Efficient allocations with hidden income and hidden storage (Q2763322)

The authors consider the economic environment model in which there is a single consumption good \(c\) in every period \(t=1,\ldots,T\) and each individual receives an unobservable stochastic endowment \(\theta_{t}\in Y=\{y_1,\ldots, y_{J}\},\;y_{i}\geq 0 \;\forall i\) in period \(t\). The endowments are i.i.d. both across individuals and across time. It is assumed that the private storage unit that is unobservable to others individuals and public storage have the same rate of return. Let us denote by \(\theta^{t}= \{\theta_1,\ldots,\theta_{t}\}\) and for given \(\theta^{t}\) let \(Y^{n}(\theta^{t})=\{\theta^{t}\}\times Y^{n-1},\;n\geq t\). The vector \((c_{t}, s_{t}, \tau_{t},S_{t})_{t=1}^{T}\) is called an allocation, where \(c_{t}:\;Y^{t}\to R\), \(c_{t}(\theta^{t})\) is the consumption of an individual who has history \(\theta^{t}\in Y^{t}\); \(s_{t}:\;Y^{t}\to R_{+}\), \(s_{t}(\theta^{t})\) is that individual's nonnegative private storage level that he carries over from \(t\) to \(t+1\); \(\tau_{t}:Y^{t}\to R\), \(\tau_{t}(\theta^{t})\) is the transfer of consumption the the individual receives; \(S_{t}\in R\) is the aggregate level of public storage.NEWLINENEWLINENEWLINEThe authors give the definition of efficient allocation as a solution of corresponding extremal problem with constraints and prove that given any incentive-feasible allocation \((c,s,\tau,S)\), there exists another incentive-feasible allocation \((c,0,\tau',S')\). That is why the specification of the extremal problem allows us to maximize over allocations while imposing the restriction that private storage is zero. Then it is shown that these efficient arrangements can be supported by trade in risk-free bonds. The extensions of results to version of considered model that include an infinite horizon, diminishing returns to storage and lotteries are presented.