On the robustness of laissez-faire

This paper considers a model economy in which agents are privately informed about their type: their endowments of various goods and their preferences over these goods. While preference orderings over observable choices are allowed to be correlated with an agent’s private type, we assume that the planner/government is both uncertain about the nature of this joint distribution and unable to choose among multiple equilibria of any given social mechanism. We model the planner/government as having a maximin objective in the face of this uncertainty. Our main theorem is as follows: Once we allow for this kind of uncertainty and assume no wealth effects in preferences, the uniquely optimal social contract is laissez-faire, in which agents trade in unfettered markets with no government intervention of any kind. ∗The authors thank Robert Lucas for discussions on this paper and over two decades of discussions as our teacher, colleague and friend. We also thank participants at the University of Chicago Symposium on Dynamic General Equilibrium honoring Robert Lucas, the editor Karl Shell, an anonymous associate editor, an anonymous referee, and our discussant Ivan Werning for helpful comments. We thank Roozbeh Hosseini and Kenichi Fukushima for excellent research assistance. The views expressed herein are those of the authors and not necessarily those of the Federal Reserve Bank of Minneapolis or the Federal Reserve System. “Primum non nocere” — medical aphorism