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This solutions manual is a companion volume to the classic textbook Recursive Methods in Economic Dynamics by Nancy L. Stokey and Robert E. Lucas. Efficient and lucid in approach, this manual will greatly enhance the value of Recursive Methods as a text for self-study.
Economics, Mathematical --- Recursive Functions --- Dynamic programming --- Economics, Mathematical. --- Recursive functions. --- Dynamic programming. --- Recursive functions --- E-books --- Mathematical optimization --- Programming (Mathematics) --- Systems engineering --- Functions, Recursive --- Algorithms --- Arithmetic --- Logic, Symbolic and mathematical --- Number theory --- Recursion theory --- Decidability (Mathematical logic) --- Economics --- Mathematical economics --- Econometrics --- Mathematics --- Foundations --- Methodology --- Mathématiques économiques --- Récursivité, Théorie de la --- Économétrie --- Programmation dynamique --- Économie politique --- Modèles mathématiques --- Mathématiques économiques --- Récursivité, Théorie de la --- Économétrie --- Économie politique --- Modèles mathématiques
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We develop a macroeconomic model with physical and human capital, human capital risk, and limited contract enforcement. We show analytically that young (high-return) households are the most exposed to human capital risk and are also the least insured. We document this risk-insurance pattern in data on life-insurance drawn from the Survey of Consumer Finance. A calibrated version of the model can quantitatively account for the life-cycle variation of insurance observed in the US data and implies welfare costs of under-insurance for young households that are equivalent to a 4 percent reduction in lifetime consumption. A policy reform that makes consumer bankruptcy more costly leads to a substantial increase in the volume of credit and insurance.
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