Christopher Phelan

Computing Multi-Period, Information-Constrained Optima

This paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi-period (including infinite-period), continuum-agent, unobservedeffort economy. Actual solutions are displayed illustrating cross-sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time. The optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full-information economy and various restricted-contracting regimes.

A Recursive Formulation for Repeated Agency with History Dependence

There is now an extensive literature regarding the efficient design of incentive mechanisms in dynamic environments. In this literature, there are no exogenous links across time periods because either privately observed shocks are assumed time independent or past private actions have no influence on the realizations of current variables. The absence of exogenous links across time periods ensures that preferences over continuation contracts are common knowledge, making the definition of incentive compatible contracts at a point in time a simple matter. In this paper, we present general recursive methods to handle environments where privately observed variables are linked over time. We show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility conditions.

Sequential equilibria in a Ramsey tax model

This paper presents a full characterization of the equilibrium value set of a Ramsey tax model. More generally, it develops a dynamic programming method for a class of policy games between the government and a continuum of consumers. By selectively incorporating Euler conditions into a strategic dynamic programming framework, we wed two technologies that are usually considered competing alternatives, resulting in a dramatic simplification of the problem.

Reconsidering the Costs of Business Cycles with Incomplete Markets

We measure the potential welfare gains from countercyclical policy in an economy with incomplete markets. In the course of conducting this measurement, we focus on two questions as central to the determination of those potential gains: (1) What is the likely effect of countercyclical policy on the nature of the income risk faced by individuals in the economy, (2) What are the likely general equilibrium effects brought about as asset prices change due to the implementation of countercyclical policies? In taking up the first question, we see it as critical to distinguish whether the main effect of countercyclical policy is to reduce directly the income risk faced by each individual or is simply to reduce the correlation across individuals in the income risk that they face. We present a model of the wage and employment risk faced by individuals over the cycle in which the levels of those risks are chosen endogenously. On the basis of that model, we argue that the main effect of countercyclical policy aimed at reducing aggregate fluctuations may be simply to remove the correlation across individuals in the unemployment risk that they face. We then use asset price data to argue that in an incomplete markets framework, the potential welfare gains from countercyclical policy are close to zero.

Public trust and government betrayal

Abstract This study presents a simple model of government reputation (in which government type cannot be directly observed by households) with the variation that government type, rather than being permanent, follows an exogenous Markov process. This formulation captures three characteristics of bad policy outcomes: governments which betray public trust do so erratically, public trust is regained only gradually after a betrayal, and governments with recent betrayals betray with higher probability than other governments.

Incentives and Aggregate Shocks

This paper presents an incentive-based theory of the dynamics of the distribution of consumption in the presence of aggregate shocks. The paper builds on the models concerning the distribution of income or consumption and incentive problems of Green (1987), Thomas and Worrall (1991), Phelan and Townsend (1991), and Atkeson and Lucas (1992). By incorporating aggregate production shocks, the model allows an examination of the interactions between individual and aggregate consumption series given incomplete insurance. Further, the methodology outlined allows the incorporation of incentive considerations to macroeconomic environments similar to Rogerson (1988) and Hansen (1985).

On the robustness of laissez-faire

This paper considers a model economy in which agents are privately informed about their type: their endowments of various goods and their preferences over these goods. While preference orderings over observable choices are allowed to be correlated with an agents private type, we assume that the planner/government is both uncertain about the nature of this joint distribution and unable to choose among multiple equilibria of any given social mechanism. We model the planner/government as having a maxmin objective in the face of this uncertainty. Our main theorem is as follows: Once we allow for this kind of uncertainty and assume no wealth effects in preferences, the uniquely optimal social contract is laissez-faire, in which agents trade in unfettered markets with no government intervention of any kind.

Incentives, insurance, and the variability of consumption and leisure☆

Abstract This paper considers to what extent dynamic incentive models such as Green (1987), Phelan and Townsend (1991), and Atkeson and Lucas (1992) can quantitatively explain why some individuals consume (or work) more than others and why a typical individuals consumption (or leisure) varies over time. A simple repeated agency model is shown to be able to better match several population moments concerning life-cycle labor supply and consumption variation than the same model without incentive constraints. On the other hand, I show for the standard stylized models of repeated agency, incentive-induced variability is an insufficient explanation of the variability in the data.

Recall and private monitoring

For a general class of games with private monitoring we show for any finite state strategy (or automaton strategy) with Di states for players i∈{1,…,N}, if there exists a number of periods t such that it is possible on-path to reach any joint state from any joint state in t periods, the strategy is a strict correlated equilibrium only if each players strategy is a function only of what the player observes in the last Di−1 periods.

Speculative Runs on Interest Rate Pegs - The Frictionless Case

In this paper we show that interest rate rules lead to multiple equilibria when the central bank faces a limit to its ability to print money, or when private agents are limited in the amount of bonds that can be pledged to the central bank in exchange for money. Some of the equilibria are familiar and common to the environments where limits to money growth are not considered. However, new equilibria emerge, where money growth and inflation are higher. These equilibria involve a run on the central banks interest target: households borrow as much as possible from the central bank, and the shadow interest rate in the private market is different from the policy target.