Transfer programs under alternative insurance schemes and liquidity constraints

Abstract

We consider a dynamic allocation problem under alternative insurance and capital market regimes and proper risk aversion separate from intertemporal substitution. We apply the model to study the effect of one-size-fits-all transfers. We find that one-size-fits-all transfers can have different and diametrically opposed qualitative and quantitative effects on consumption, investment, expected growth of output and consumption and the fair price of insurance of the risky technology. The differences depend upon the regime of insurance to the risky technology, the regime of capital markets and the proper separate measures of risk aversion and intertemporal substitution.