Search Results
Journal Article
Wealth Effects with Endogenous Retirement
In this article, we study wealth effects, i.e., the response of consumption to exogenous changes in wealth. We use a consumption-saving model with endogenous retirement to show that the endogenous response of the value of a worker's human capital to changes in her wealth helps to account for the weak wealth effects observed in the data.
Journal Article
Optimal nonlinear income taxation with costly tax avoidance
Journal Article
Optimal Contracts for Housing Services Purchases
In this article, we study tradeoffs associated with homeownership and renting. We consider a model in which housing capital generates housing services, but also requires regular maintenance. A household wants to purchase a flow of housing services. Maintenance on the house providing this flow to the household can be performed by the household itself or by an outside property manager. We abstract from taxes or other government distortions. The household contracts with a bank/landlord that has funds sufficient to make a lumpy housing investment. We do not assume that the bank/landlord can ...
Working Paper
Risky human capital and deferred capital income taxation
We study the structure of optimal wedges and capital taxes in a Mirrlees economy with endogenous skills. Human capital is a private state variable that drives the skill process of each individual. Building on the findings of the labor literature, we assume that human capital investment is a) risky, b) made early in the life-cycle, and c) hard to distinguish from consumption. These assumptions lead to the optimality of a) a human capital premium, i.e., an excess return on human capital relative to physical capital, b) a large intertemporal wedge early in the life-cycle stemming from the lack ...
Journal Article
Financial firm resolution policy as a time-consistency problem
In this article, we describe a time-consistency problem that can arise in the government's policy toward insolvent financial firms. We present this problem using a simple model in which shareholders of a large financial firm can raise low-cost debt financing and take on an excessive amount of risk. If this risk backfires, there are spillover effects harmful to the economy as a whole. In such a crisis event, the government's best action is to bail the firm out. The prospect of this bailout is the very reason why the firm can raise debt at low cost while taking on excessive risk. Given the ...
Working Paper
Optimal wealth taxes with risky human capital
We study the structure of optimal wealth and labor income taxes in a Mirrlees economy in which the productivity of labor (i.e., skill) is private, stochastic, and endogenous. Individual agents' skills are determined by their level of human capital. Human capital is not publicly observable and the returns to human capital investment are subject to idiosyncratic shocks. Preferences are not assumed to be additively separable in consumption and human capital investment and, thus, the intertemporal marginal rates of substitution of consumption are private information. We characterize the optimal ...
Briefing
Real Estate Commissions and Home Search Efficiency
In the U.S. residential housing market, homebuyers' agents typically offer free house showings and collect a commission equal to 3 percent of the price of the home bought by their clients. Our analysis shows that, by deviating from cost basis, this compensation structure may lead to elevated home prices, overused agent services and prolonged home searches. We explain that shifting to a simple a la carte compensation structure may improve home search efficiency and social welfare.
Journal Article
Saving for Retirement with Job Loss Risk
This article studies a tractable theoretical model of optimal consumption and saving decisions with endogenous retirement. Particular attention is paid to the impact of an increase in the risk of losing one?s job on the optimal path of consumption and wealth accumulation. Even if one does not actually lose their job, an increase in the risk of a job loss is by itself sufficient to cause lower consumption, higher saving, and, through faster retirement, lower labor supply.
Journal Article
Distortionary taxation for efficient redistribution
This article uses a simple model to review the economic theory of efficient redistributive taxation. The model economy is a Lucas-tree economy, in which income comes from a stock of productive capital. Agents, who own the capital stock, are heterogenous with respect to their preference for early versus late consumption. A competitive capital market, in equilibrium, supports a unique Pareto-efficient allocation of consumption among the agents, i.e., the First Welfare Theorem holds. The equilibrium allocation represents one efficient division of the total gains from trade that are available in ...
Working Paper
Contingent Debt and Performance Pricing in an Optimal Capital Structure Model with Financial Distress and Reorganization
Building on the trade-off between agency costs and monitoring costs, we develop a dynamic theory of optimal capital structure with financial distress and reorganization. Costly monitoring eliminates the agency friction and thus the risk of inefficient liquidation. Our key assumption is that monitoring cannot be applied instantaneously. Rather, transitions between agency and monitoring are subject to search frictions. In the optimal contract, the firm seeks a monitoring opportunity whenever it is financially distressed, i.e., when the risk of liquidation is high. If a monitoring opportunity ...