**Research**

**Top Earners: Cross-Country Facts
**

(joint with Alejandro Badel, Moira Daly and Martin Nybom)

**Abstract:**
We provide a common set of life-cycle earnings facts based on administrative data from the
United States, Canada, Denmark and Sweden. These facts are relevant for theoretical models of top earners.

**Taxing Top Earners: A Human Capital Perspective
**

(joint with Alejandro Badel)

**Abstract:**
We assess the consequences of substantially increasing the marginal tax rate on U.S. top earners using a
human capital model.

**The Sufficient Statistic Approach:
Predicting the Top of the Laffer Curve
**

(joint with Alejandro Badel, (forthcoming) Journal of Monetary Economics)

**Abstract:**
A formula for the revenue maximizing top tax rate is derived as a function of three elasticities.
The formula applies to static models and to steady states of dynamic models and is relevant for
the top tax rate on any component of income. The formula is applied to several classic models.
The application of the formula is also illustrated using a quantitative human capital model.
Working Paper version is Here

**The Money Value of a Man**

(joint with Greg Kaplan, Review of Economic Dynamics 2016, 22, 21-51.)

**Abstract:**
This paper examines the value of an individual's human capital using U.S. data on male earnings and
financial asset returns. We find that (1) the value of human capital is far below the value implied by discounting
future earnings at the risk-free rate and (2) when we decompose this value into stock and bond components,
the stock component typically averages below 35 percent of the total value at each age.

**Interpreting
Life-Cycle Inequality Patterns as an Efficient Allocation: Mission Impossible? **

(joint with Alejandro Badel, Review of Economic Dynamics 2014, 17, 613-29. )

**Abstract:**
The life-cycle patterns of consumption, wage and hours dispersion observed in U.S. cross-sectional data are commonly
viewed as being incompatible with a Pareto efficient allocation.
We determine the extent to which these qualitative and quantitative patterns can or cannot be produced
by Pareto efficient allocations in models with preference shocks, wage shocks and full information.

**Human Capital Values and Returns:
Bounds Implied by Earnings and Asset Returns Data **

(joint with Greg Kaplan, Journal of Economic Theory 146, 897-919 (2011))

**Abstract:**
We provide theory for calculating bounds on both the value of an individual's human capital
and the return on an individual's human capital,
given knowledge of the process governing earnings and financial asset returns.
We calculate bounds using U.S. data on male earnings and financial asset returns.
The large idiosyncratic component of earnings risk implies that bounds on values and returns are quite loose.
However, when aggregate shocks are the only source of risk, both bounds are tight.

**Sources of
Lifetime Inequality**

(joint with Gustavo Ventura and Amir Yaron, American Economic Review 101, 2923-54 (2011))

**Abstract:**
Is lifetime inequality mainly due to differences across people
established early in life or to differences in luck experienced over the working lifetime?
We answer this question within a model with risky human capital. We find that, as of age 23, differences in initial
conditions account for more of the variation in lifetime earnings, lifetime wealth and lifetime utility than
do differences in shocks received over the working lifetime.

**How Well
Does the US Social Insurance System Provide Social Insurance? **

(joint with Juan Carlos Parra, Journal of Political Economy 118 no.1, (2010 )

**Abstract:**
This paper answers the question posed in the title within a model where
agents receive idiosyncratic, wage-rate shocks that are privately observed.

**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.

**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, 469-94 (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))

**
The
Risk-Free Rate in Heterogeneous-Agent Incomplete-Insurance Economies**

(Univ. of Illinois, BEBR - Working Paper 91-0155)

**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.