Research


 
 

 Papers

 

 

    Sources of Lifetime Inequality  (joint with Mark Huggett and Amir Yaron). 

 

     Abstract: Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the working lifetime? We answer this question within a model that features idiosyncratic shocks to human capital, estimated directly from data, as well as heterogeneity in ability to learn, initial human capital, and initial wealth -- features which are chosen to match observed properties of earnings dynamics by cohorts. We find that as of age 20, differences in initial conditions account for more of the variation in lifetime utility, lifetime earnings and lifetime wealth than do differences in shocks received over the lifetime. Among initial conditions, variation in initial human capital is substantially more important than variation in learning ability or initial wealth for determining how an agent fares in life. An increase in an agent's human capital affects expected lifetime utility by raising an agent's expected earnings profile, whereas an increase in learning ability affects expected utility by producing a steeper expected earnings profile.

 

This version: June 2007.

 

    Taxation, Aggregates and the Household  (joint with Nezih Guner and Remzi Kaygusuz)

     Abstract:  We evaluate reforms to the U.S. tax system in a dynamic setup with heterogeneous married and single households, and with an operative extensive margin in labor supply. We restrict our model with observations on gender and skill premia, labor force participation of married females across skill groups, and the structure of marital sorting. We study four revenue-neutral tax reforms: a proportional consumption tax, a proportional income tax, a progressive consumption tax, and a reform in which married individuals file taxes separately. Our findings indicate that tax reforms are accompanied by large and differential effects on labor supply: while hours per-worker display small increases, total hours and female labor force participation increase substantially. Married females account for more than 50% of the changes in hours associated to reforms, and their importance increases sharply for values of the intertemporal labor supply elasticity on the low side of empirical estimates. Tax reforms in a standard version of the model result in output gains that are up to 15% lower than in our benchmark economy.

 

This version: April 2008. Slides are here.

 

    Macroeconomic Implications of Size-Dependent Policies (joint with Nezih Guner and Xu Yi)

    Abstract: Government policies that impose restrictions on the size of large establishments or firms, or promote small ones, are widespread across countries. In this paper, we develop a framework to systematically study policies of this class. We study a simple growth model with an endogenous size distribution of production units. We parameterize this model to account for the size distribution of establishments and for the large share of employment in large establishments. Then, we ask: quantitatively, how costly are policies that distort the size of production units? What is the impact of these policies on productivity measures, the equilibrium number of establishments and their size distribution? We find that these effects are potentially large: policies that reduce the average size of establishments by 20% lead to reductions in output and output per establishment up to 8.1% and 25.6% respectively, as well as large increases in the number of establishments (23.5%).     

     

(Click here for the paper. Forthcoming in Review of Economic Dynamics)

 

   Productivity Differences and the Dynamic Effects of Labor Movements (joint with Paul Klein)

     Abstract: This paper is about the interaction between differences in TFP and barriers to labor mobility. We use a growth model with endogenous labor movements to provide a quantitative assessment of the effects on output, capital accumulation and welfare of removing barriers to labor mobility. We parameterize this model so that it is broadly consistent with evidence on historical international labor movements, and apply it to two cases: the enlargement of the European Union and the (hypothetical) creation of a common labor market in NAFTA.  Our main finding is that there are large resulting gains in terms of output and welfare. In the European case, the output gains after fifty years are about 1.7-4.5%, and in the NAFTA case hey are about 1.3-3.0%. Young individuals from “new'' Europe experience rise in welfare corresponding to an increase in consumption of 2.7-5.9%, whereas young Mexicans gain about 2.0-4.3%. The losses of young residents of rich locations are much smaller. We also find that capital accumulation strongly magnifies the output effects of labor mobility.

 

(Click here for the paper (May 2007)).  


 
 
 

Published Papers

 

  TFP Differences and the Aggregate Effects of Labor Mobility in the Long Run (joint with Paul Klein, B.E. Journal in Macroeconomics, May 2007)

     Abstract: The coexistence of barriers to labor mobility with large output-per-worker disparities driven by Total Factor Productivity (TFP) differences suggests that the world's labor force is misallocated across countries. We investigate the extent and consequences of this potential misallocation in the context of a simple two-location growth model, in which production requires capital, labor and an essential immobile factor (land). We characterize the magnitude of labor movements implied by an efficient long-run allocation in a number of cases, and derive their implications for the aggregate capital stock. Quantitatively, even for small TFP differences, we find substantial increases in world output associated with efficient allocations. These output increases are driven by large movements of labor from low to high TFP countries, as well as by a sizeable increase in the capital stock and changes in its endogenous division across countries. Our results are robust to a large set of parameter values, including unrealistically conservative ones.

 

(Click here for the paper)

 

   Human Capital and Earnings Distribution Dynamics (joint with Mark Huggett and Amir Yaron, Journal of Monetary Economics, March 2006)

       Abstract: Earnings heterogeneity plays a crucial role in modern macroeconomics. We document that mean earnings and measures of earnings dispersion and skewness all increase in US data over most of the working life-cycle for a typical cohort as the cohort ages. We show that (i) a human capital model can replicate these properties from the right distribution of initial human capital and learning ability, (ii) differences in learning ability are essential to produce an increase in earnings dispersion over the life cycle and (iii) differences in learning ability account for the bulk of the variation in the present value of earnings across agents. These findings emphasize the need to further understand the role and origins of initial conditions.    

 

(Click here for the paper. Earlier versions of this paper circulated under the name “Distributional Implications of a Benchmark Human Capital Model”.)

 

  Income Taxation and Marital Decisions (joint with Hector Chade, Review of Economic Dynamics, 8, 2005)

 

      Abstract: Differential tax treatment of married and single people is a key feature of the tax code in the US and other countries. We analyze its equilibrium and welfare effects in a matching model with search frictions and nontransferable utility. We find that an increase in taxes on married people unambiguously reduces the equilibrium number of marriages, but it need not make both men and women more reluctant to marry. We also show that it is optimal to give married couples a preferential tax treatment. A quantitative analysis using US data reveals that relatively large changes in taxes are associated with small changes in the number of marriages and divorces. Finally, we extend the model to allow for cohabitation as an alternative to marriage, and find that the number of marriages becomes more sensitive to increases in the marriage tax penalty. The magnitude of the resulting changes, however, is still moderate.

 

(Click here for the paper.)

  On Inflation as a Regressive Consumption Tax (joint with Andrés Erosa, Journal of Monetary Economics, May 2002.)

        Abstract: Evidence on the portfolio holdings and transaction patterns of households suggests that the burden of inflation is not evenly distributed. We build a monetary growth model consistent with key features of cross-sectional household data and use this framework to study the distributional impact of inflation. At the aggregate level, our model economy behaves similarly to standard monetary growth models within the representative agent abstraction. Inflation has, however, important distributional effects since it is effectively a regressive consumption tax. Thus, neglecting the distributional consequences of inflation may prove misleading in assessing the effects of inflation in our economy.

(Click here for the paper. You can also get Figure 2.1, Figure 2.3 , Figure 4.1 and  Figure 4.2 . Earlier versions of this paper circulated under the title "Inflation, Heterogeneity and Costly Credit: How Regressive is the Inflation Tax?")
  

  Taxes and Marriage: A Two-Sided Search Analysis (joint with Hector Chade, International Economic Review, 2002)

        Abstract: This paper analyzes the effects of differential tax treatment of married and single individuals in the US  on marriage formation and composition, divorce and labor supply. We develop a marriage market model with search frictions and heterogeneous agents that is sufficiently rich to capture key elements of the problem under consideration. We then  calibrate the model and use it to evaluate the quantitative effects of several tax reforms  aimed at making the tax law  neutral with respect to marital status.  We find that these reforms (i) systematically increase the labor supply of married females, with changes ranging from 0.3 to 10.1 percent; (ii) have substantial effects on the correlation of spouses' incomes, which changes from 0.2 to values between 0.185 and 0.334; (iii) can lead to either an increase or decrease in the fraction of people married, with changes that range from -0.6 to 2.4 percent.

(Click here for the paper)

  Understanding Why High Income Households Save More then Low Income Households (joint with Mark Huggett; Journal of Monetary Economics, April 2000.)

        Abstract: We use a calibrated life-cycle model to evaluate why high income households save as a group a much higher fraction of income than do low income households in US cross-section data. We find that (1) age and relatively permanent earnings differences across households together with the structure of the US social security system are sufficient to replicate this fact, (2) without social security the model economies still produce large differences in saving rates across income groups and (3) purely temporary earnings shocks of the magnitude estimated in US data alter only slightly the saving rates of high and low income households.

(Click here for the paper)

 

  Flat Tax Reform: A Quantitative Exploration (Journal of Economic Dynamics and Control, 23, 1999.)
 

        Abstract: This paper explores quantitatively the general equilibrium implications of  a revenue neutral tax reform in which  the current income and capital income tax structure in the U.S. is replaced by a  flat  tax, as proposed by Hall and Rabushka (1995). The central aspects of such reform, the impact of tax reform on capital accumulation and  labor supply, as well as its  distributional consequences, are analyzed in a dynamic general equilibrium model. Main results are that, i) the elimination of the actual taxation of capital income has an important and positive effect on capital accumulation; ii) mean labor hours are relatively constant across tax systems, but aggregate labor in efficiency units increases; iii) in  all circumstances analyzed, he distributions of earnings, income and especially wealth become more concentrated.

(Click here for the paper).

 

   On the Distributional Implications of Social Security Reform (joint with Mark Huggett; Review of Economic Dynamics, 1999.)

      Abstract: How will the distribution of welfare, consumption and leisure across households be affected by social security reform? This paper addresses this question for social security reforms with a two-tier structure by comparing steady states under a realistic version of the current US system and under the two-tier system. The first tier is a mandatory, defined-contribution pension offering a retirement annuity proportional to the value of taxes paid, whereas the second tier guarantees a minimum retirement income. Our findings, which are summarized in the introduction, do not in general favor the implementation of pay-as-you go versions of the two-tier system for the US economy.

 

  A Model of Experimentation with Informational Externalities (Joint with Rolando Guzmán; Journal of Economic Dynamics and Control, November 1998).

 

       Abstract: This paper presents a simple model of experimentation and information externality. Specifically, we analyze an experimentation game in which the consequences of the actions of each agent can be costlessly observed by other agents.  Our analysis provides a complete characterization of the  non-cooperative equilibrium in stationary strategies. In particular, it shows that such an equilibrium is not efficient, because players stop experimenting when the social value of experimentation is still positive.  We also prove, however, a Folk-type result according to which a socially efficient outcome can be sustained as an equilibrium when the players have memory of previous actions and are sufficiently patient. Finally, we indicate a large class of economic problems which provides motivation for our model and to which our approach might be applied.

(Click here for the paper).