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  4. November 2024
  5. Micro Risks and (Robust) Pareto-Improving Policies

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Micro Risks and (Robust) Pareto-Improving Policies

  • Mark Aguiar
  • Manuel Amador
  • Cristina Arellano
American Economic Review
vol. 114, no. 11, November 2024
(pp. 3669–3713)
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Abstract

We provide conditions for the feasibility of robust Pareto-improving (RPI) policies when markets are incomplete and the interest rate is below the growth rate. We allow for arbitrary heterogeneity in preferences and income risk and a wedge between the return to capital and bonds. An RPI improves risk sharing and can induce a more efficient level of capital. Elasticities of aggregate savings to changes in interest rates are the crucial ingredients to the feasibility of RPIs. Government debt may complement rather than substitute for capital in an RPI. Our analysis emphasizes the welfare-improving qualities of government bonds versus explicit redistribution.

Citation

Aguiar, Mark, Manuel Amador, and Cristina Arellano. 2024. "Micro Risks and (Robust) Pareto-Improving Policies." American Economic Review 114 (11): 3669–3713. DOI: 10.1257/aer.20230128

Additional Materials

JEL Classification

  • D52 Incomplete Markets
  • E43 Interest Rates: Determination, Term Structure, and Effects
  • E62 Fiscal Policy
  • H20 Taxation, Subsidies, and Revenue: General
  • H63 National Debt; Debt Management; Sovereign Debt