Constrained Inefficiency over the Life-cycle Dongya Koh ∗ University of Arkansas February 14, 2018 PRELIMINARY AND INCOMPLETE PLEASE DO NOT CIRCULATE Abstract We quantitatively explore how saving and human capital investment are pushed away from efficient levels, measured in constrained optimum, through one’s course of life. In this paper, we compare realistically calibrated competitive equilibrium profiles of saving and time investment on human capital with constrained efficient profiles. We find that top 10% income earners would save 256% more at age 25 in the constrained optimum than in the competitive equilibrium and would invest almost no time on human capital. On the contrary, the bottom 10% of households would save 79% less at age 25 but would start saving more than competitive equilibrium after age 43. They would also spend 24% of their time on human capital investment at age 25, instead of 10% in the competitive equilibrium. We extend this framework to welfare implications of student debt burden associated with the attainment of higher education over the life-cycle. Keywords: Constrained efficiency, life-cycle, incomplete insurance, uninsurable idiosyncratic shocks, saving, human capital investment JEL Codes: D15, D52, D62, H23, J24 * dkoh@walton.uark.edu; https://sites.google.com/site/dongyakoh/