cover image: CIGS Working Paper Series No. 24-002E


CIGS Working Paper Series No. 24-002E

1 Feb 2024

3Davis and Heathcote (2007) estimate the price and quantity of residential land using the residual method to extract the value of land as the difference between the value of a property and its replacement cost starting from the flow of funds data and making adjustments for capital gains. [...] 5.2.1 The Role of CRRA In the baseline results, the value of the CRRA is taken as 2 corresponding to an estimate of the IES of 0.5 that seems to be in the middle of the range of estimates in the literature. [...] The three columns in the middle replicate the replacement rate θ, the return to capital MPK, and the expected lifetime utility V1 in the baseline calculations with γ = 2.0 shown in Table 2, where dynamic inefficiency exists until θ = 0.7 and the optimal replacement rate is θ = 0.7. [...] The optimality of the unfunded social security system depends somewhat on the assumed risk aversion.15 14I keep the income shares of labor, capital and land the same as in the baseline case as well as the transaction tax rate κ. [...] Hence, depending on the strength of the private saving motives, institutional arrangements in the economic environment, and the details of the calibration of the model, it is quantitatively quite possible for dynamic inefficiency to exist and for fiscal policy to restore dynamic efficiency and improve long run welfare.
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