John Leach

Underemployment with liquidity-constrained multi-period firms

S. Grossman and O. D. Hart [Amer. Econ. Rev. 71 (1981), 301–307] have shown that underemployment can occur if firms are risk averse and have better information than workers. C. Kahn and J. Scheinkman [J. Econ. Theory 35 (1985), 343–365] replace the assumption of risk aversion with the more basic assumption of limited liability, but they obtain risk-averse behaviour only when the liquidity constraint is currently binding. A T-period model is developed here to show that firms will also display risk aversion if the liquidity constraint might become binding in the future.

Income Disparity, Inequity Aversion and the Design of the Healthcare System

An ex post social welfare function is used to evaluate alternative healthcare systems. If a society is averse to inequality and there is some income disparity, social welfare under private healthcare insurance is sometimes higher and sometimes lower than social welfare under public healthcare. However, a third system - public healthcare with the option to purchase supplemental healthcare insurance - is always socially preferred to private healthcare insurance. Moreover, it is either socially preferred to public healthcare or equivalent to it.

Optimal Portfolio and Savings Decisions in an Intergenerational Economy

An intergenerational economy in which transactions costs cause agents to diversify their portfolios is presented. Changes in the rate of monetary expansion lead to changes in the velocity of money. Earlier intergenerational models introduced this relationship in an ad hoc fashion by assuming that money yields direct utility. The comparative statics of this model are significantly different from those of its predecessors. Greater inflation can lead to either a greater or a smaller capital intensity. The capital intensity corresponding to a constant money supply can be greater than, equal to, or less than the golden rule capital intensity. Copyright 1987 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

Liquidity-constrained employment contracts

Abstract Kahn and Scheinkman (1985) have shown that optimal contracting between risk-averse workers and risk-neutral but liquidity-constrained firms results in underemployment if firms have better information than workers. This result is extended here by allowing the firm to divide its wealth between capital and liquid assets, so that liquidity is a choice variable. The firm generally chooses a portfolio under which it is optimal not to choose the ‘risk-neutral’ (i.e., expected profit-maximizing) employment contract. The underemployment result is thereby shown not to be strongly dependent on the choice of parameters.

Capital accumulation with a finite decision horizon

Abstract The possibility that capital will be over-accumulated when agents have finite decision horizons is examined. This possibility can generally be ruled out if agents are free to choose their labour supply optimally.