In this paper, we extend the standard incomplete markets Aiyagari(1994) and the limited commitment model Kehoe and Levine(1993) with a role for information. Each period, households receive a public signal on their future labor income. We find that public information improves the quantitative predictions for risk sharing in both models. In the standard incomplete markets model, informative signals facilitate more borrowing and lending in equilibrium and consumption inequality decreases. In the limited commitment model, public information via a Hirshleifer(1971) effect results in lower transfers from high-income to low-income households, thereby resulting in higher consumption inequality.
Joint work with Christian Stoltenberg.