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on Dynamic General Equilibrium |
| By: | Dirk Krueger (Goethe University Frankfurt, Mertonstr. 17, PF 81, 60054 Frankfurt); Harald Uhlig (Humboldt University, Wirtschaftswissenschaftliche Fakultät, Spandauer Str. 1, 10178 Berlin) |
| Abstract: | This paper analyzes dynamic equilibrium risk sharing contracts between profit-maximizing intermediaries and a large pool of ex-ante identical agents that face idiosyncratic income uncertainty that makes them heterogeneous ex-post. In any given period, after having observed her income, the agent can walk away from the contract, while the intermediary cannot, i.e. there is one-sided commitment. We consider the extreme scenario that the agents face no costs to walking away, and can sign up with any competing intermediary without any reputational losses. We demonstrate that not only autarky, but also partial and full insurance can obtain, depending on the relative patience of agents and financial intermediaries. Insurance can be provided because in an equilibrium contract an up-front payment e.ectively locks in the agent with an intermediary. We then show that our contract economy is equivalent to a consumption-savings economy with one-period Arrow securities and a short-sale constraint, similar to Bulow and Rogo. (1989). From this equivalence and our characterization of dynamic contracts it immediately follows that without cost of switching financial intermediaries debt contracts are not sustainable, even though a risk allocation superior to autarky can be achieved. |
| Keywords: | Long-term Contracts, Risk Sharing, Limited Commitment, Competition |
| JEL: | G22 E21 D11 D91 |
| Date: | 2005–01–07 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200507&r=dge |
| By: | Juan Carlos Conesa (Universitat Pompeu Fabra, CREA and CREB-UB); Dirk Krueger (Department of Business and Economics, Johann Wolfgang Goethe-University Frankfurt am Main, Mertonstr. 17, PF 81, 60054 Frankfurt am Main, Germany; and CFS, CEPR and NBER) |
| Abstract: | 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. |
| Keywords: | Progressive Taxation, Optimal Taxation, Flat Taxes, Social Insurance, Transition |
| JEL: | E62 H21 H24 |
| Date: | 2005–01–10 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200510&r=dge |
| By: | Dirk Krueger (University of Frankfurt); Felix Kubler (University of Mannheim) |
| Abstract: | This paper studies an overlapping generations model with stochastic production and incomplete markets to assess whether the introduction of an unfunded social security system leads to a Pareto improvement. When returns to capital and wages are imperfectly correlated a system that endows retired households with claims to labor income enhances the sharing of aggregate risk between generations. Our quantitative analysis shows that, abstracting from the capital crowding-out effect, the introduction of social security represents a Pareto improving reform, even when the economy is dynamically effcient. However, the severity of the crowding-out effect in general equilibrium tends to overturn these gains. |
| Keywords: | Social Security Reform, Aggregate Fluctuations, Intergenerational Risk Sharing, Incomplete Markets. |
| JEL: | E62 H55 H31 D91 D58 |
| Date: | 2005–01–12 |
| URL: | http://d.repec.org/n?u=RePEc:cfs:cfswop:wp200512&r=dge |
| By: | Evi Pappa |
| Abstract: | We study the mechanics of transmission of fiscal shocks to labor markets. We characterize a set of robust implications following government consumption, investment and employment shocks in a RBC and a New-Keynesian model and use part of them to identify shocks in the data. In line with the New-Keynesian story, shocks to government consumption and investment increase real wages and employment contemporaneously both in US aggregate and in US state data. The dynamics in response to employment shocks are mixed, but in many cases are inconsistent with the predictions of the RBC model. |
| URL: | http://d.repec.org/n?u=RePEc:igi:igierp:293&r=dge |
| By: | Lars Peter Hansen; John Heaton; Nan Li |
| Abstract: | We characterize and measure a long-run risk return tradeoff for the valuation of financial cash flows that are exposed to fluctuations in macroeconomic growth. This tradeoff features components of financial cash flows that are only realized far into the future but are still reflected in current asset values. We use the recursive utility model with empirical inputs from vector autoregressions to quantify this relationship; and we study the long-run risk differences in aggregate securities and in portfolios constructed based on the ratio of book equity to market equity. Finally, we explore the resulting measurement challenges and the implied sensitivity to alternative specifications of stochastic growth. |
| JEL: | G1 E2 |
| Date: | 2005–07 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:11476&r=dge |