Private information, growth, and asset prices with stochastic disturbances Marcelo Bianconi* Department of Economics, Tufts University, 111 Braker Hall, Medford, MA 02155, USA Received 19 June 2001; received in revised form 18 April 2002; accepted 29 April 2002 Abstract We introduce both idiosyncratic and aggregate shocks in an endogenous growth model with endogenous partial insurance to the idiosyncratic shock. Aggregate uncertainty introduces an additional channel that can play an important role in determining the effects of private information on expected growth and asset prices. We show the impact of aggregate and idiosyncratic shocks on expected growth and on the variability of individual quantities and asset prices. D 2002 Elsevier Science Inc. All rights reserved. JEL classification: E8; E9; D1; D2 Keywords: Optimal contract; Endogenous growth; Endogenous partial insurance; Asset prices 1. Introduction The last 10 to 15 years witnessed an increasing interest in the area of economic growth from the point of view of the neoclassical framework. The new interest emerged first from contributions in the 1980s that essentially directed this area to a second generation of growth models where either production externalities or human capital accumulation delivered growth endogenously. Parallel to this development, there has been an increased interest in the study of general equilibrium with informational asymmetries. 1 1059-0560/02/$ – see front matter D 2002 Elsevier Science Inc. All rights reserved. PII:S1059-0560(02)00141-7 * Tel.: +1-617-627-2677; fax: +1-617-627-3917. E-mail address: mbiancon@emerald.tufts.edu (M. Bianconi). URL: www.tufts.edu/~mbiancon. 1 See Barro and Sala-i-Martin (1995), for a recent survey on economic growth, and the seminal contributions of Atkeson and Lucas (1992) and Prescott and Townsend (1984) on asymmetric information. International Review of Economics and Finance 12 (2003) 1–24