We analyze a dynamic stochastic general‐equilibrium (DSGE) model with an externality—through climate change—from using fossil energy. Our central result is a simple formula for the marginal externality damage of emissions (or, equivalently, for the optimal carbon tax). This formula, which...

The paper studies how asset prices are determined in a decentralized market with asymmetric information about asset values. We consider an economy in which a large number of agents trade two assets in bilateral meetings. A fraction of the agents has private information about the asset values. We...

Before choosing among two actions with state‐dependent payoffs, a Bayesian decision‐maker with a finite memory sees a sequence of informative signals, ending each period with fixed chance. He summarizes information observed with a finite‐state automaton. I characterize the optimal protocol...

We study optimal monetary and fiscal policies in a New Keynesian model with heterogeneous agents, incomplete markets, and nominal rigidities. Our approach uses small‐noise expansions and Fréchet derivatives to approximate equilibria quickly and efficiently. Responses of optimal policies to...

In this paper, we generalize the notion of Pareto efficiency to make it applicable to environments with endogenous populations. Two efficiency concepts are proposed: 𝒫-efficiency and 𝒜-efficiency. The two concepts differ in how they treat potential agents that are not born. We show that these...

We study the provision of dynamic incentives to self-interested politicians who control the allocation of resources in the context of the standard neoclassical growth model. Citizens discipline politicians using elections. We show that the need to provide incentives to the politician in power...