The allocation of resources over time and across states: Individual decisions and market interactions

ECS547NFB The allocation of resources over time and across states: Individual decisions and market interactions

  • Topics


    1. Statistical tools and objects: Markov chains and Stationary time series. [LS2]; Dynamic programming: theory and a simple example (the stochastic growth model) [LS3, LS4]  
    2. Consumption theory: the life cycle and the permanent income model. [AW , LS16]
    3. Consumption smoothing and market arrangements: complete markets. [ AW , LS8]
    4. Exogenously incomplete markets. [AW; LS17]
    5. Consumption smoothing under imperfectly enforceabile contracts [LS20]
    6. Consumption smoothing under imperfect information. [ LS19]

  • Learning outcome

    Learning outcome

    This course deals with models of resource allocations over time in an uncertain environment. There are two parts to the substance of the course: the individual consumption problem (for which we will look at various versions of the life cycle model) and the market structure in which individuals interact. In the first lecture of this course we will provide a rigorous introduction to dynamic problems in economics. We discuss both the formal mathematics behind dynamic programming and dynamic optimization and provide the numerical techniques that can be used in a variety of contexts to solve specific problems

    The allocation of resources over time, which is what the life cycle/permanent income model is about, depends on three elements: (i) individual preferences, (ii) resources and technology and (iii) market arrangements. After a discussion of points (i) and (ii), we will be focusing extensively on different models of intertemporal markets. In particular, we will discuss the implications of self-insurance models (where markets are incomplete in an exogenously given fashion), of complete markets models, and of different types of endogenously incomplete markets. In the process of discussing market structure we will also discuss how to use the consumption model for asset pricing and the empirical implications of such a model at the macro and micro level.

    By the end of the course the course the students will able to:

    • analyze economic questions with modern macro models, that explicitly describe individual decision making in uncertain environments;
    • handle the basic mathematical tools to solve a dynamic macro model, including dynamic optimization and numerical techniques;
    • understand optimal allocation problems in a life-cycle model and intertemporal markets;
    • understand implications for self-insurance in complete and incomplete markets;
    • describe implications for asset pricing, as well as micro and macro (aggregate) behavior

  • Teaching


    June 2014

  • Required prerequisites

    Required prerequisites

    Knowledge of macro and micro at Masters level.

  • Assessment


    The mini-course can be accredited as a course (3 ECTS), if participants complete a take-home assignment at the end of the course.

  • Grading Scale

    Grading Scale

    Grading scale: pass/fail

  • Computer tools

    Computer tools


  • Semester



  • Literature


    Much of the material covered in the course is based on Ljungqvist and Sargent (2009) ( LS ). In the list of topics below, LSi refers to chapter i of the second edition of Ljungqvist and Sargent's book. Some of the material on consumption and market structure is taken from Attanasio and Weber (2010) ( AW) . Several other books and papers contain very useful material. Sargent (1987) is a very useful textbook. Dynamic programing is explained very well there. Other books include Lucas, Stokey and Prescott (1989), Deaton (1992), Blanchard and Fisher (1989).

    • Lars Lundquist and Thomas Sargent, Recursive Macroeconomic Theory, Cambridge, Mass.: MIT Press, 2000. (LS)
    • Orazio Attanasio and Guglielmo Weber "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy." Journal of Economic Literature, September 2010, 48(3):693-751. (AW)

    In addition, the following are also useful references:

    • Nancy Stokey, Robert E. Lucas, and Edward C. Prescott, Recursive Methods in Economic Dynamics, Cambridge, Mass.: Harvard Univer sity Press, 1989. (SLP)
    • Thomas Sargent, Dynamic Macroeconomic Theory, Cambridge, Mass.: Harvard University Press, 1987. (TS)
    • Costas Azariadis, Intertemporal Macroeconomics, Cambridge, Mass.: Blackwell, 1993. (CA)
    • Olivier Blanchard and Stanley Fischer, Lectures on Macroeconomics, Cambridge: MIT Press, 1989. (BF)
    • Deaton, A. Understanding Consumption, Oxford University Press, 1992.
    • N. Gregory Mankiw and David Romer, New Keynesian Economics, MIT Press, 1991.
    • Andreu Mas--Colell, Michael Whinston and Jerry Green, Microeconomic Theory , Oxford University Press, 1995.
    • Thomas Sargent, Macroeconomic Theory, New York: Academic Press, 1979.
    • David Romer, Advanced Macroeconomics, McGraw--Hill, 2001.(DR)


ECTS Credits
Teaching language

Course responsible

Professor Orazio Attanasio (University College London).