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Abstract. The quantitative implications of a setting with household heterogeneity and incomplete financial markets have been widely studied in the literature, mostly under the assumption that households own the stock of physical capital and undertake the intertemporal investment decision, while firms simply rent capital and labor from the households to maximize profits on a period by period basis. The present paper provides the conditions under which this distinction is irrelevant even if markets are incomplete and households are subject to general portfolio restrictions. It is shown that, if the firm owns the stock of capital and it chooses the optimal investment level to maximize its market value, in the sense that it discounts future cash flows with positive state prices that are consistent with security prices, the equilibrium allocations are the same as in the standard setting with static firms, while there might still be shareholder disagreement. Further, the allocations are sensitive to the objective of the firm in the absence of value maximization, particularly with respect to aggregate behavior.Keywords: Incomplete markets, Infinite Horizon, Firm Objectives JEL Classification: D52, E44, G12, L20 Following Bewley (1977, 1986, an extensive literature has studied the quantitative implications of calibrated models with heterogeneous agents and incomplete financial markets. Among others, Aiyagari (1994), Huggett (1997), Smith (1997, 1998) and Storesletten, Telmer and Yaron (2001a, 2001b, 2004 have analyzed the effects of such a framework on the aggregate savings rate, the shape of the wealth distribution, the portfolio asset returns, and the welfare costs of business cycles. While these models are characterized by the presence of an endogenous production sector using as inputs physical capital and labor, an important assumption is that households (as opposed to the firm) are the owners of the capital stock and undertake the intertemporal investment decision, while the firm simply rents capital and labor from the households to maximize profits on a period by period basis. This distinction is innocuous under complete markets, but it becomes relevant when markets are incomplete. In particular, if one assumes instead that the firm owns the stock of physical capital and decides on the optimal investment level, the usual value maximization objective is no longer well defined when markets are incomplete, since the available markets no longer provide sufficient information to value future streams of resources unambiguously. Further, Introduction

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractImmigration is having an increasingly important effect on the social insurance system in the United States. On the one hand, eligible legal immigrants have the right to eventually receive pension benefits but also rely on other aspects of the social insurance system such as health care, disability, unemployment insurance, and welfare programs, while most of their savings have direct positive effects on the domestic economy. On the other hand, most undocumented immigrants contribute to the system through taxed wages but are not eligible for these programs unless they attain legal status, and a large proportion of their savings translates into remittances that have no direct effects on the domestic economy. Moreover, a significant percentage of immigrants migrate back to their countries of origin after a relatively short period of time, and their savings while in the United States are predominantly in the form of remittances. Therefore, any analysis that tries to understand the impact of immigrant workers on the overall system has to take into account the decisions and events these individuals face throughout their lives, as well as the use of the government programs they are entitled to. We propose a life-cycle Overlapping Generations (OLG) model in a general equilibrium framework of legal and undocumented immigrants' decisions regarding consumption, savings, labor supply, and program participation to analyze their role in the financial sustainability of the system. Our analysis of the effects of potential policy changes, such as giving some undocumented immigrants legal status, shows increases in capital stock, output, consumption, labor productivity, and overall welfare. The effects are relatively small in percentage terms but considerable given the size of our economy.