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))

Erratum: The published version of this article mistakenly inserted tables and figures corresponding to a different model economy. The working paper and thesis version of the paper have tables and figures which correspond to the model economies described in the JEDC paper. The working paper can be found below.

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.