Research
Sources of
Lifetime Inequality
(joint with Gustavo Ventura and Amir Yaron, manuscript )
Abstract: Is lifetime inequality mainly due to differences across people established early in life or to differences in luck experienced over the lifetime? We answer this question within a model with risky human capital. 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 relatively more important than variation in learning ability for determining how an agent fares in life. However, differences in learning ability are key in accounting for the increase in earnings dispersion for a cohort over the lifetime observed in US data.
Interpreting
Life-Cycle Inequality Patterns as an Efficient Allocation: Mission Impossible?
(joint with Alejandro Badel, manuscript )
Abstract: Data on consumption, earnings, wages and hours dispersion over the life cycle has been viewed as being at odds with an efficient allocation. We challenge this view. We show that a model with preference and wage shocks and full insurance produces the type of inequality patterns across age groups found in U.S. data. The efficient allocation model requires an increasing preference shock dispersion profile to account for an increasing consumption dispersion profile. We examine U.S. data and find support for the view that the dispersion in preference shocks increases with age.
How Well
Does the US Social Insurance System Provide Social Insurance?
(joint with Juan Carlos Parra, manuscript )
Abstract: This paper answers the question posed in the title within a model where agents receive idiosyncratic, wage-rate shocks that are privately observed. When the model social insurance system is comprised by the US social security and income tax system, then the maximum ex-ante welfare gain to improved insurance is equivalent to a 12.3 percent increase in consumption. We determine the reasons behind this large welfare gain. We also analyze two parametric reforms of the model social insurance system. One reform increases welfare very little, whereas the other achieves nearly all of the maximum possible welfare gain.
Human
Capital and Earnings Distribution Dynamics
(
joint with Gustavo Ventura and Amir Yaron; Journal of Monetary Economics 53, 265- 90 (2006)).
Abstract: 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 a benchmark human capital model can replicate these properties from the right distribution of initial human capital and learning ability. These distributions have the property that learning ability must differ across agents and that learning ability and initial human capital are positively correlated. Differences in learning ability account for the bulk of the variation in the present value of earnings across agents.
Precautionary
Wealth Accumulation
(Review of Economic Studies 71, 769- 781
(2004))
Abstract: When does an individual's expected wealth holding
profile increase as earnings uncertainty increases? This paper answers this
question for multi-period models where earning shocks are independent over
time. Sufficient conditions are stated in terms of properties of decision rules
for savings and, alternatively, in terms of properties of preferences.
When Are
Comparative Dynamics Monotone?
(Review of Economic Dynamics 6, 1-11 (2003))
Abstract: A common problem in dynamic economic theory is to determine when an increase in a parameter or initial condition increases the future dynamics of a theoretical model. Necessary and sufficient conditions are provided for making statements of this type. These conditions are then developed in detail when stochastic dominance is the notion of monotone comparative dynamics.
Precautionary Wealth Accumulation: A Positive Third Derivative is not
Enough
(Joint with
Edouard Vidon; Economics Letters 76, 323-29 (2002))
Abstract: It is commonly conjectured that expected wealth accumulation increases when earnings risk increases as long as the utility function in each period is increasing, concave and has a positive third derivative. We present a counter example which highlights the importance of the convexity of the savings function.
On Aggregate
Precautionary Saving: When is the Third Derivative Irrelevant?
(Joint with Sandra Ospina; Journal of Monetary Economics 48, 373-96 (2001)).
Abstract: When is aggregate
precautionary saving positive? We address this question in the context of a
general equilibrium model where infinitely-lived agents receive idiosyncratic
labor endowment shocks, hold a risk-free asset to smooth consumption and face a
liquidity constraint. We prove that (1) the steady-state capital stock is
always larger in any equilibrium with idiosyncratic shocks and a liquidity
constraint than without idiosyncratic shocks (i.e. there is aggregate
precautionary saving) as long as consumers are risk averse and (2) aggregate
precautionary saving occurs if and only if the liquidity constraint binds for
some agents.
Does Productivity
Growth Fall After the Adoption of New Technology?
(joint with Sandra Ospina; Journal of Monetary Economics 48, 173-95 (2001))
Abstract: A number of theoretical models of technology adoption have been proposed that imply that measured productivity growth may initially fall and then later rise after the adoption of new technology. This paper investigates whether or not this implication is a feature of plant-level data from the Colombian manufacturing sector. We focus on technology adoption embodied in new equipment, given the emphasis put on embodied technological change in the literature. We find evidence that the effect of a large equipment purchase is initially to reduce plant-level total factor productivity growth.
Understanding
Why High Income Households Save More than Low Income Households
(joint with Gustavo Ventura; Journal of Monetary Economics 45, 361- 97 (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.
On the
Distributional Effects of Social Security Reform
(joint with
Gustavo Ventura; Review of Economic Dynamics 2, 498- 531 (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.
The
One-Sector Growth Model with Idiosyncratic Shocks: Steady States and Dynamics
(Journal of Monetary Economics 39, 385- 403 (1997))
Abstract: This paper investigates the one-sector growth model where agents receive idiosyncratic labor endowment shocks and face a borrowing constraint. It is shown that any steady state capital stock lies strictly above the steady state in the model without idiosyncratic shocks. In addition, the capital stock increases monotonically when it is sufficiently far below a steady state. However, near a steady state there can be non-monotonic economic dynamics.
Wealth
Distribution in Life-Cycle Economies
(Journal of
Monetary Economics 38, 469-494 (1996))
Abstract: This paper compares
the age-wealth distribution produced in life-cycle economies to the
corresponding distribution in the US economy. The idea is to calibrate the
model economies to match features of the US earnings distribution and then
examine the wealth distribution implications of the model economies. The
findings are that the calibrated model economies with earnings and lifetime
uncertainty can replicate measures of both aggregate wealth and transfer wealth
in the US. Furthermore, the model economies produce the US wealth Gini and a
significant fraction of the wealth inequality within age groups. However, the
model economies produce less than half the fraction of wealth held by the top 1
percent of US households.
Money
and Storage in a Differential Information Economy
(joint with Stefan Krasa, Economic Theory 8, 191- 210 (1996))
Abstract: Is the use of fiat money essential in any efficient organization of exchange? We investigate this question in economies that are generalizations of the Townsend (1980) turnpike model that include limited commitment and differential information. We show that in the Townsend turnpike model fiat money is not essential unless there is limited commitment. Furthermore, fiat money has no role whenever there is storage with positive returns. In the presence of differential information fiat money is essential in overcoming information problems. This is the case even if there is storage with positive returns.
The
Risk-Free Rate in Heterogeneous-Agent Incomplete-Insurance Economies
(Journal of
Economic Dynamics and Control 17, 953- 969 (1993))
Abstract: Why has the average real risk-free interest rate been less than one percent? The question is motivated by the failure of a class of calibrated representative-agent economies to explain the average return to equity and risk-free debt. I construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk-free asset. I calibrate the economy and characterize equilibria computationally. With a borrowing constraint of one year's income, the resulting risk-free rate is more than one percent below the rate in the comparable representative-agent economy.