Jess Benhabib

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• Doctor of Philosophy
• Professor at New York University

We show that in Heterogeneous-Agent New-Keynesian (HANK) economies with countercyclical risk the natural interest rate is endogenous and co-moves with output, leaving the economy susceptible to self-fulfilling fluctuations. Unlike in Representative-Agent New-Keynesian models, the Taylor principle is not sufficient to guarantee uniqueness of equilib...

Compared to the distributions of earnings, the distributions of wealth in the US and many other countries are strikingly concentrated on the top and skewed to the right. To explain the income and wealth inequality, we provide a tractable heterogeneous‐agent model with incomplete markets in continuous time. We separate illiquid capital assets from l...

Recent empirical work has demonstrated a positive correlation between grandparent-child wealth-rank, even after controlling for parent-child wealth-rank, and a positive correlation between dynastic wealth-ranks across almost 600 years. We show that a simple heterogeneous agents model with idiosyncratic wealth returns generates a realistic wealth di...

We study several models of growth driven by innovation and imitation by a continuum of firms, focusing on the interaction between the two. We first investigate a model on a technology ladder where innovation and imitation combine to generate a balanced growth path (BGP) with compact support, and with productivity distributions for firms that are tr...

We show that sentiments - self-fulfilling changes in beliefs that are orthogonal to fundamentals - can drive persistent aggregate fluctuations under rational expectations in a beauty-contest game. Such fluctuations can occur even in the absence of exogenous aggregate fundamental shocks. Moreover, sentiments alter the volatility and persistence of a...

We study an equilibrium model of “revenue diversion” by management and its effects on talent allocation and the earnings distribution. In our occupational choice model with “workers” and “managers”, the talent allocation depends on earnings across occupations. Revenue diversion makes the allocation inefficient. It contributes, beyond productivity d...

We generalize recent results of Bassetto and Benhabib (2006) and Straub and Werning (2019) in a neoclassical model with endogenous labor-leisure choice where all agents are allowed to save and accumulate capital. We provide a sufficient condition under which optimal redistributive capital taxes remain at their allowed upper bound forever, even if t...

We study how endogenous innovation and technology diffusion interact to determine the shape of the productivity distribution and generate aggregate growth. We model firms that choose to innovate, adopt technology, or produce with their existing technology. Costly adoption creates a spread between the best and worst technologies concurrently used to...

We study several models of growth driven by innovation and imitation by a continuum of firms, focusing on the interaction between the two. We first investigate a model on a technology ladder where innovation and imitation combine to generate a balanced growth path (BGP) with compact support, and with productivity distributions for firms that are tr...

Recent empirical work has demonstrated a positive correlation between grandparent-child wealth-rank, even after controlling for parent-child wealth-rank, as well as a positive correlation between dynastic wealth-ranks across almost 600 years. We show that a simple heterogeneous agents model with idiosyncratic returns to wealth generates a realistic...

We develop a general equilibrium model of informational interdependence between financial markets and the real economy, linking economic uncertainty to information production and aggregate economic activities. The mutual learning between financial markets and the real economy creates a strategic complementarity in their information production, lead...

We develop an endogenous growth model with vintages of physical capital where human capital is endogenously produced. Under some simplifying assumptions, we can solve the model analytically and study its dynamics. We provide conditions under which a balanced growth path, in the ratio of capital to human capital, exists and is stable, with the trans...

We examine whether sentiment influences aggregate demand by studying the relationship between the Michigan Survey expectations concerning national output growth and future economic activity at the state level. We instrument for local sentiments with political outcomes, positing that agents in states with a higher share of congressmen from the polit...

This paper introduces a simple adverse selection problem arising in credit markets into a standard textbook continuous-time real business cycle model. Such adverse selection generates multiple steady states and both local and global indeterminacy, and can give rise to equilibria with probabilistic jumps in credit, consumption, investment and employ...

We construct a simple neoclassical model to capture the Keynesian idea that equilibrium aggregate supply is determined by aggregate demand and thus influenced by consumer sentiments about aggregate income. This result is nontrivial because in a standard neoclassical setting it is the aggregate supply (productive capacity) that determines aggregate...

We study the relation between the distribution of labor earnings and the distribution of wealth. We show, theoretically as well as empirically, that while labor earnings and precautionary savings are important determinants of wealth inequality factors, they cannot by themselves account for the thick tail of (the large top shares in) the observed di...

We introduce endogenous information acquisition into an otherwise standard business cycle model. In our framework information is a productive input, which is essentially specialized labor, so information acquisition is linked to the labor market and thereby to macroeconomic conditions. We show that when firms acquire information optimally, informat...

We study a model where limited liability and enforcement permits bank owners to shift the risk of their asset portfolios to the depositors. Incentive-compatible equilibria require the franchise value of the bank to exceed the value that the bank owners can obtain by undertaking excessively risky investments, and defaulting on deposits when investme...

This paper studies how financial information frictions can generate sentiment-driven fluctuations in asset prices and self-fulfilling business cycles. In our model economy, exuberant financial market sentiments of high output and high demand for capital increase the price of capital, which signals strong fundamentals of the economy to the real side...

Invariably across a cross-section of countries and time periods, wealth distributions are skewed to the right displaying thick upper tails, that is, large and slowly declining top wealth shares. In this survey we categorize the theoretical studies on the distribution of wealth in terms of the underlying economic mechanism generating skewness and th...

We study the wealth distribution in Bewley economies with idiosyncratic capital income risk. We show analytically that under rather general conditions on the stochastic structure of the economy, a unique ergodic distribution of wealth displays a fat tail.

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about demand, optimal decisions based on sentiments can generate stochastic self-fulfilling rational expectations equilibria in standard econom...

This paper attempts to quantitatively identify the factors that drive wealth dynamics in the U.S. and are consistent with its observed skewed cross-sectional distribution and social mobility. We concentrate on three critical factors: a skewed and persistent distribution of earnings, differential saving and bequest rates across wealth levels, and ca...

We study a model where some agents have private information about risky asset returns and trade to obtain capital gains, while others acquire the risky asset and hold it to maturity, forming expectations of returns based on market prices. We show that under such a structure, in addition to fully revealing rational expectations equilibria, there exi...

We study the dynamics of the distribution of wealth in an economy with infinitely lived agents, intergenerational transmission of wealth, and redistributive fiscal policy. We show that wealth accumulation with idiosyncratic investment risk and uncertain lifetimes can generate a double Pareto wealth distribution.

We construct a model to capture the Keynesian idea that production and em-ployment decisions are based on expectations of aggregate demand driven by sen-timents, and that realized demand follows from the production and employment decisions of …rms. We cast the Keynesian idea into a simple model with imperfect information about aggregate demand and...

We test the relation between income and democracy during the postwar period. We employ panel estimation methods that explicitly allow for the fact that the primary measures of democracy are censored with substantial mass at the boundaries. We find that the statistically significant positive income–democracy relationship is robust to the inclusion o...

We show that the simple Aghion-Howitt model exhibits oscillatory indeterminacy in the process of creative destruction as firms undertaking new research do not internalize their effect on existing firms. A simple calibration shows that indeterminacy occurs for quite plausible parametrizations of the share of the intermediate good.

We formalize the Keynesian insight that aggregate demand driven by sentiments can generate output fluctuations under rational expectations. When production decisions must be made under imperfect information about aggregate demand, optimal decisions based on sentiments can generate stochastic self-fulfillng rational expectations equilibria in standa...

We show that self-fulfilling equilibria and indeterminacy can easily arise in a simple financial accelerator model with reasonable parameter calibrations and without increasing returns in production. A key feature for generating indeterminacy in our model is the countercyclical markup due to the procyclical loan to output ratio. We illustrate, via...

We examine global dynamics under infinite-horizon learning in New Keynesian models where the interest-rate rule is subject to the zero lower bound. As in Evans, Guse and Honkapohja (2008), the intended steady state is locally but not globally stable. Unstable deflationary paths emerge after large pessimistic shocks to expectations. For large expect...

Will fast growing emerging economies sustain rapid growth rates until they “catch-up” to the technology frontier? Are there incentives for some developed countries to free-ride off of innovators and optimally “fallback” relative to the frontier? This paper models agents growing as a result of investments in innovation and imitation. Imitation facil...

Recently there has been a surge of interest in endogenous business cycles that arise in competitive laissez-faire economies. In the context of standard overlapping generations economies, conditions for the existence of equilibrium cycles have been given by Grandmont (1983) and by Benhabib and Day (1982). Models of the economy with extrinsic uncerta...

Recently there has been a renewed interest in indeterminacy, or alternatively put, in the existence of a continuum of equilibria in dynamic economies that exhibit some market imperfections. One of the primary concerns of this literature has been the empirical plausibility of indeterminacy, which arises in markets with external effects or with monop...

The local and global stability of multisector optimal growth models has been extensively studied in the recent literature. Brock and Scheinkman (1976), Cass and Shell (1976), McKenzie (1976), and Scheinkman (1976) have established strong results about global stability that require a small rate of discount. Burmeister and Graham (1973), Araujo and S...

Recently there has been a renewed interest in the possibility of indeterminacy and sunspots, or alternatively put, in the existence of a continuum of equilibria that arises in dynamic economies with some market imperfections. Much of the research in this area has been concerned with the empirical plausibility of indeterminacy in markets with extern...

We examine, with the tools of economics, a fundamental tenet of some of the most recent theoretical work in sociology, which we refer to as the Postmodernist Critique: preferences are socially constructed, firms exploit their monopoly power through advertising in order to create new (false) needs in consumers, and, as a consequence, consumer spendi...

Social economics is the study, with the methods of economics, of social phenomena in which aggregates a¤ect individual choices. 1 Such phenomena include, just to men-tion a few, social norms and conventions, cultural identities and stereotypes, peer and neighborhood e¤ects. A central underpinning of the the methods of economics is individualism. In...

We examine the asymptotic distribution of estimated coe¢ cients and endogenous variables in a dynamic self-referential model when agents learn adaptively using a constant gain stochastic gradient algorithm. The model environment can represent a number of economic models, including asset pricing models, that have been studied recently in the adaptiv...

A number of recent empirical studies have cast doubt on the “modernization theory” of democratization, which posits that increases in income are conducive to increases in democracy levels. This doubt stems mainly from the fact that while a strong positive correlation exists between income and democracy levels, the relationship disappears when one c...

We examine the role of generalized constant gain stochastic gradient (SGCG) learning in generating large deviations of an endogenous variable from its rational expectations value. We show analytically that these large deviations can occur with a frequency associated with a fat tailed distribution even though the model is driven by thin tailed exoge...

We study the dynamics of the distribution of wealth in an overlapping generation economy with finitely lived agents and intergenerational transmission of wealth. Financial markets are incomplete, exposing agents to both labor and capital income risk. We show that the stationary wealth distribution is a Pareto distribution in the right tail and that...

Are models and data on choice processes useful as a complement to revealed preferences in decision theory? We answer this methodological question in the armative. We also argue, however, that progress in neuroeconomics is likely to require relying more clearly on structural empirical methods. We illustrate our arguments by means of examples from in...

In this paper we elicit preferences for money-time pairs via experimental techniques. We estimate a general specification of discounting that nests exponential and hyperbolic discounting, as well as various forms of present bias, including quasi-hyperbolic discounting. We find that discount rates are high and decline with both delay and amount, as...

We examine the impact of political and criminal accountabil- ity on economic growth. Governments seek to maximize their own consumption by extracting rents that are costly to growth. When citizens are able to depose politicians through elections, governments are tightly controlled. The rents politicians are able to extract increase in the length of...

When monetary policy is subject to regime switches conditions for determinacy become more complex. Davig and Leeper (2007) and Farmer, Waggoner and Zha (2009a) have studied such conditons. Using some new results from stochastic processes, we characterize the moments of the stationary distribution of ination under regime switiching to obtain conditi...

We present a mechanism to analytically generate a double Pareto distri- bution of wealth in a continuous time OLG model with optimizing agents who have bequest motives, and are subject to stochastic returns on capital and uncertain lifespans. We disentangle the contribution of inheritance, age and stochastic rates of capital return to wealth inequa...

In the present paper, we construct a continuous time model of economic growth with positive externalities and with variable capacity utilization, and study the global equilibrium paths in this model. If there is a homoclinic orbit or a periodic solution in this model, equilibrium is globally indeterminate. We show that positive externalities can yi...

A new literature in the 1980s studied the possibility that endogenous cycles and irregular chaotic dynamics resembling stochastic fluctuations could be generated by deterministic, equilibrium models of the economy, in particular in overlapping generations models and in models with infinitely lived representative agents. Other empirical studies atte...

We characterize the equilibrium of simple dynamic economy with linear production and redistribution, where agents face arbitrary sequences of after tax returns on wealth. This allows us to study the dynamics of the distribution of wealth. We apply our analytical method to illustrate that for an agent with wealth less than or equal to the median, th...

The possibility of cycles and chaos arising from nonlinear dynamics in economics emerged in the 1980s, and it came as a surprise. This paper surveys developments in this literature.

We ask what level of migration would maximize world welfare. We find that skill-neutral policies are never optimal. An egalitarian welfare function induces a policy that entails moving mainly unskilled immigrants into the rich countries, whereas a welfare function skewed highly towards the rich countries induces an optimal policy that entails a bra...

In this paper we study theoretically the dynamics of the distribution of wealth in an Overlapping Generation economy with bequest and various forms of redistributive taxation. We characterize the transitional dynamics of the wealth distribution and as well as the stationary distribution. We show that, in our economy, the stationary wealth distribut...

We study a simple model of production, accumulation, and redistribution, where agents are heterogeneous in their initial wealth, and a sequence of redistributive tax rates is voted upon. Though the policy is infinite-dimensional, we prove that a median voter theorem holds if households have identical, Gorman aggregable preferences; furthermore, the...

We ask what redistributions of income and assets are feasible in a democracy, given the initial assets and their distribution. The question is motivated by the possibility that if redistribution is insufficient for the poor or excessive for the rich, they may turn against democracy. In turn, if no redistribution simultaneously satisfies the poor an...

In this paper we explore whether the changing composition of output in response to technology shocks can play a significant role in the propagation of shocks over time. For this purpose we study two multisector real business cycle models, with two and three sectors. We find that, although the two-sector model requires a high intertemporal elasticit...

In a recent paper, Atkeson and Kehoe (2004) demonstrated the lack of a robust empirical relationship between inflation and growth for a cross-section of countries with 19th and 20th century data, concluding that the historical evidence only provides weak support for the contention that deflation episodes are harmful to economic growth. In this pape...

We study the the emergence of multiple equilibria in models with capital and bonds under various monetary and fiscal policies. We show that the presence of capital is indeed another independent source of local and global multiplicites, even under active policies that yield local determinacy. We also show how a very similar mechanism generates multi...

Wages and their effect on labour supply are not only an important subject for labour economists who aim at measuring substitution and income effects. Additionally, the government is interested in the impact of policy changes on the labour market and companies would like to know if it is possible to increase labour supply and especially productivity...

The papers in this symposium address the issue of multiple equilibria that can be induced by monetary policy in models with capital accumulation. In particular they examine how the “Taylor Principle”, under which interest rates respond more than proportionately to increases in inflation, can generate multiple equilibria. They also explore the desig...

We show that under indeterminacy aggregate demand shocks are able to explain not only aspects of actual fluctuations that standard RBC models predict fairly well, but also aspects of actual fluctuations that standard RBC models cannot explain, such as the hump-shaped, trend reverting impulse responses to transitory shocks found in US output (Cogley...

We study the design of monetary policy in a continuous-time framework with delays. More explicitly, we consider a linear, flexible-price model where inflation and nominal interest rates change continuously, but where nominal rates are set by the Central Bank in response to a lagged inflation measure, and where the measure of inflation can be constr...

A vast empirical evidence in experimental psychology on time discounting has documented various behavioral anomalies which cast doubts on the empirical support for exponential discounting, to date the most widely used assumption on time preference in economic theory. The most important of such anomalies, called ''reversal of preferences,'' has been...

We provide a new model of consumption-saving decisions which explicitly allows for internal commitment mechanisms and self-control. Agents have the ability to invoke either automatic processes that are susceptible to the temptation of 'over- consuming,' or alternative control processes which require internal commitment but are immune to such tempta...

The purpose of this paper is to characterize the possibility of indeterminacy in multisector growth models that exhibit constant marginal returns to scale at the social level, with empirically realistic small external effects. Our results demonstrate that indeterminacy does not require increasing returns to scale, large external effects, or close t...

The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this concern, a growing literature has focused on the stabiliz...

The existing literature on the stabilizing properties of interest-rate feedback rules has stressed the perils of linking interest rates to forecasts of future inflation. Such rules have been found to give rise to aggregate fluctuations due to self-fulfilling expectations. In response to this concern, a growing literature has focused on the stabiliz...

We characterize a large class of constant-returns-to-scale economies with standard Cobb–Douglas production technologies, which, when perturbed to incorporate external effects, exhibit indeterminacy or multiple equilibria. The perturbations are constrained to maintain overall constant returns to scale. We characterize the magnitude of the external e...

We consider a discrete-time two-sector Cobb-Douglas economy with positive sector specific external effects. We show that indeterminacy of steady states and cycles can easily arise with constant or decreasing social returns to scale, and very small market imperfections. This is in sharp contrast with most of the contributions in the literature in wh...

This paper generalizes the Nelson–Phelps catch-up model of technology diffusion. We allow for the possibility that the pattern of technology diffusion can be exponential, which would predict that nations would exhibit positive catch-up with the leader nation, or logistic, in which a country with a sufficiently small capital stock may exhibit slower...

Once the zero bound on nominal interest rates is taken into account, Taylor-type interest rate feedback rules give rise to unintended self-fulfilling decelerating inflation paths and aggregate fluctuations driven by arbitrary revisions in expectations. These undesirable equilibria exhibit the essential features of liquidity traps since monetary pol...

A growing empirical and theoretical literature argues in favor of specifying monetary policy in the form of Taylor-type interest rate feedback rules. That is, rules whereby the nominal interest rate is set as an increasing function of inflation with a slope greater than one around an intended inflation target. This paper shows that such rules can e...

This paper generalizes the Nelson-Phelps catch-up model of technology diffusion facilitated by levels of human capital. We allow for the possibility that the pattern of technology diffusion can be exponential, which would predict that nations would exhibit positive catch-up with the leader nation, or logistic, in which a country with a sufficiently...

We consider a representative agent, infinite-horizon economy where production requires private and public capital. The supply of public capital is financed through distortionary taxation. The optimal (second best) tax policy of a benevolent government is time inconsistent. We therefore introduce explicitly the constraint that at no point in time th...

Does it matter whether productivity growth is embodied in new machines or whether it is disembodied and lifts the productivity of all equipment? Phelps (1962) argued that the composition of the sources of growth is irrelevant in the long run. In this paper we reconsider Phelps' result and take our analysis a step further. We consider the relevance...

Introduction and Motivation Western societies have developed into a historically new stage in the evolution of capitalism, one which is characterized by corporations exercising monopolistic power and sustaining demand by advertising through the media. While this theme has been emphasized e.g., by J. A. Schumpeter in Business Cycles; A Theoretical,...

This paper examines the channels through which country characteristics affect growth. We investigate whether "primitives," or rates of factor accumulation, are sufficient statistics for economic growth, and whether "ancillary variables," such as political instability, income distribution, and financial development, affect growth by influencing leve...