This note describes a simple procedure for solving the risky steady state in medium-scale macroeconomic models. This is the “point where agents choose to stay at a given date if they expect future risk and if the realization of shocks is 0 at this date” [Coeurdacier, N., Rey, H., Winant, P.,...

We introduce an envelope condition method (ECM) for solving dynamic programming problems. The ECM method is simple to implement, dominates conventional value function iteration and is comparable in accuracy and cost to Carroll’s (2005) endogenous grid method. Codes are available.

We extend the pioneering work of Aumann–Serrano by presenting an index of riskiness for gambles with either positive or negative expectations. It can be of use for a variety of abstract behaviors, when adapting the framework of either Expected-Utility Theory or Prospect Theory.

We reappraise the robustness of sunspot effects in overlapping-generations models. Azariadis’s well-known example economies have stationary, deterministic fundamentals (preferences, technologies, and endowments), yet sunspots affect multiple equilibria. And those equilibria are robust to...

This paper shows that grid-based numerical solutions to models with incomplete markets and aggregate uncertainty are sensitive to the number and placement of grid points in the aggregate asset holdings direction. Higher moments of the cross-sectional distribution of asset holdings can be...

Numerical methods for dynamic programming often use value function iteration and interpolation. We present a novel shape-preserving rational spline approximation method that improves value function iteration in terms of both stability and accuracy compared to more common methods.

In this paper, we consider a finite-horizon model with the time-additive utility and the time varying discount rate. With the assumption of the concavity of absolute risk tolerance, the concavity of the consumption function has been proved. This result significantly broadens the conclusion of...

In this paper, we propose a constrained maximum likelihood estimator for misclassification models, by formulating the estimation as an MPEC (Mathematical Programming with Equilibrium Constraints) problem. Our approach improves the numerical accuracy and avoids the singularity problem. Monte...

We present a polynomial time method for identifying the maximal set in excess demand at a given payoff vector. This set can be used in “large” partnership formation problems to identify the minimum element in the set of individually rational payoff vectors at which there is no overdemanded...

We consider procedures that use randomness to make a decision that involves several individuals. We asked subjects to compare the fairness of six pairs of seemingly equivalent procedures. We propose a classification of subjects into two categories: those who are “emotional” in the sense...