Studies in Distribution Theory

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Recursive methods are now in wide use in macroeconomics and capital theory because they permit researchers to rigorously derive useful and in some cases profound insights into economic dynamics. Most such applications depend critically on the assumption that all agents can be represented by the same representative agent. The representative agent assumption precludes the use of these models to study issues involving distribution, private information or both. The present project develops a new, recursive method for constructing efficient allocations in an interesting class of heterogeneous agent models. The models will be extended to aggregate uncertainty and to decentralized planning. This project develops a theory of the dynamics of the income distribution in a market economy. Its central technical idea is a new Bellman equation for constructing and characterizing efficient allocations in economies with differently situated households and private information. This equation is used to study income distribution, asset pricing and optimal taxation.