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on Dynamic General Equilibrium |
| By: | Kunio Tsuyuhara (University of Calgary) |
| Abstract: | This paper proposes a search theoretic model of optimal employment contract under repeated moral hazard. The model integrates two important attributes of the labour market: workers' work incentive on the job and their mobility in the labour market. The optimal long-term contract is characterized by an increasing wage-tenure profile. The labour productivity of a match also increases with tenure due to a worker's increasing effort provision. Even though all workers and firms are ex ante homogeneous, these two outcomes jointly generate endogenous heterogeneity of the wages and labour productivity. It is also shown that the interaction of these factors provides novel implications for wage dispersion, and the calibrated model generates significantly larger wage dispersion than previous studies. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:630&r=dge |
| By: | Marco Del Negro (Federal Reserve Bank of New York); Vasco Curdia (Federal Reserve Bank of New York) |
| Abstract: | We estimate a DSGE model where rare large shocks can occur, by replacing the commonly used Gaussian assumption with a Student-t distribution. We show that the latter is favored by the data in the context of a Smets and Wouters-type model estimated on macro variables, even if we allow for low frequency variation in the shocks' volatility. The evidence is even stronger when we introduce financial frictions as in Bernanke, Gertler and Gilchrist (1999), and correspondingly include a measure of interest rate spreads among the observables. We provide some evidence that introducing Student-t shocks reduces the importance of low-frequency time-variation in volatility. In particular, we show that the Great Recession of 2008-09 does not result in significant increases in estimated time-varying volatility (i.e., it is not a reversal of the Great Moderation) but is largely the outcome of large shocks. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:654&r=dge |
| By: | Giorgio Primiceri (Northwestern University) |
| Abstract: | Household deleveraging is often cited as one of the key headwinds bearing on the US economy as it slowly recovers from the Great Recession of 2007-2009. We calibrate a general equilibrium model of this process of debt reduction, in which impatient households borrow from patient ones, using the value of their homes as collateral. In the model, an exogenous reduction in the loan-to-value ratio required by lenders, has sizable aggregate consequences only if the real interest rate cannot fall enough to induce the lenders to reduce their savings (as in a model with sticky prices and a zero lower bound for the nominal interest rate). |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:628&r=dge |
| By: | Miguel Casares (Departamento de Economía-UPNA); Luca Deidda (Università di Sassari. Italia); Jose E. Galdon-Sanchez (Departamento de Economía-UPNA) |
| Abstract: | We describe a dynamic macroeconomic model that incorporates firm-level borrowing constraints, competitive CES loan production, and rigidities on both setting prices and wages. The external finance premium (interest-rate spread) is countercyclical with technology and financial shocks, and procyclical with consumption spending shocks. The real effects of financial shocks are significantly amplified when either considering greater rigidities for price/wage setting or a low elasticity of substitution in loan production (banking real rigidities). In the monetary policy analysis, a stabilizing Taylor (1983)-style rule performs slightly better when incorporating a positive and small response coefficient to the external finance premium. |
| Keywords: | financial accelerator, nominal rigidities, real rigidities donations |
| JEL: | E32 E44 |
| Date: | 2013 |
| URL: | http://d.repec.org/n?u=RePEc:nav:ecupna:1304&r=dge |
| By: | Martin Schneider (Stanford University); Johannes Stroebel (Stanford University); Monika Piazzesi (Stanford University) |
| Abstract: | This paper documents stylized facts on buyer and seller behavior across different segments of the housing market, and uses them to inform a search model with heterogeneous houses. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:670&r=dge |
| By: | Katarina Borovickova (University of Chicago) |
| Abstract: | the number of hired and separated workers. In addition, workers also switch jobs or leave their current firms for reasons related to the career development. Workers learn about their match quality while employed, build their careers through search for better job opportunities, and separate if they infer that their current job is not a good match. Firm-level productivity shocks impact the match quality of employed workers, which captures the idea that technology is partly embodied in workers and innovation can make some workers less suitable for the new technology. I use a large panel dataset of the labor market histories of individuals in Austria for the empirical investigation. I calibrate the model to match the aggregate labor market flows and show that the model generates dynamics which is consistent with the observed cross-sectional patterns for the job and worker flows. I use the calibrated model to evaluate the contribution of different mechanisms to the worker flows. The learning mechanism accounts for more than 50 percent of the flows which suggests that the uncertainty at the worker level plays an important role in explaining the large magnitude of the worker flows. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:652&r=dge |
| By: | Iraola, Miguel; Torres-Martínez, Juan Pablo |
| Abstract: | We address a dynamic general equilibrium model where securities are backed by collateralized loans, and borrowers face endogenous liquidity contractions and financial participation constraints. Although the only payment enforcement is the seizure of collateral guarantees, restrictions on credit access make individually optimal payment strategies---coupon payment, prepayment, and default---sensitive to idiosyncratic factors. In particular, the lack of liquidity and the presence of financial participation constraints rationalize the prevalence of negative equity loans. We prove equilibrium existence, characterize optimal payment strategies, and provide a numerical example illustrating our main results. |
| Keywords: | Asset-Backed Securities - Liquidity Contractions - Incomplete Financial Participation |
| JEL: | D52 D53 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46838&r=dge |
| By: | Marios Karabarbounis (University of Rochester) |
| Abstract: | Standard public finance principles imply that workers with more elastic labor supply should face smaller tax distortions. This paper quantitatively tests the potential of such an idea within a realistically calibrated life cycle model of labor supply with heterogeneous agents and incomplete markets. Heterogeneity in labor supply elasticity arises endogenously from differences in reservation wages. I find that older cohorts are much more responsive to wage changes than younger and especially middle aged cohorts. Both a shorter time horizon and a larger stock of savings account for this difference. Since the government does not have direct information on individual labor supply elasticity it uses these life cycle variables as informative moments. The optimal Ramsey tax policy decreases the average and marginal tax rates for agents older than 50 and more so the larger is the accumulated stock of savings. At the same time, the policy increases significantly the tax rates for middle aged workers. Finally, the optimal policy provides redistribution by decreasing tax rates of wealth-poor young workers. The policy encourages work effort by high elasticity groups while targets inelastic middle aged groups to raise revenues. As a result, total supply of labor increases by 2.98% and total capital by 5.37%. These effects translate into welfare gains of about 0.85% of annual consumption. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:655&r=dge |
| By: | Gerhard Glomm (Department of Economics, Indiana University - Bloomington); Juergen Jung (Department of Economics, Towson University) |
| Abstract: | We construct a dynamic general equilibrium model to analyze the effects of large energy subsidies in a small open economy. The model includes domestic energy production and consumption, trade in energy at world market prices, as well as private and public sector production. The model is calibrated to Egypt and used to study reforms such as reductions in energy subsidies with corresponding reductions in various tax instruments, or increases in infrastructure investment. We calculate the new steady states, transition paths to the new steady state and the size of the associated welfare losses or gains. In response to a 15 percent cut in energy subsidies, GDP may fall as less energy is used in production. Excess energy is exported and capital imports fall. Welfare in consumption equivalent terms can rise by up to 0.6 percent of GDP. Gains in output can be realized only if the government re-invests into infrastructure. |
| Keywords: | Energy subsidies, fiscal policy reform, public sector reform, growth. |
| JEL: | E21 E63 H55 J26 J45 |
| Date: | 2013–02 |
| URL: | http://d.repec.org/n?u=RePEc:tow:wpaper:2013-02&r=dge |
| By: | Batyra, Anna (Galatasaray University Economic Research Center); de la Croix, David; Pierrard, Olivier; Sneessens, Henri R. |
| Abstract: | We offer an alternative explanation for the decline in labor force participation of senior workers. Typically, tax and transfer explanations have been proposed. On the contrary, a model with imperfectly competitive labor market allows to consider as well the effects of a drop in bargaining power, which would not be possible in a purely neoclassical framework. We find that a decline in the bargaining power of workers, which has taken place in the last four decades, has largely contributed to the rise in inactivity in Europe. However, we need a combination of these two explanations, along with population aging and a fall in the matching efficiency, in order to correctly reproduce the joint evolutions of other labor market variables such as the employment and unemployment rates. |
| Keywords: | Overlapping Generations; Search Unemployment; Labor Force Participation; Ageing; Labor Market Policy and Institutions |
| JEL: | E24 H55 J26 J64 |
| Date: | 2013–05–03 |
| URL: | http://d.repec.org/n?u=RePEc:ris:giamwp:2013_006&r=dge |
| By: | Randall Wright (U Wisconsin); Vaidyanathan (Venky) Venkateswaran (Penn State University) |
| Abstract: | This paper models the role of assets in facilitating intertemporal exchange: because limited commitment precludes unsecured credit, buyers need to pledge assets as collateral. We develop a general equilibrium model where assets differ in terms of pledgability, and put it to work in applications to finance and macroeconomics. The framework nests standard growth and asset pricing models as special cases. We can price at currency as well as real assets, and analyze how monetary policy affects interest rates, generalizing Fishers approach. We also deliver a Tobin effect of inflation on capital accumulation. We study liquidity differentials along both extensive and intensive margins, making pledgability endogenous, while determining the terms of trade in a general way that captures standard pricing mechanisms as special cases. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:601&r=dge |
| By: | Borghan Nezami Narajabad (Rice University); Cyril Monnet (Universitat Bern) |
| Abstract: | In a model with matching frictions, we provide conditions under which repurchase agreements (or repos) co-exist with asset sales. In a repo, the seller agrees to repurchase the asset at a later date at the agreed price. Absent bilateral trading frictions, repos have no role despite uncertainty about future valuations. Introducing pairwise meetings, we show that agents prefer to sell (or buy) assets whenever they face little uncertainty regarding the future use of the asset. As agents become more uncertain of the value of holding the asset, repos become more prevalent. We show that while the total volume of repos is always increasing with the uncertainty, the total sales volume is hump-shaped. In other words, pairwise matching alone is sufficient to explain why repo markets exist and there is no need to introduce random matching, search frictions, information asymmetries or other market frictions. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:647&r=dge |
| By: | Ignacio Presno (Federal Reserve Bank of Boston); Demian Pouzo (UC at Berkeley) |
| Abstract: | This paper develops a general equilibrium model of sovereign debt with endogenous default. Foreign lenders fear that the probability model which dictates the evolution of the endowment of the borrower is misspecied. To compensate for the risk and uncertainty-adjusted probability of default, they demand higher returns on their bond holdings. In contrast with the existing literature on sovereign default, we are able to match the average bond spreads observed in the data together with the standard empirical regularities of emerging economies. The technical contribution of the paper lies in extending the methodology of McFadden (1981) to compute equilibrium allocations and prices using the discrete state space (DSS) technique in the context of risk and uncertainty aversion on the lenders' side. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:608&r=dge |
| By: | Francesco Lancia; Alessia Russo |
| Abstract: | This paper proposes a dynamic politico-economic theory of intergenerational contracts, whose driving force is the intergenerational con?ict over government spending. Embedding a repeated probabilistic voting setup in a standard OLG model with human capital accumulation, we ?nd that the empowerment of elderly constituencies is key in order to enforce productive policies. The paper characterizes the Markov-perfect equilibrium of the voting game, as well as the welfare properties. The main results are: (i) the existence of a Markov-perfect equilibrium which attains a growth- enhancing intergenerational contract does not require pre-commitment through the establishment of long-lasting institutions; (ii) the political sustainability of the intergenerational contract relies solely on the politico-economic fundamentals that are payo¤-relevant for future constituents; (iii) the implementation of pork-barrel transfers does not necessarily crowd out productive public investment; and, (iv) the greater the degree of intergenerational con?icts over the government spending, the lower the ine¢ ciency. |
| JEL: | D72 E62 H23 H30 H53 |
| Date: | 2013–03 |
| URL: | http://d.repec.org/n?u=RePEc:vie:viennp:1304&r=dge |
| By: | Venky Venkateswaran; Randall Wright |
| Abstract: | When limited commitment hinders unsecured credit, assets help by serving as collateral. We study models where assets differ in pledgability – the extent to which they can be used to secure loans – and hence liquidity. Although many previous analyses of imperfect credit focus on producers, we emphasize consumers. Household debt limits are determined by the cost households incur when assets are seized in the event of default. The framework, which nests standard growth and asset-pricing theory, is calibrated to analyze the effects of monetary policy and financial innovation. We show that inflation can raise output, employment and investment, plus improve housing and stock markets. For the baseline calibration, optimal inflation is positive. Increases in pledgability can generate booms and busts in economic activity, but may still be good for welfare. |
| JEL: | E41 E43 E44 E52 G12 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19009&r=dge |
| By: | Shouyong, Shi; Berentsen, Aleksander; Rojas Breu, Mariana |
| Abstract: | Many countries simultaneously suffer from high rates of inflation, low growth rates of per capita income and poorly developed financial sectors. In this paper, we integrate a microfounded model of money and finance into a model of endogenous growth to examine the effects of inflation and financial development. A novel feature of the model is that the market for innovation goods is decentralized. Financial intermediaries arise endogenously to provide liquid funds to the innovation sector. We calibrate the model to address two quantitative issues. One is the effects of an exogenous improvement in the productivity of the financial sector on welfare and per capita growth. The other is the effects of inflationonwelfareandgrowth.Consistent with the data but in contrast to previous work, reducing inflation generates large gains in the growth rate of per capita income as well as in welfare. Relative to reducing inflation, improving the efficiency of the financial market increases growth and welfare by much smaller amounts. |
| Keywords: | Money; Growth; Innovation; Financial intermediation; |
| JEL: | O4 E1 G00 |
| Date: | 2012–12 |
| URL: | http://d.repec.org/n?u=RePEc:ner:dauphi:urn:hdl:123456789/7354&r=dge |
| By: | Gaetano Lisi (Centro di Analisi Economica CREAtività e Motivazioni) |
| Abstract: | This housing market matching model considers two types of home seekers: people who search for a house both in the rental and in the homeownership market, and people who only search in the homeownership market. The house-search process leads to several types of matching and in turn this implies different prices of equilibrium. Also, the house-search process connects the rental market with the homeownership market. This model is thus able to explain both the relationship between the rental price and the selling price and the price dispersion which exists in the housing market. Furthermore, this theoretical model can be used to study the impact of taxation in the two markets. Precisely, it is straightforward to show the effects of two different taxes: the tax on property sale and the tax on rental income. |
| Keywords: | rental market, homeownership market, housing prices. |
| JEL: | R21 R31 J63 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2013-04&r=dge |
| By: | Georgy Chabakauri (London School of Economics) |
| Abstract: | We evaluate the impact of portfolio constraints on financial markets in a dynamic equilibrium pure exchange economy with one consumption good and two CRRA investors that may differ in risk aversions, beliefs regarding the dividend process and portfolio constraints. Despite numerous applications, portfolio constraints are notoriously difficult to incorporate into dynamic equilibrium analysis without the restrictive assumption of logarithmic preferences. We provide a tractable solution method that yields new insights on the asset pricing implications of portfolio constraints such as limited stock market participation, margin requirements and short sales prohibition without restricting risk aversion parameters. We demonstrate that in a setting where one investor is unconstrained while the other faces an upper bound constraint on the proportion of wealth that can be invested in stocks the model generates countercyclical market prices of risk and stock return volatilities, procyclical price-dividend ratios, excess volatility and other patterns consistent with empirical findings. In a setting with margin requirements we demonstrate that under plausible parameters tighter constraints decrease stock return volatilities during the times when the constraints are likely to bind. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:636&r=dge |
| By: | Jun, Bogang; Hwang, Won-Sik |
| Abstract: | Against the background of inconclusive evidence about the inequality–growth relation, this paper suggests that the level of inequality increases via the human capital channel with credit market imperfections and that this increasing inequality negatively affects economic growth. We expand the model presented by Galor and Zeira (1993) to represent the fact that the economy benefits from endogenous technological progress and that the government provides financial aid to reduce the financial hurdles for human capital accumulation. The presented empirical results, using Korean data from 1998 to 2008, imply that education plays a significant role in the divergence of household wealth over time and that the government’s financial aid package in the form of the new student loans program positively influences equality and short-run economic growth by promoting the number of skilled workers. |
| Keywords: | Human Capital, Growth, Inequality |
| JEL: | I24 I25 O15 |
| Date: | 2012–12–31 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:46317&r=dge |
| By: | Richard Blundell; Monica Costa Dias; Costas Meghir; Jonathan M. Shaw |
| Abstract: | We consider the impact of Tax credits and income support programs on female education choice, employment, hours and human capital accumulation over the life-cycle. We thus analyze both the short run incentive effects and the longer run implications of such programs. By allowing for risk aversion and savings we are also able to quantify the insurance value of alternative programs. We find important incentive effects on education choice, and labor supply, with single mothers having the most elastic labor supply. Returns to labour market experience are found to be substantial but only for full-time employment, and especially for women with more than basic formal education. For those with lower education the welfare programs are shown to have substantial insurance value. Based on the model marginal increases to tax credits are preferred to equally costly increases in income support and to tax cuts, except by those in the highest education group. |
| JEL: | H2 H3 I21 J22 J24 J31 |
| Date: | 2013–05 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:19007&r=dge |
| By: | Venky Venkateswaran; Luis Llosa (UCLA) |
| Abstract: | We study the efficiency of information acquisition decisions in models with dispersed information and strategic considerations. Our main result is that information choice is typically inefficient because agents do not fully internalize the effects of their information on others. This ex-ante suboptimality is obtained even in environments where information is used efficiently ex-post. We demonstrate this finding in 3 benchmark environments. In a beauty contest model `a la Morris and Shin (1998), incentives to invest in information can diverge from the socially optimal level because the absolute level of the plannerâÂÂs welfare criterion is different from that of the private payoff function. In a RBC framework with dispersed information about technology shocks, distortions due to imperfect substitutability have no effect on incentives to respond to information, but distort the private value of information, leading to an inefficiently low level of information acquired in equilibrium. Finally, in a monetary model with nominal price-setting by heterogeneously informed firms, inefficiencies arise in both the use and the acquisition of information. Importantly, the latter persist even when the former are removed. We also discuss optimal policy response to address these inefficiencies. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:660&r=dge |
| By: | José Ramón García Martínez (Dpto. Análisis Económico); Valeri Sorolla (Dpt. Economia i d'Història Econòmica) |
| Abstract: | This paper uses a model with a matching function in the labor market, where matches last for one period, to obtain the amount of frictional and non frictional (rationed/disequilibrium) unemployment for different standard wage-setting rules when there are matching frictions. We also compute the frictional and non frictional unemployment rate for two economies characterized by different labor market institutions, namely the Spanish and US economies. The empirical analysis takes into account two types of micro-foundations of the matching function: coordination failure and mismatch due to heterogeneity in the labor market. The empirical findings for Spain suggest that approximately half of all unemployment is due to job rationing and the other half to frictional and mismatch problems. However, the rationing unemployment rate for the US economy represents, two thirds of all unemployment on average, while frictional and mismatch problems account for only a third. |
| Keywords: | matching frictions, frictional unemployment, disequilibrium unemployment. |
| JEL: | E24 O41 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:ivi:wpasad:2013-02&r=dge |
| By: | Ronald Wolthoff (University of Toronto); Benjamin Lester (Federal Reserve Bank of Philadelphia) |
| Abstract: | This paper studies the effect of screening costs on the equilibrium allocation of workers with different productivities to firms with different technologies. In the model, a worker's type is private information, but can be learned by the firm during a costly screening or interviewing process. We characterize the planner's problem in this environment and determine its solution. A firm may receive applications from workers with different productivities, but should in general not interview them all. Once a sufficiently good applicant has been found, the firm should instead make a hiring decision immediately. We show that the planner's solution can be decentralized if workers direct their search to contracts posted by firms. These contracts must include the wage that the firm promises to pay to a worker of a particular type, as well as a hiring policy which indicates which types of workers will be hired immediately, and which types will lead the firm to keep interviewing additional applicants. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:631&r=dge |
| By: | Josef Schroth (EUI) |
| Abstract: | This paper studies a dynamic version of the Holmstrom-Tirole model of intermediated finance. I show that competitive equilibria are inefficient when the economy experiences a financial crises. A pecuniary externality entails that bank back-loading may weaken bank incentives. I show that a constrained social planner finds it beneficial to introduce a permanent wedge between the deposit rate and the economy's marginal rate of transformation. The wedge improves borrowers' access to finance during a financial crisis by strengthening banks' incentives to provide intermediation services. I propose a simple implementation of the constrained-efficient allocation that limits bank size. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:617&r=dge |
| By: | Edward Prescott (Federal Reserve Bank of Minneapolis); Ellen McGrattan (Federal Reserve Bank of Minneapolis) |
| Abstract: | Prior to the mid-1980s, labor productivity growth was a useful barometer of the U.S. economy's performance: it was low during economic recessions and high during expansions. Since then, labor productivity has become significantly less procyclical. In the recent recession of 2008-2009, labor productivity actually rose as GDP plummeted. These facts have motivated the development of new business cycle theories because the conventional view is that they are inconsistent with existing business cycle theory. In this paper, we analyze recent events with existing theory and find that the labor productivity puzzle is much less of a puzzle than previously thought. In light of these findings, we argue that policy agendas arising from new untested theories should be disregarded. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:644&r=dge |
| By: | Sebastian Giesen; Rolf Scheufele |
| Abstract: | In this paper we analyze the small sample properties of full information and limited information estimators in a potentially misspecified DSGE model. Therefore, we conduct a simulation study based on a standard New Keynesian model including price and wage rigidities. We then study the effects of omitted variable problems on the structural parameters estimates of the model. We find that FIML performs superior when the model is correctly specified. In cases where some of the model characteristics are omitted, the performance of FIML is highly unreliable, whereas GMM estimates remain approximately unbiased and significance tests are mostly reliable. |
| Keywords: | FIML, GMM, finite sample bias, misspecification, Monte Carlo, DSGE |
| JEL: | C26 C36 C51 E17 |
| Date: | 2013–04 |
| URL: | http://d.repec.org/n?u=RePEc:iwh:dispap:8-13&r=dge |
| By: | Soojin Kim (University of Pennsylvania); Dirk Krueger (University of Pennsylvania); Harold Cole (University of Pennsylvania) |
| Abstract: | This paper constructs a dynamic model of health insurance to evaluate the short- and long run effects of policies that prevent firms from conditioning wages on health conditions of their workers, and that prevent health insurance companies from charging individuals with adverse health conditions higher insurance premia. Our study is motivated by recent US legislation that has tightened regulations on wage discrimination against workers with poorer health status (Americans with Disability Act of 2009, ADA, and ADA Amendments Act of 2008, ADAAA) and that will prohibit health insurance companies from charging different premiums for workers of different health status starting in 2014 (Patient Protection and Affordable Care Act, PPACA). In the model, a tradeoff arises between the static gains from better insurance against poor health induced by these policies and their adverse dynamic incentive effects on household efforts to lead a healthy life. Using household panel data from the PSID we estimate and calibrate the model and then use it to evaluate the static and dynamic consequences of no-wage discrimination and no-prior conditions laws for cross-sectional consumption dispersion, the evolution of the cross-sectional health distribution of a cohort of households as well as ex-ante lifetime welfare of a typical member of this cohort. We find that although a combination of both policies is effective in providing full consumption insurance in the short run, it lowers social welfare since it induces a more rapid deterioration of the cohort health distribution over time. Interestingly, introducing each law in isolation has limited adverse dynamic incentive effects, but a combination of both laws severely undermines the incentives to lead healthier lives. The resulting negative effects on health outcomes in society more than offset the static gains from better consumption insurance so that social welfare, measured in terms of the expected discounted lifetime utility, declines as a result of introducing both policy measures in conjunction. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:609&r=dge |
| By: | Rafael Lopes de Melo (University of Chicago) |
| Abstract: | In this paper, we show that firm heterogeneity and labor market sorting can help us understand a number of empirical facts, and aspects related to the political economy of minimum wages. We study a competitive economy with non-transferable utility, and preferences which depend on worker and firm types. Sorting in this environment can be induced by complementarities in productions or forces related to preferences. With firm heterogeneity, minimum wage increases affect workers above the minimum wage threshold, reducing wage inequality, increasing dispersion in firm profits and reducing the size of employment effects. It can also explain why such policies have political support, as workers above the threshold benefit from the policy. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:611&r=dge |
| By: | Nicolas Serrano-Velarde (Oxford University); Douglas Hanley (University of Pennsylvania); Ufuk Akcigit (University of Pennsylvania) |
| Abstract: | This paper introduces endogenous technical change through basic and applied research in a growth model. Basic research differs from applied research in two significant ways. First, significant advances in technological knowledge come through basic research rather than applied research. Second, these significant advances could potentially be applicable to multiple industries. Since these applications are not immediate, the innovating firm cannot exploit all the benefits of the basic innovations for production. We analyze the impact of this appropriability problem on firmsâ basic research incentives in an endogenous growth framework with private firms and an academic sector. After characterizing the equilibrium, we estimate our model using micro level data on research expenditures and behavior by French firms. We then decompose the aggregate growth by the source and type of innovation. Moreover, we quantitatively document the size of the underinvestment in basic research and consider various research policies to alleviate this inefficiency. Our analysis highlights the need for devoting a larger fraction of GDP for basic academic research, as well as higher subsidy rates for private research. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:665&r=dge |
| By: | Timothy Kehoe (University of Minnesota); Juan Carlos Conesa (Universitat Autonoma de Barcelona) |
| Abstract: | We develop a model for analyzing the sovereign debt crises of 2010 and 2011 in such European countries as Greece, Ireland, and Portugal. The government sets its expenditure-debt policy optimally given a fixed probability of a recovery in fiscal revenues. In doing so, the government can optimally choose to “gamble for redemption,†and the economy can be optimally driven to a level of debt that increases its vulnerability to self-fulfilling debt crises. The model explains why, in contrast to the Mexican crisis of 1994–95, where a loan package put together by U.S. President Bill Clinton put an immediate end to the crisis, rescue packages put together by the European Union do not seem to have ended the crises in Greece, Ireland, or Portugal. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:614&r=dge |
| By: | Ananth Ramanarayanan (University of Western Ontario) |
| Abstract: | The bulk of international trade takes place in intermediate inputs as opposed to goods for final consumption. Studies of firm-level data show that there is substantial heterogeneity in the share of inputs that are imported by different firms, and that a firm's productivity increases with the quantity and variety of inputs that it imports. This paper develops a model to quantify the contributions of firm-level productivity gains to aggregate productivity and welfare gains from trade. In the model, heterogeneous firms choose the fraction of their inputs to import. Importing a higher fraction of inputs raises firm-level productivity, but requires higher up-front fixed costs. Therefore, firms with different inherent profitability will vary in how much they import and the productivity they gain from doing so. This heterogeneity provides aggregate productivity and welfare gains from trade that would not exist in a world in which firms used identical input bundles. These gains are consistent with data on specific trade liberalization episodes that show large firm-level productivity gains attributed to higher imports of intermediate inputs. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:612&r=dge |
| By: | Vincenzo Quadrini (USC); Ramon Marimon (European University Institute & UPF - Barcelona GSE); Thomas Cooley (New York University) |
| Abstract: | Over the last three decades we have observed a dramatic increase in the concentration of income at the very top of the distribution. This increase in income inequality has been especially steep in the managerial occupations in financial industries, where it has often been associated with greater risk-taking using more complex financial instruments. Parallel to this trend, organizational forms in the financial sector have been transformed; in particular, traditional forms of partnerships have been replaced by public companies with weaker forms of commitment between investors and managers. In this paper we propose one possible explanation linking both trends. We emphasize the increase in competition for human talents that followed domestic and international liberalization of financial markets and its interplay with different degrees of contract enforcement, representing different organizational forms. Because of the limited enforcement of contracts, the increase in competition raises the managerial incentives to undertake risky investment. Although this may have a positive effect on economic growth, the equilibrium outcome is not efficient and generates greater risk-taking and income inequality. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:603&r=dge |
| By: | Tullio Jappelli (University of Naples Federico II, CSEF and CEPR); Mario Padula (University “Ca’ Foscari” of Venice and CSEF) |
| Abstract: | We present an intertemporal portfolio choice model where individuals invest in financial literacy, save, allocate their wealth between a safe and a risky asset, and receive a pension when they retire. Financial literacy affects the excess return and the cost of stock market participation. Since literacy depreciates over time and has a cost related to current consumption, investors simultaneously choose how much to save, the portfolio allocation, and the optimal investment in literacy. This last depends on households' resources, its preference parameters and on how much financial literacy affects the returns on risky assets and the stock market participation cost, and the returns on social security wealth. The model implies one should observe a positive correlation between stock market par- ticipation (and risky asset share, conditional on participation) and financial literacy, and a negative correlation between the generosity of the social security system and financial literacy. The model also implies that the stock of financial literacy accumulated early in life is positively correlated with the individual's wealth and portfolio allocations later in life. Using microeconomic cross-country data, we find support for these predictions. |
| Keywords: | Financial Literacy, Portfolio Choice, Saving |
| JEL: | E2 D8 G1 J24 |
| Date: | 2013–04–22 |
| URL: | http://d.repec.org/n?u=RePEc:sef:csefwp:330&r=dge |
| By: | Carl Sanders (Washington University in St. Louis) |
| Abstract: | Workers entering the labor market are uncertain about their skill set. Standard human capital theory assumes workers have perfect information about their skills. In this paper, I argue that skill uncertainty can explain one type of worker moves that standard human capital theory cannot: moves between jobs where they perform different kinds of tasks. I consider workers who have a multi-dimensional bundle of labor market skills and begin their careers uncertain about their skill levels. I construct a model that links learning about skills to the tasks performed in jobs: the more intensely a job uses a particular skill, the more the workers learn about their true level of that skill. The model also contains a skill accumulation motive: as workers use a skill they gain additional amounts of it. A simpliï¬Âed version of the model suggests that if skill uncertainty were the dominant force workers would switch between jobs that use skills in different ratios but similar total levels. On the other hand, if skill accumulation were the dominant force they would switch between jobs that use similar ratios of skills but higher total levels. Linking data on workers from the National Longitudinal Study of Youth 1979 with occupational characteristics from the US Department of Labor O*NET database, I show that worker mobility across different task mixes is common and I estimate the model parameters. The current results indicate that skill uncertainty explains approximately 30% of worker mobility across different task ratios. |
| Date: | 2012 |
| URL: | http://d.repec.org/n?u=RePEc:red:sed012:633&r=dge |