
(with P. Reichlin)
We reexamine the tests for dynamic inefficiency in productive overlapping-generations economies with stochastic growth. The size of real, long-term, safe interest rates relative to average GDP growth is an inconclusive test for dynamic inefficiency. A more accurate test should take into account the correlation between growth and the marginal utility of wealth. This typically restricts the room for inefficiency and welfare-improving policies. We also distinguish capital overaccumulation from an inefficient distribution of consumption risk. The refined test for capital overaccumulation is rather stringent: capital is not overaccumulated if the net dividend remains positive with some probability, as opposed to always, as in the original Abel et al. [1]’s formulation.
(with C. LeVan and Y. Vailakis)
We provide a unified approach to stochastic dynamic programming with recursive utility based on an elementary application of Tarski’s Fixed Point Theorem. We establish that the exclusive source of multiple values is the presence of multiple recursive utilities consistent with the given aggregator, each yielding a legitimate value to the recursive program. Unbounded returns are encompassed by means of an approximation method. We also present a spectral radius condition ensuring a unique value to the recursive program in some circumstances. We finally apply our theory to Epstein-Zin preferences. Overall, acknowledging the unavoidable failure of uniqueness in general, we argue that, contrary to a certain practice in the literature, the greatest fixed point of the Bellman operator should have a privileged position.