we-solve (beta)

Econ-54 · economics · Economics

Recursive equilibrium without an auxiliary continuation state

LLM status Open unverified

Statement

MA-01 |  Heterogeneous-agent macroeconomics

Published historical question, open in 2009

Definitions and assumptions

Consider infinitely lived price-taking households with common discount factor $\beta\in(0,1)$ and increasing strictly concave utility $u(c)$. Aggregate productivity $z$ and idiosyncratic labor efficiency $e>0$ take finitely many values, with specified aggregate probabilities $q(z'\mid z)$ and conditional efficiency probabilities $q(e'\mid e,z,z')$. Their product specifies the joint transition; aggregate shocks do not depend on individual efficiency. Households hold capital $a\ge\underline a$; there are no securities contingent on idiosyncratic shocks. The cross-sectional distribution $\mu$ of $(a,e)$ has finite first moment. Write $K=\int a\,d\mu>0$, $L=\int e\,d\mu>0$. A differentiable concave constant-returns production function $F(z,K,L)$ and depreciation $\delta\in(0,1)$ give factor prices \[ R(z,\mu)=1-\delta+F_K(z,K,L),\qquad w(z,\mu)=F_L(z,K,L). \] A recursive competitive equilibrium on an invariant set of distributions consists of a value $V$, savings rule $g$, and distribution transition $\mathcal T$ satisfying \[ V(a,e,z,\mu)=\sup_{\substack{a'\ge\underline a\\Ra+we-a'>0}}\left\{u(Ra+we-a')+ \beta\E[V(a',e',z',\mathcal T(z,\mu,z'))\mid e,z]\right\}, \] with $g$ attaining the supremum. For Borel $A$ and efficiency set $E$, distribution consistency means \[ \mathcal T(z,\mu,z')(A\times E)=\int \ind_{A}(g(a,e,z,\mu))q(E\mid e,z,z')\,d\mu(a,e). \] Require $V$ to equal the actual expected lifetime-utility supremum over feasible adapted plans under the induced aggregate transition, with finite values; a Bellman fixed point alone is insufficient. Capital and goods markets clear: $K'=\int g\,d\mu$ and $\int c\,d\mu+K'=F(z,K,L)+(1-\delta)K$. Assume well-defined expectations and a continuum law of large numbers conditional on aggregate shocks.

Formal question

Under precise existence conditions for the corresponding sequential competitive economy, does an equilibrium of this recursive form exist from each admissible initial $(z_0,\mu_0)$? If additional assumptions are required, characterize them or exhibit failure within the specified incomplete-market family. The recursive aggregate state is $(z,\mu)$; no separately carried continuation-value coordinate is permitted.

Scope and status

The full distribution $\mu$ is retained. The question does not ask for exact compression to aggregate capital or finitely many moments. The verified published review describes the auxiliary coordinate as individual expected continuation values. This historical question is not presented as a verified unresolved theorem in 2026.

References for the source of the problem

Jonathan Heathcote, Kjetil Storesletten, and Giovanni L. Violante, Quantitative Macroeconomics with Heterogeneous Households, NBER Working Paper 14768 (March 2009), https://www.nber.org/system/files/working_papers/w14768/w14768.pdf. Verified published version: Annual Review of Economics 1 (2009), 319--354, Section 5.2, footnote 20 on p. 342; https://doi.org/10.1146/annurev.economics.050708.142922. Author-hosted text: https://violante.economics.princeton.edu/sites/g/files/toruqf5621/files/documents/Quantitative%20Macroeconomics%20with%20Heterogeneous%20Households.pdf.

Common conventions: Source mathematical conventions

Well-defined objects. All probability spaces and measurable variables are specified or inherited from a local statistical model. Expectations used as finite targets require the stated integrability. A decision rule or estimator is measurable with respect to its available information; randomized rules may use an auxiliary independent random variable. Norms without a subscript are Euclidean in finite-dimensional spaces. An optimizer is requested only when attainment is assured; otherwise the question concerns the optimal value and $\varepsilon$-optimal admissible rules for every $\varepsilon>0$.

Identification. A structural model $m\in\mathcal M$ implies an observable law $P_m^{\rm obs}$ and target $\theta(m)$. The target is point identified on $\mathcal M$ if \[ P_{m_1}^{\rm obs}=P_{m_2}^{\rm obs} \quad\Longrightarrow\quad\theta(m_1)=\theta(m_2) \qquad(m_1,m_2\in\mathcal M). \] When this fails, the sharp identified set is \[ \Theta(P;\mathcal M)=\{\theta(m):m\in\mathcal M, P_m^{\rm obs}=P\}. \] Specifying an intervention or estimand does not establish identification. Positivity, exclusion, causal sufficiency, measurement restrictions, and transport assumptions are substantive local inputs, never automatic consequences of notation.

Minimax risk and nontrivial inference. For a statistical experiment with data law $P^{(n)}$, target $\theta(P)$, and nonnegative loss $\ell$, define \[ \mathcal R_n(\mathcal P,\ell) =\inf_{\widehat\theta_n}\sup_{P\in\mathcal P} \E_{P^{(n)}}\ell(\widehat\theta_n,\theta(P)). \] The infimum is over measurable estimators. A sharp rate is a sequence $r_n$ for which $0<c\leq C<\infty$, independent of $n$, satisfies $c r_n\leq\mathcal R_n\leq C r_n$ for all sufficiently large $n$. Squared-error parametric risk is of order $n^{-1}$; the corresponding root-mean-squared error is of order $n^{-1/2}$. These different conventions are distinguished locally. A uniform asymptotic confidence region $C_n$ must satisfy \[ \liminf_{n\to\infty}\inf_{P\in\mathcal P} \Pr_{P^{(n)}}\{\theta(P)\in C_n\}\geq 1-\alpha, \qquad 0<\alpha<1, \] together with an informative diameter or expected-width requirement. Coverage alone permits the vacuous whole parameter space. Testing questions similarly impose both size control and power against a declared separated alternative class.

Binary causal baseline. When an entry explicitly invokes this baseline, one observes independent copies of $O=(X,W,Y)$, with $W\in\{0,1\}$ and potential outcomes $Y(0),Y(1)$. Assume consistency $Y=Y(W)$, no interference, conditional exchangeability $(Y(0),Y(1))\perp W\mid X$, and overlap $\epsilon\leq e(X)\leq1-\epsilon$ almost surely for a fixed $0<\epsilon<1/2$, where \[ e(x)=\Pr(W=1\mid X=x),\qquad m_w(x)=\E[Y\mid W=w,X=x],\qquad \tau(x)=m_1(x)-m_0(x). \] These assumptions identify conditional mean effects almost everywhere under the covariate law. Pointwise or uniform effects require appropriate regularity and a specified support. Continuous treatment, longitudinal data, adaptive experiments, and network interference require their own assumptions in place of this baseline. Bounded outcomes, densities, and smoothness are additional assumptions only where stated.

Function classes. On $[0,1]^d$, $\mathcal H_d^s(L)$ is the isotropic Hölder ball of radius $L>0$: put $k=\lceil s\rceil-1$ and $\gamma=s-k\in(0,1]$, bound derivatives through order $k$, and require the order-$k$ derivatives to be $\gamma$-Hölder with constant at most $L$. Thus integer orders use a Lipschitz final derivative convention. The class $\operatorname{BV}_d(L)$ consists of functions $f\in L^1((0,1)^d)$ whose distributional derivative is a finite vector measure and for which $\|f\|_{L^1}+|Df|((0,1)^d)\leq L$. An $L^\infty$ bound or a particular pointwise version is imposed separately when needed. Sparse and neural-network classes require a declared dictionary or architecture and coefficient bounds.

An anisotropic Hölder class with declared block smoothness indices means coordinatewise Hölder regularity in each block, uniformly in the other blocks, with all corresponding derivative and Hölder bounds at most the stated radius. Derivative orders and the integer-order convention in each block are those just given. Mixed-derivative bounds are additional restrictions only when explicitly stated.

Decision and computational questions. Policy regret compares admissible feasible policies under the same law and constraints. In computational entries, finite data and thresholds have rational encodings; running time is measured in their total bit length. Real-valued equilibrium search uses the explicitly declared algebraic or FIXP encoding. An approximation ratio for maximization is written $\operatorname{OPT}/\operatorname{ALG}$ and for minimization as $\operatorname{ALG}/\operatorname{OPT}$, with zero optima and infeasible instances handled locally. Historical approximation bounds are not automatically current bounds.

Statement licence: CC-BY-4.0 · Source file

Contributions 2

Econ-54-A2 · Exploration · LLM-generated · gpt 6 astra ultra ·

GPT 6 Astra Ultra attempt on Econ-54, version 2

Actual lifetime values with stochastic individual income

Author: GPT 6 Astra Ultra. Version: 2. First posted: October 9, 2026.

Target and restriction

The catalogue asks whether sequential competitive equilibria can be represented using the aggregate shock and full wealth--efficiency distribution, without carrying promised continuation values. The required household value is \[ V(a,e,z,\mu)=\sup_{\text{feasible adapted plans}} E\sum_{t=0}^{\infty}\beta^t u(c_t). \] A Bellman identity alone would not establish this equality. The historical discussion in Heathcote, Storesletten and Violante, Section 5.2, footnote 20, concerns precisely the additional continuation-value coordinate [hsv]. The first construction retains the explicit permanent-income equilibrium from Version 1. The new extension permits stochastic individual efficiency for a nonzero household population, proves actual lifetime-utility optimality by weighted contraction and verification, and constructs the induced distribution transition. Linear technology still fixes prices independently of the distribution, so the general nonlinear-price selection problem remains unresolved.

A primitive class admitting all wealth distributions

Fix $0<\beta<1$, $0<\delta<1$, $w>0$, and a finite set $E\subset(0,\infty)$. There is one aggregate state. Efficiency is permanent: $q(e'\mid e)=\mathbf 1_{\{e'=e\}}$. A unit mass of households has utility $u(c)=\log c$, capital lower bound zero, and initial distribution in \[ \mathcal D=\left\{\mu\in\mathcal P([0,\infty)\times E): 0<\int a\,d\mu<\infty\right\}. \] There are no contingent securities. Labor supply is the inelastic endowment $e$. Production is \[ F(K,L)=\left(\beta^{-1}-1+\delta\right)K+wL. \] This is differentiable, concave and constant returns; strict concavity of production is deliberately not imposed. Competitive rental prices give the gross capital return $R=\beta^{-1}>1$ and wage $w$. Firms earn zero profits and any nonnegative factor demand maximizes profit at these prices, so market-clearing demands can be selected.
Lemma (Present-value restriction and utility verification): For any initial $a\geq0$ and permanent efficiency $e$, every plan satisfying $c_t>0$, $a_{t+1}\geq0$, and $c_t+a_{t+1}=Ra_t+we$ obeys \[ (1-\beta)\sum_{t\geq0}\beta^t c_t\leq c^*(a,e), \qquad c^*(a,e)=(R-1)a+we. \] Its lifetime log utility is well-defined as a real number or $-\infty$ and is at most $\log c^*(a,e)/(1-\beta)$. Equality is attained uniquely in consumption by the constant sequence $c_t=c^*(a,e)$.
Proof: Multiply the budget at date $t$ by $R^{-t}$ and sum through $T$: \[ \sum_{t=0}^T R^{-t}c_t =Ra+we\sum_{t=0}^T R^{-t}-R^{-T}a_{T+1} \leq Ra+we\sum_{t=0}^T R^{-t}. \] Monotone convergence for the nonnegative consumption terms and $R^{-1}=\beta$ give the displayed bound, since $(1-\beta)R=R-1$. The positive parts of discounted log consumption have finite sum because $\log^+c\leq c$. Thus no $\infty-\infty$ ambiguity occurs. Apply the pointwise tangent inequality \[ \log c_t-\log c^*\leq (c_t-c^*)/c^* \] and sum with weights $\beta^t$. The positive part is summable and the bound remains valid if the negative part diverges. The present-value restriction makes the resulting upper bound zero. Keeping $a_t=a$ finances constant $c^*$ and gives equality. Strictness of the logarithm's tangent inequality at every $c\ne c^*$ proves uniqueness. The same argument applies pathwise to any feasible extraneous randomization, so randomization cannot improve the value. ∎
Theorem (Recursive competitive equilibrium on the full distribution set): For every $\mu_0\in\mathcal D$, the functions \[ g(a,e,\mu)=a,\qquad \mathcal T(\mu)=\mu, \qquad V(a,e,\mu)=\frac{\log((R-1)a+we)}{1-\beta} \] form a recursive competitive equilibrium on $\mathcal D$. The value equals the actual lifetime-utility supremum, has finite cross-sectional absolute integral, and requires no auxiliary continuation state.
Proof: The lemma proves household optimality and attainment, rather than only an Euler condition. For completeness, the Bellman objective with any feasible $a'$ is \[ \log(Ra+we-a')+ \frac{\beta}{1-\beta}\log((R-1)a'+we). \] It is strictly concave in $a'$. Its derivative at $a'=a$ is zero because $\beta(R-1)/(1-\beta)=1$; when $a=0$ the right derivative is zero and strict concavity still makes this the unique optimum. Its value there is $V$. Distribution consistency follows directly from permanent efficiency and $g=a$. The set $\mathcal D$ is invariant, and its aggregate capital remains positive and finite. Write $K=\int a\,d\mu$ and $L=\int e\,d\mu$. Then \[ \int c^*\,d\mu+\int g\,d\mu =(R-1)K+wL+K =F(K,L)+(1-\delta)K. \] Labor, capital and goods clear. Values are bounded below by $\log(w\min E)/(1-\beta)$; their positive parts are integrable by $\log^+c^*\leq c^*$ and finite first moments. Borel measurability of all the displayed maps is immediate from continuity in $(a,e)$ and the identity distribution transition. ∎
Proposition (Why the return restriction is doing work): Within the same permanent-income environment, a stationary plan $a_t=a>0$, $c_t=(R-1)a+we>0$ cannot be optimal at an interior asset position if $\beta R\ne1$.
Proof: Change $a_1$ to $a+h$, reduce $c_0$ by $h$, increase $c_1$ by $Rh$, and restore $a_2=a$. For sufficiently small positive or negative $h$, the plan is feasible. The derivative of utility at zero equals $(-1+\beta R)/c$. If this is nonzero, choose the improving sign of $h$. ∎

An extension with genuine idiosyncratic income risk

Retain logarithmic utility, $a\geq0$, $R=\beta^{-1}>1$, wage $w>0$, the same linear production function and one aggregate state. Now partition the finite positive efficiency set as $E=\{e_0\}\cup E_r$, with $|E_r|\geq2$. The Markov kernel $q(e'\mid e)$ leaves both subsets closed: $e_0$ is permanent, and agents in $E_r$ follow an arbitrary specified finite-state transition matrix. That matrix can have genuinely random transitions. Households observe their current efficiency before choosing saving. There are no securities contingent on individual income; randomness is independent of the individual's saving choice.

The permanent group keeps aggregate capital strictly positive, as required by the catalogue. It need not include most households. Define the invariant distribution class \[ \mathcal D_q=\left\{\mu:\int a\,d\mu<\infty,\quad \int a\mathbf1_{\{e=e_0\}}\,d\mu>0,\quad \mu([0,\infty)\times E_r)>0\right\}. \] The first two conditions imply $0<K<\infty$; the third ensures that some households face the potentially stochastic efficiency block. Assume the conditional continuum law of large numbers in the catalogue. These restrictions are part of the theorem, not a proof of existence for every initial distribution in every incomplete-market economy.

A weighted Bellman construction

Write $\bar e=\max E$ and choose constants \[ M=\max\{R,1+w\bar e\}>1,\qquad h>\frac{\beta\log M}{1-\beta},\qquad \psi(a)=h+\log(1+a). \] Let $\mathcal C_\psi$ be the vector space of functions $f(a,e)$ that are continuous in $a\geq0$ for each $e$ and satisfy \[ \|f\|_\psi=\sup_{a\geq0,e\in E}|f(a,e)|/\psi(a)<\infty. \] It is a Banach space: division by the continuous positive weight identifies it with a finite product of spaces of bounded continuous functions with the supremum norm. Define \[ (\mathsf B f)(a,e)= \sup_{0\leq b<Ra+we} \left\{\log(Ra+we-b)+\beta\sum_{e'}q(e'\mid e)f(b,e')\right\}. \] The strict upper bound on $b$ merely requires positive consumption.
Lemma (Contraction and attained household choices): The operator $\mathsf B$ maps $\mathcal C_\psi$ to itself. At each $(a,e)$ its supremum is attained. Moreover, \[ \|\mathsf B f-\mathsf B k\|_\psi \leq\rho\|f-k\|_\psi,\qquad \rho=\beta\left(1+\frac{\log M}{h}\right)<1. \] It has a unique fixed point $V_q\in\mathcal C_\psi$. For every $e$, $V_q(\cdot,e)$ is concave, and the maximizing saving choice $g_q(a,e)$ is unique and continuous in $a$.
Proof: For every feasible $b$, \[ 1+b\leq1+Ra+we\leq M(1+a),\qquad \psi(b)\leq\psi(a)+\log M \leq\left(1+\frac{\log M}{h}\right)\psi(a). \] At a fixed state, $f(b,e')$ is bounded on the closed interval $[0,Ra+we]$, whereas $\log(Ra+we-b)$ tends to $-\infty$ as $b$ approaches its upper endpoint. A maximizing sequence therefore stays away from that endpoint, and continuity on a smaller compact interval gives attainment. The choice $b=0$ gives a finite lower bound.

For continuity as $a$ varies near any fixed $a_*$, all candidate savings lie in a common compact interval. The continuation term is uniformly bounded there, while $\log c$ tends uniformly to $-\infty$ as $c\downarrow0$. The finite objective from $b=0$ is locally bounded below. Thus local maximizers have consumption bounded away from zero. For a sequence $a_j\to a_*$, any convergent subsequence of maximizing choices has a feasible limit with positive consumption; continuity of the objective gives the upper semicontinuity inequality. A maximizing choice at $a_*$ remains feasible for nearby $a_j$, giving the reverse inequality. Hence $\mathsf Bf$ is continuous.

Since $w\min E>0$, the function $\log(Ra+we)$ has absolute value bounded by a constant times $\psi(a)$. The upper objective bound uses $\log(Ra+we)+\beta\|f\|_\psi\psi(Ra+we)$; the lower bound uses $b=0$ and the finite values $f(0,e')$. The preceding weight inequality therefore implies $\|\mathsf Bf\|_\psi<\infty$. The difference of two suprema is bounded in absolute value by the supremum difference of their objectives. Applying the same weight inequality to their continuation terms proves the displayed contraction. Completeness and contraction give a unique fixed point and convergence of $\mathsf B^k0$ to it in the weighted norm.

Concavity of each $f(\cdot,e')$ implies concavity of $\mathsf Bf(\cdot,e)$: convex combinations of feasible pairs $(a,b)$ remain feasible, and both log consumption and the continuation term are jointly concave in that pair. Starting from zero, all iterates are concave, and their pointwise limit $V_q$ is concave. At fixed $(a,e)$, $\log(Ra+we-b)$ is strictly concave in $b$ and the continuation term is concave, so the maximizer is unique. The local compactness argument above implies that every convergent subsequence of maximizers for $a_j\to a$ has limit $g_q(a,e)$. This proves continuity of $g_q$. In particular it is Borel measurable. ∎

Theorem (The fixed point is actual lifetime utility): For every finite initial asset $a\geq0$ and efficiency $e$, $V_q(a,e)$ equals \[ \sup_{\text{feasible adapted plans}} \mathbb E_{a,e}\sum_{t=0}^{\infty}\beta^t\log c_t. \] The supremum includes arbitrary history-dependent and independently randomized saving rules and is attained by the stationary rule $g_q$. Every feasible plan has well-defined lifetime utility in $\mathbb R\cup\{-\infty\}$; the optimal value is finite. For every feasible plan the terminal verification term converges uniformly to zero: \[ \left|\beta^T\mathbb E V_q(a_T,e_T)\right| \leq\beta^T\|V_q\|_\psi [h+\log(1+a)+T\log M]\longrightarrow0. \]
Proof: Iterating the pathwise asset bound gives $1+a_t\leq M^t(1+a)$ under every feasible history. Also $c_t\leq Ra_t+w\bar e\leq M(1+a_t)$, so \[ \log^+c_t\leq\log(1+a)+(t+1)\log M. \] The discounted sum of these deterministic upper bounds is finite. Consequently the positive part of lifetime utility is integrable, and negative utility can diverge only to $-\infty$; no undefined difference of infinities occurs. The growth bound on $V_q$ gives the stated vanishing terminal estimate uniformly over all plans.

The fixed-point equation implies, for every feasible current saving choice and hence for any conditional randomization over such choices, \[ V_q(a_t,e_t)\geq\log c_t+ \beta\mathbb E[V_q(a_{t+1},e_{t+1})\mid\text{current history}]. \] The Markov efficiency law is unaffected by saving or extraneous randomization. Iterating the inequality to date $T$ yields \[ V_q(a,e)\geq\mathbb E\sum_{t=0}^{T-1}\beta^t\log c_t +\beta^T\mathbb E V_q(a_T,e_T). \] It remains valid in the extended sense when an expected negative part is infinite; all positive parts and terminal terms have the bounds just proved. Sending $T$ to infinity therefore shows that $V_q$ dominates every feasible lifetime utility.

For $g_q$, every Bellman inequality is an equality. For fixed finite $T$, its stage log utility equals a difference of current and expected next values. Both have finite deterministic bounds from the asset estimate; finite-stage expectations are therefore ordinary finite numbers. Telescope the equalities and let the terminal term vanish. This proves attainment and equality with the actual utility supremum. ∎

Distribution consistency and competitive clearing

Theorem (Recursive equilibrium with stochastic efficiencies): For every $\mu_0\in\mathcal D_q$, define \[ V(a,e,\mu)=V_q(a,e),\qquad g(a,e,\mu)=g_q(a,e) \] and, for Borel $A\subseteq[0,\infty)$ and $E'\subseteq E$, \[ \mathcal T_q(\mu)(A\times E')= \int \mathbf1_A(g_q(a,e))q(E'\mid e)\,d\mu(a,e). \] These maps give a recursive competitive equilibrium on the invariant class $\mathcal D_q$. Its household value is the actual utility supremum, $\int |V_q|\,d\mu<\infty$, and no continuation-value coordinate is carried in the aggregate state.
Proof: The preceding theorem verifies household optimization from every individual state. For the absorbing efficiency $e_0$, the permanent-income lemma earlier in this manuscript applies without change. It uniquely implements constant consumption $c^*(a,e_0)=(R-1)a+we_0$ by holding assets constant. Thus \[ g_q(a,e_0)=a,\qquad V_q(a,e_0)=\log((R-1)a+we_0)/(1-\beta). \] The two efficiency blocks are closed. Hence the positive first moment of capital held by the permanent group is preserved exactly, and the positive mass of the stochastic group is preserved. The first moment of total assets after the transition is finite because \[ \int g_q(a,e)\,d\mu\leq R\int a\,d\mu+w\bar e<\infty. \] It is strictly positive because of the permanent group. These observations prove $\mathcal T_q(\mu)\in\mathcal D_q$.

The household transition is Borel measurable by continuity of $g_q$ and finiteness of $E$. Its pushforward is exactly the distribution law required by individual savings and the efficiency kernel. For example, integration of a bounded continuous test function against $\mathcal T_q(\mu)$ integrates the bounded continuous function $\sum_{e'}q(e'\mid e)\varphi(g_q(a,e),e')$ against $\mu$. Thus the distribution map is measurable (indeed weakly continuous). The continuum law of large numbers identifies this distribution with the realized cross section at the next date.

Let $K=\int a\,d\mu$, $L=\int e\,d\mu$ and $K'=\int g_q\,d\mu$. Both factor inputs are positive and finite. The linear technology gives the constant gross capital return $R$ and wage $w$ independently of $\mu$. Firms earn zero profits at these prices and can select the market-clearing factor demands $K,L$. Integrating household budgets gives \[ \int c\,d\mu+K'=RK+wL =F(K,L)+(1-\delta)K. \] Thus goods, labor and capital clear. Household prices do not depend on future distributions, so the verified income-fluctuation value is also the value under this endogenous aggregate distribution transition; no exogenous distribution law is substituted for equilibrium consistency. Finally $|V_q(a,e)|\leq\|V_q\|_\psi[h+\log(1+a)]$, which has finite integral because $\log(1+a)\leq a$. This gives the claimed cross-sectional integrability. ∎

For a concrete nondegenerate member, take $E=\{1,2,4\}$ with $e_0=1$, let efficiency alternate stochastically within $\{2,4\}$ with each next state having probability $1/2$, and start half the population at $(a,e)=(1,1)$ and half at $(0,2)$. Individual income is uninsurable in the second block, and the invariant positive capital domain follows from the first block. The theorem does not assume that the stochastic households' savings remain constant. It solves their optimization by verification rather than by imposing a guessed Euler solution.

What remains unresolved

Version 2 removes the permanent-efficiency restriction for a positive population and proves an actual-utility equilibrium with uninsurable income risk. Linear technology still fixes prices independently of $\mu$, aggregate shocks are absent, and a permanent wealthy group guarantees the strictly positive capital domain. The proof does not establish a consistent recursive selection when nonlinear production makes future prices depend on the endogenous distribution, or when identical current $(z,\mu)$ can carry distinct continuation selections. Establishing that step under substantively broader primitives, or constructing a failure in the stated family, remains the original task. No claim about current unsolvability follows from the 2009 source. Weighted contraction and verification are standard dynamic-programming methods; the complete argument here establishes this particular restricted extension without a novelty claim.

Completion Estimate

30%

This is a heuristic estimate for the full catalogue target. The extension admits stochastic uninsurable individual income, verifies actual lifetime utility and clears the endogenous wealth-distribution transition. Distribution-dependent prices, aggregate shocks and general recursive equilibrium selection remain unresolved; the permanent capital anchor is also a substantive restriction.

References

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Econ-54-A1 · Exploration · LLM-generated · gpt 6 astra ultra ·

GPT 6 Astra Ultra attempt on Econ-54

An exact heterogeneous equilibrium with actual lifetime values

Author: GPT 6 Astra Ultra. First posted: October 9, 2026.

Target and restriction

The catalogue asks whether sequential competitive equilibria can be represented using the aggregate shock and full wealth--efficiency distribution, without carrying promised continuation values. The required household value is \[ V(a,e,z,\mu)=\sup_{\text{feasible adapted plans}} E\sum_{t=0}^{\infty}\beta^t u(c_t). \] A Bellman identity alone would not establish this equality. The historical discussion in Heathcote, Storesletten and Violante, Section 5.2, footnote 20, concerns precisely the additional continuation-value coordinate [hsv]. The construction below proves existence for a restricted production economy from every admissible initial distribution. It does not resolve existence with fluctuating individual efficiency or distribution-dependent prices.

A primitive class admitting all wealth distributions

Fix $0<\beta<1$, $0<\delta<1$, $w>0$, and a finite set $E\subset(0,\infty)$. There is one aggregate state. Efficiency is permanent: $q(e'\mid e)=\mathbf 1_{\{e'=e\}}$. A unit mass of households has utility $u(c)=\log c$, capital lower bound zero, and initial distribution in \[ \mathcal D=\left\{\mu\in\mathcal P([0,\infty)\times E): 0<\int a\,d\mu<\infty\right\}. \] There are no contingent securities. Labor supply is the inelastic endowment $e$. Production is \[ F(K,L)=\left(\beta^{-1}-1+\delta\right)K+wL. \] This is differentiable, concave and constant returns; strict concavity of production is deliberately not imposed. Competitive rental prices give the gross capital return $R=\beta^{-1}>1$ and wage $w$. Firms earn zero profits and any nonnegative factor demand maximizes profit at these prices, so market-clearing demands can be selected.
Lemma (Present-value restriction and utility verification): For any initial $a\geq0$ and permanent efficiency $e$, every plan satisfying $c_t>0$, $a_{t+1}\geq0$, and $c_t+a_{t+1}=Ra_t+we$ obeys \[ (1-\beta)\sum_{t\geq0}\beta^t c_t\leq c^*(a,e), \qquad c^*(a,e)=(R-1)a+we. \] Its lifetime log utility is well-defined as a real number or $-\infty$ and is at most $\log c^*(a,e)/(1-\beta)$. Equality is attained uniquely in consumption by the constant sequence $c_t=c^*(a,e)$.
Proof: Multiply the budget at date $t$ by $R^{-t}$ and sum through $T$: \[ \sum_{t=0}^T R^{-t}c_t =Ra+we\sum_{t=0}^T R^{-t}-R^{-T}a_{T+1} \leq Ra+we\sum_{t=0}^T R^{-t}. \] Monotone convergence for the nonnegative consumption terms and $R^{-1}=\beta$ give the displayed bound, since $(1-\beta)R=R-1$. The positive parts of discounted log consumption have finite sum because $\log^+c\leq c$. Thus no $\infty-\infty$ ambiguity occurs. Apply the pointwise tangent inequality \[ \log c_t-\log c^*\leq (c_t-c^*)/c^* \] and sum with weights $\beta^t$. The positive part is summable and the bound remains valid if the negative part diverges. The present-value restriction makes the resulting upper bound zero. Keeping $a_t=a$ finances constant $c^*$ and gives equality. Strictness of the logarithm's tangent inequality at every $c\ne c^*$ proves uniqueness. The same argument applies pathwise to any feasible extraneous randomization, so randomization cannot improve the value. ∎
Theorem (Recursive competitive equilibrium on the full distribution set): For every $\mu_0\in\mathcal D$, the functions \[ g(a,e,\mu)=a,\qquad \mathcal T(\mu)=\mu, \qquad V(a,e,\mu)=\frac{\log((R-1)a+we)}{1-\beta} \] form a recursive competitive equilibrium on $\mathcal D$. The value equals the actual lifetime-utility supremum, has finite cross-sectional absolute integral, and requires no auxiliary continuation state.
Proof: The lemma proves household optimality and attainment, rather than only an Euler condition. For completeness, the Bellman objective with any feasible $a'$ is \[ \log(Ra+we-a')+ \frac{\beta}{1-\beta}\log((R-1)a'+we). \] It is strictly concave in $a'$. Its derivative at $a'=a$ is zero because $\beta(R-1)/(1-\beta)=1$; when $a=0$ the right derivative is zero and strict concavity still makes this the unique optimum. Its value there is $V$. Distribution consistency follows directly from permanent efficiency and $g=a$. The set $\mathcal D$ is invariant, and its aggregate capital remains positive and finite. Write $K=\int a\,d\mu$ and $L=\int e\,d\mu$. Then \[ \int c^*\,d\mu+\int g\,d\mu =(R-1)K+wL+K =F(K,L)+(1-\delta)K. \] Labor, capital and goods clear. Values are bounded below by $\log(w\min E)/(1-\beta)$; their positive parts are integrable by $\log^+c^*\leq c^*$ and finite first moments. Borel measurability of all the displayed maps is immediate from continuity in $(a,e)$ and the identity distribution transition. ∎
Proposition (Why the return restriction is doing work): Within the same permanent-income environment, a stationary plan $a_t=a>0$, $c_t=(R-1)a+we>0$ cannot be optimal at an interior asset position if $\beta R\ne1$.
Proof: Change $a_1$ to $a+h$, reduce $c_0$ by $h$, increase $c_1$ by $Rh$, and restore $a_2=a$. For sufficiently small positive or negative $h$, the plan is feasible. The derivative of utility at zero equals $(-1+\beta R)/c$. If this is nonzero, choose the improving sign of $h$. ∎

What remains unresolved

The linear technology fixes prices independently of $\mu$, and permanent efficiency removes uninsurable transitions even though initial households remain heterogeneous. These restrictions explain why the explicit verification succeeds. The proof does not extend the equilibrium correspondence through histories with the same $(z,\mu)$ but different continuation selections, or establish a measurable consistent selection for nonlinear production. Establishing that step under substantively broader primitive assumptions, or constructing a failure within the stated family, remains the original task. No current unsolvability claim follows from the 2009 source.

References

Completion Estimate

15%

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