U.S. inequality: Debt constraints or incomplete asset markets?

To examine the role of debt constraints and incomplete asset markets (lack of insurance markets) in explaining U.S. inequality, we run horse races between competing models. For a widely used model, we decompose inequality into its fundamental driving forces. The underlying source of inequality in all models is uninsurable idiosyncratic risk. Both debt constraints and incomplete asset markets are needed to account for inequality, but asset market incompleteness is the key friction. It better accounts for the concentration and dispersion of wealth, and is the most costly friction in terms of welfare. Tight debt constraints are important for explaining the lower tail of the wealth distribution.     

Progressive taxation in a dynastic model of human capital

We develop a quantitative theory of economic inequality to investigate the effects of replacing the current U.S. progressive income tax system with a proportional one. The cross-sectional implications of the theory are used to discipline the assessment of the effects of tax policy and circumvent the lack of conclusive micro-evidence on the parameterization of the human capital production technology. We find that the elimination of progressive taxation increases steady state level of output by 12.6%, capital by 21.8%, and consumption by 13.2%. Moreover, it increases economic inequality and its persistence across generations.     

On the optimal progressivity of the income tax code

This paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor productivity risk gives rise to a nontrivial income and wealth distribution. A progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare. These beneficial effects of a progressive tax system have to be traded off against the efficiency loss arising from distorting endogenous labor supply and capital accumulation decisions.Using a utilitarian steady state social welfare criterion we find that the optimal US income tax is well approximated by a flat tax rate of 17.2% and a fixed deduction of about $9,400. The steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 1.7% higher consumption in each state of the world. An explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates that a majority of the population currently alive (roughly 62%) would experience welfare gains, suggesting that such fundamental income tax reform is not only desirable, but may also be politically feasible.     

Taxes, transfers and employment in an incomplete markets model

The consequences of increases in the scale of tax and transfer programs are assessed in the context of a model with idiosyncratic productivity shocks and incomplete markets. The effects are contrasted with those obtained in a stand-in household model featuring no idiosyncratic shocks and complete markets. The main finding is that the impact on hours remains very large, but the welfare consequences are very different. The analysis also suggests that tax and transfer policies have large effects on average labor productivity via selection effects on employment.     

Inventories, employment and hours

This paper develops a model that integrates inventory and labor decisions. We extend a model of inventory behavior to include a detailed specification of the role of labor input in the production process, distinguishing between employment, hours and effort per worker. We estimate jointly the Euler equations for inventories and employment, a labor compensation schedule, and an hours requirement function with the cross-equation restrictions imposed. The econometric results shed light on several important topics, including the shape of the marginal cost of output, the role of labor hoarding as an explanation of pro-cyclical productivity, and the persistence of inventory stocks.     

Fiscal Policy and Occupational Employment Dynamics

We document substantial heterogeneity in occupational employment dynamics in response to government spending shocks in the United States. Employment rises most strongly in service, sales, and office (“pink-collar”) occupations. By contrast, employment in blue-collar occupations is hardly affected by fiscal policy. We provide evidence that occupation-specific changes in labor demand are key for understanding these findings. We develop a business-cycle model that explains the heterogeneous occupational employment dynamics as a consequence of composition effects due to heterogeneous employment changes across industries and occupation-specific within-industry employment shifts due to differences in the short-run substitutability between labor and capital services across occupations.     

Crude substitution: The cyclical dynamics of oil prices and the skill premium

At the business cycle frequency, energy prices and the skill premium display a strong, negative correlation. This fact is robust to different de-trending procedures. Identifying exogenous shocks to oil prices using the Hoover-Perez [1994. Post hoc ergo propter once more: an evaluation of ‘Does monetary policy matter?’ in the spirit of James Tobin. Journal of Monetary Econonmics 34, 47-73] dates, shows that the skill premium falls in response to such a shock. The estimation of the parameters of an aggregate technology that uses, among other inputs, energy and heterogeneous skills, demonstrates that capital-skill and capital-energy complementarity are responsible for this correlation. As energy prices rise, the use of capital decreases and the demand for unskilled labor—relative to skilled labor—increases, lowering the skill premium.     

Altruism, incomplete markets, and tax reform

We compute the welfare effects of different revenue-neutral tax reforms that eliminate capital income taxation in two general equilibrium models calibrated to the U.S. economy. In our dynastic model, the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35%; 75% of the population alive at the time of the reform benefit from it. Individuals use intervivos transfers and bequests to redistribute the long-run benefits. In a pure life-cycle economy that lacks this redistribution technology, we find that the same reform would benefit only 9% of the population.     

Investment,consumption, and hedging under incomplete markets

Entrepreneurs often face undiversifiable idiosyncratic risks from their business investments. We extend the standard real options approach to an incomplete markets environment and analyze the joint decisions of business investments, consumption/savings, and portfolio selection. For a lump-sum investment payoff and an agent with a sufficiently strong precautionary savings motive, an increase in volatility can accelerate investment, contrary to the standard real options analysis. When the agent can trade the market portfolio to partially hedge against investment risk, the systematic volatility is compensated via the standard CAPM argument, and the idiosyncratic volatility generates a private equity premium. Finally, when the investment payoff is a series of flows, the agent's idiosyncratic risk exposure alters both the implied option value and the implied project value, causing a reversal of the results in the lump-sum payoff case.     

Restructuring,consolidation and competition in Latin American banking markets

This study examines the competitive conditions in the banking industries of eleven Latin American countries for the period 1993–2000. For these countries, the time interval under examination corresponds to an era characterized by substantial reforms to restructure their banking systems, increased consolidation and foreign bank penetration. The banks in our sample are found to be earning their revenues as if operating under monopolistic competition, as in many other developed and emerging financial systems. The results indicate that, overall, market concentration is not significantly related with competitive conduct. At the country level, however, we do observe a decline in competition for Brazil, Chile, and Venezuela in late 1990s which may be attributable to increased consolidation. Further, we observe that deregulation and opening up of the financial markets for foreign participation serves as an important catalyst to increase the competitiveness of banking markets. Higher degree of competition in the sector, in return, is associated with reduced bank margins and profitability but improved cost efficiency.     

Skills, search and the persistence of high unemployment

The persistence of high-unemployment rates in Europe has fueled theories advocating the existence of multiple natural rates of unemployment. Labor-market institutions and increasing returns to scale have been singled out as the main causes of multiplicity and, therefore, of high-unemployment traps. The contribution of this paper is both to expand the set of mechanisms leading to multiple natural rates of unemployment and to establish a minimum set of assumptions under which such multiplicity may arise. To this aim, a search-matching model is presented where households allocate time to market and non-market activities, and invest both in physical and human capital. It is shown that under the standard assumption of concavity in production and matching such a model yields multiple long-run equilibria with different rates of unemployment. This result does not rely on labor-market institutions or increasing returns to scale. Multiplicity in our model arises from differences in the intensity of use of human capital across time-consuming activities.     

Equilibrium Unemployment, Job Flows, and Inflation Dynamics

In order to explain the joint fluctuations of output, inflation and the labor market, this paper develops and estimates a general equilibrium model that integrates a theory of equilibrium unemployment into a monetary model with nominal price rigidities. The estimated model accounts for the responses of employment, hours per worker, job creation, and job destruction to a monetary policy shock. Moreover, search frictions in the labor market generate a lower elasticity of marginal costs with respect to output. This helps to explain the sluggishness of inflation and the persistence of output that are observed in the data.     

U.S. tax policy and health insurance demand: Can a regressive policy improve welfare?

The U.S. tax policy on health insurance is regressive because it subsidizes only those offered group insurance through their employers, who also tend to have a relatively high income. Moreover, the subsidy takes the form of deductions from the progressive income tax system giving high income earners a larger subsidy. To understand the effect of the policy, we construct a dynamic general equilibrium model with heterogenous agents and an endogenous demand for health insurance. A complete removal of the subsidy may lead to a partial collapse of the group insurance market, reduce the insurance coverage and deteriorate welfare. There is, however, room for improving the coverage and welfare by extending a refundable credit to the individual insurance market.     

Nonseparable Preferences, Fiscal Policy Puzzles, and Inferior Goods

Nonseparable preferences over consumption and leisure can generate an increase in private consumption in response to government spending, as found in the data, in a frictionless business cycle model. However, the conditions on preferences required for these result to obtain hold if and only if the consumption good is inferior. Similarly, positive co-movement of consumption and hours worked occurs if and only if either consumption or leisure is inferior.     

The Friedman rule: Old and new

In overlapping generations models, money growth creates intergenerational wealth effects and leads to the breakdown of the Friedman rule; the rule can be restored via lump-sum tax and transfers that neutralize these wealth transfers. Additionally, and in contrast to money-in-the-utility-function models, the Friedman rule is not the unique first-best solution in cash-in-advance-constraint models of money: a continuum of combinations of money growth rates and consumption taxes implement the first-best allocation. This paper traces through the intellectual origins of the first (old) result, which was recently restated in Bhattacharya, et al. [2005. Monetary policy, fiscal policy, and the inflation tax: equivalence results. Macroeconomic Dynamics 7, 647-669.] and formally demonstrates the second (new) result.     

Unemployment insurance and capital accumulation

In this paper, I examine a model economy with production, search, and unemployment insurance. The introduction of capital into the economy of Wang and Williamson (J. Monetary Econom. 49(7)(2001)1337) generates the result that optimal replacement ratios are always zero. The result arises from the decline in aggregate activity caused by unemployment insurance: both capital and labor inputs to production fall when benefits rise. Unlike most of the literature, I compute explicitly the cost of the transition path; agents are made better off by switching to a steady state with no unemployment insurance, but the welfare gain is approximately cut in half. Only the very poor and unemployed suffer welfare losses along the transition path. I then briefly investigate the implications of negative replacement ratios.     

Competition,transmission and bank pricing policies: Evidence from Belgian loan and deposit markets

This paper addresses the pass-through from market interest rates to retail bank interest rates. The paper advocates a heterogeneous approach and applies it to the Belgian banking market. A substantial proportion of the heterogeneity in bank pricing policies can be explained by the bank lending channel and the relative market power hypothesis. The results also suggest that the long-term pass-through is typically less than one-for-one, rejecting the completeness hypothesis. While there is no convincing evidence for asymmetry in retail rates, large deviations from equilibrium mark-ups are faster reduced than small deviations. Overall, conditions for corporate loans are more competitive compared to consumer loans. Demand and savings deposits have, by far, the most rigid prices.     

Generalists versus specialists: Lifetime work experience and chief executive officer pay

We show that pay is higher for chief executive officers (CEOs) with general managerial skills gathered during lifetime work experience. We use CEOs' résumés of Standard and Poor's 1,500 firms from 1993 through 2007 to construct an index of general skills that are transferable across firms and industries. We estimate an annual pay premium for generalist CEOs (those with an index value above the median) of 19% relative to specialist CEOs, which represents nearly a million dollars per year. This relation is robust to the inclusion of firm- and CEO-level controls, including fixed effects. CEO pay increases the most when firms externally hire a new CEO and switch from a specialist to a generalist CEO. Furthermore, the pay premium is higher when CEOs are hired to perform complex tasks such as restructurings and acquisitions. Our findings provide direct evidence of the increased importance of general managerial skills over firm-specific human capital in the market for CEOs in the last decades.     

Job Duration over the Business Cycle

Evidence from the National Longitudinal Survey of Youth (NLSY) suggests that the cyclicality of job duration depends on the worker's prior and future employment status. For example, among matches formed with previously nonemployed workers, those that end with the worker returning to nonemployment display procyclical duration. In contrast, matches that end because the worker switches to another job have countercyclical duration. Moreover, differences in starting wages do not account for these patterns.     

Corporate tax,capital structure,and the accessibility of bank loans: Evidence from China

In this paper, we investigate whether listed firms in China adjust their capital structure in response to an increase in the corporate tax rate. Although theories of capital structure suggest that corporate tax is an important determinant of capital structure, how exogenous changes of the tax rate affect firms’ leverage decisions has not been fully explored. We examine a unique circumstance in which the Chinese government increased the corporate tax rate of firms that had previously received local government tax rebates. The evidence indicates that these firms increased their leverage when the corporate tax rate increased. Further investigation suggests that the adjustment of leverage was mostly driven by firms with a high level of access to bank loans.