Macroeconomics and Inequality

We investigate the macroeconomic effects of partially irreversible investment arising from a wedge between the buying and selling price of capital. We derive sufficient statistics that characterize the implications of irreversibility for three long-run macroeconomic outcomes—capital allocation, capital valuation, and capital fluctuations. Measuring these statistics with investment microdata, we find that irreversibility distorts the allocation of capital, lowers capital valuation, and increases the persistence of capital fluctuations. Corporate income tax cuts, by lowering the deductibility of capital losses due to the price wedge, effectively increase irreversibility and structurally change long-run capital behavior.

We develop a numerical method for performing second, and in principle higher, order approximations of equilibrium policy rules in models with heterogeneous agents and occasionally binding constraints. In a version of the Krusell and Smith (1998), we show that the higher order approximation robustly produces errors which are an order of magnitude smaller than a first order approximation. The higher order approximation generates policy rules that depend on the level of aggregate risk, which allows us to study the response of economic variables to changes in the level of aggregate uncertainty. The impulse response to an increase in uncertainty over the growth rate of TFP in a model with heterogeneous households generates nearly twice the welfare losses in asset poor compared to asset rich households.

We propose an efficient, reliable, and interpretable global solution method, the Deep learning-based algorithm for Heterogeneous Agent Models (DeepHAM), for solving high dimensional heterogeneous agent models with aggregate shocks. The state distribution is approximately represented by a set of optimal generalized moments. Deep neural networks are used to approximate the value and policy functions, and the objective is optimized over directly simulated paths. In addition to being an accurate global solver, this method has three additional features. First, it is computationally efficient in solving complex heterogeneous agent models, and it does not suffer from the curse of dimensionality. Second, it provides a general and interpretable representation of the distribution over individual states, which is crucial in addressing the classical question of whether and how heterogeneity matters in macroeconomics. Third, it solves the constrained efficiency problem as easily as it solves the competitive equilibrium, which opens up new possibilities for normative studies. As a new application, we study constrained efficiency in heterogeneous agent models with aggregate shocks. We find that in the presence of aggregate risk, a utilitarian planner would raise aggregate capital for redistribution less than in absence of it because poor households do more precautionary savings and thus rely less on labor income.

In this paper, I explore how optimal aggregate dynamics can be shaped
by the presence of moral hazard in unemployment insurance. I also analyze the optimal provision of unemployment insurance and the implications for the amount of cross-sectional heterogeneity. The economy that I consider embeds the Hopenhayn-Nicolini unemployment insurance model into a real business cycle model with search frictions. In a calibrated version I find that the presence of private information has large effects on optimal aggregate steady-state dynamics but not on aggregate fluctuations. In addition, I find that optimal consumption replacement ratios are approximately independent of the business cycle.

This paper studies how firms respond to the implementation of a floor for hours of work. In 2014, the French government introduced a minimum work week of 24 hours in order to reduce involuntary part time employment. As a result, a job with less than 24 hours per week cannot be created unless the worker asks explicitly for that. First, I rely on linked employer-employee data and an event study design to assess the employment effects of the policy. I find that the reform reduced both hires and the number of workers in the firm (negative extensive margin effect) and increased average hours worked (positive intensive margin effect). The latter comes from an increase in the number of full-time workers rather than part-time workers above 24 hours. Overall, total hours worked in the firm decreased significantly. Second, I find that the negative effect on employment is two times larger for women as compared to men. This results from both a strong decrease in part time employment for women and a stronger increase in full time employment for men. These findings suggest that firms tend to substitute men working full time for women working less than 24 hours. Reduced-form evidence also indicates that men benefited from indirect reallocation effects while these effects are close to zero for women. Third, I rely on a structural model in order to account for the indirect effects induced by the regulation and to quantify the macroeconomic impact of the reform. I build a search and matching model with heterogeneous workers and heterogeneous large firms. The framework allows for within- and between-firm heterogeneity in hours worked. The model predicts positive general equilibrium effects on
employment and reallocation patterns that benefit more to men.

With micro panel data from 32 countries including the poorest and the richest in the world we document (i) a negative relationship between the ability to insure consumption against income shocks and economic development and (ii) a negative relationship between the level of transfer progressivity and the stage of economic development. Importantly, our computation of transfer progressivity includes both public and private net transfers across households—e.g. food transfers. Using an overlapping generations model in which agents differ in permanent productivity, face income shocks and accumulate physical and human capital through learning-by-doing (a labor choice), we find that cross-country differences in transfer progressivity go a long way in explaining the larger ability to insure consumption in
poor countries than in rich countries. Then, we use our model to assess the role of transfer progressivity in explaining income per capita differences across countries. We find that decreasing progressivity of poor countries to the levels of rich countries increases income per capita of poor countries by 62%. The opposite experiment, using the progressivity of poor countries on rich countries, reduces income per capita of rich countries by 30%. Since a decrease in transfer progressivity increases the incentives to work and accumulate (physical and human capital) while, at the same time, it reduces social insurance and redistribution, a reduction in progressivity is not necessarily welfare improving. For this reason, we also compute the optimal of transfer progressivity for rich and poor countries separately. We find that optimal progressivity is actually similar (for different reasons) across stages of development which implies that the status quo transfer progressivity for poor (rich) countries is too high (low). Reducing the progressivity of poor countries to optimal levels increases the GDP per capita of the poor by 46% and increases their welfare by 14% in consumption equivalent terms.

More than 40% of US college students drop out without gaining a degree. This paper investigates whether dropouts are largely due to academic ability or financial constraints. I provide empirical evidence that the probability of dropout is strongly associated with both ability and finances–even after controlling for other factors. I build a quantitative general equilibrium overlapping generations model, where individuals face incomplete information on their academic ability and uncertainty about the generosity of financial aid. The model simulations show that uncertainty regarding ability is responsible for 20% of the observed dropout rates, while uncertainty regarding financial aid explains up to 53%. Pursuing a policy that eliminates uncertainty about the college aid would increase the social welfare by as much as 2.3%, benefiting both college graduates and non-college graduates. Such a policy is largely
self-financing due to endogenous improvements in skill allocation and associated growth in
GDP.

Using a nationally-representative panel of consumer credit records for the US from 1999 to 2021, we document a positive link between child and parent homeownership: children whose parents are homeowners are 1 percentage point (16%) more likely to be homeowners at age 25 relative to similar children whose parents do not own a house. We propose a new causal mechanism to explain this relationship based on parents extracting home equity to help finance their child’s home purchase. Using variation in leverage constraints as an instrument for parents’ equity extraction, we find that parents’ equity extraction raise the probability a child becoming a homeowner by five times. A back-of-the-envelope calculations suggest that dynastic home equity increases housing wealth inequality among young adults by 15%. Our results highlight the importance of familial wealth for household wealth accumulation.

We use administrative panel data from Norway between 1993 and 2015 on wealth and income to study lifecycle wealth dynamics. Our empirical results reveal strong wealth persistence at the top of the distribution. On average, the wealthiest start their lives significantly richer than other households in the same cohort, invest more in private equity, earn higher returns, and derive most of their lifetime income from dividends and capital gains on equity. Inheritances constitute a small fraction of the lifetime resources for most households except for a few wealthy ones who, in general, receive these funds earlier in life and more in the form of private equity. We find significant heterogeneity among the wealthiest: A large fraction starts relatively poor with little private equity in their portfolios but experiences rapid wealth growth early in life due to high rates of return. We then develop and estimate an overlapping generations model with rich heterogeneity in inheritances, labor income, and entrepreneurial ability. We find that the interaction between inheritance and rate of return heterogeneity is key for understanding wealth inequality in the cross-section and over the life cycle. Our counterfactual analysis suggests that a tax on inheritances reduces wealth inequality but has a detrimental effect on output and wages.

Over the last several decades, there has been a large increase in asset valuations across many asset classes. These rising valuations had important effects on the distribution of wealth. However, little is known regarding their effect on the distribution of welfare. To make progress on this question, we derive a sufficient statistic for the (money metric) welfare effect of a change in asset valuations, which depends on the present value of an individual’s net asset sales: rising asset prices benefit prospective sellers and harm prospective buyers. We estimate this quantity using panel microdata covering the universe of financial transactions in Norway from 1994 to 2015. We find that rising asset valuations had large redistributive effects: they redistributed welfare from the young towards the old and from the poor towards the wealthy.

We analyze a monetary policy quasi-experiment in Sweden from 2010–2011, when the Riksbank raised the interest rate substantially as the economy recovered from the Great Recession. We argue that this tightening was a large, credible, and partially unexpected deviation from the historical policy rule. Using administrative micro data, we explore how this shock affected the labor market. We find that unemployment increased broadly, not just at interest-rate sensitive firms, but with large differences across workers within firms. Moreover, we find that labor market rigidities amplified the effects, as sectors with more rigid wage contracts saw larger increases in unemployment.