ICEF Research Seminar by Marek Weretka (University of Wisconsin-Madison)
Speaker: Marek Weretka (University of Wisconsin-Madison)
Theme: "Quasilinear approximations"
Abstract: This paper demonstrates that the canonical stochastic infinite horizon framework, commonly used in macro and finance literature with sufficiently patient consumers in ordinal terms is indistinguishable from a simple quasilinear economy. In particular with discount factor approaching one the framework converges to its quasilinear limit in preferences, consumption choices, and ordinal welfare. Consequently, income effects associated with economic policies vanish, equivalent and compensating variations coincide and they are approximately additive on the set of temporary policies. Our convergence results holds for a large class of potentially heterogenous preferences that are in Gorman polar form. By this we formalize Marshallian conjecture (1920) according to which quasilinear approximation is justified in settings in which agents consume many commodities (here consumption in many periods).