Although equilibrium allocations in models with incomplete markets are gene
rally not Pareto- efficient, it is often argued that quantitative welfare l
osses from missing assets are small when time horizons are long and shocks
are transitory. In this paper we use a computational analysis to show that
even in the simplest infinite horizon model without aggregate uncertainty w
elfare losses can be substantial. Furthermore we show that in this model we
lfare losses from incomplete markets do not necessarily disappear when one
considers calibrations of the model in which agents become very patient. We
argue that when the economic model is calibrated to higher frequency data,
the period persistence of negative income shocks must increase as well. In
this case the welfare loss of incomplete markets remains constant even as
agents' rate of time preference tends to one. Journal of Economic Literatur
e Classification Numbers: D52, D58, D60. (C) 2001 Academic Press.