Publications
We study whether and how time preferences change over the life cycle, exploiting representative long-term panel data. In order to disentangle age effects from cohort and period factors, we estimate individual fixed-effects models, substituting period effects with period specific determinants of time preferences. We find that discount rates linearly decrease over the life cycle. This pattern holds when adjusting for the curvature of the utility function. We show the quantitative importance of this finding by demonstrating that a canonical life-cycle model with decreasing discounting significantly improves its fit to consumption and asset data relative to the model with constant discounting.
Most economic models assume that time preferences are stable over time, but the evidence on their long-term stability is lacking. We study whether and how time preferences change over the life cycle, exploiting representative long-term panel data. We provide new evidence that discount rates decrease with age and the decline is remarkably linear over the life cycle. Decreasing discounting helps a canonical life-cycle model to explain the household saving puzzles of undersaving when young and oversaving after retirement. Relative to the model with constant discounting, the model’s fit to consumption and asset data profiles improves by 40% and 30%, respectively
Most economic models assume that time preferences are stable over time, but the evidence on their long-term stability is lacking. We study whether and how time preferences change over the life cycle, using representative long-term panel data. We provide new evidence that discount rates decrease with age and the decline is remarkably linear over the life cycle. Decreasing discount rates help a canonical life-cycle model explain the saving puzzles of households undersaving when young and oversaving after retirement. Relative to the model with constant discounting, the model’s fit to consumption and asset data profiles improves by 40% and 30%, respectively.
We explore the optimal shape of the income tax and transfer schedule in an environment with distinct roles for public and private insurance. In a calibration to the United States, we find that the optimal system features marginal tax rates that increase in income. When we increase pressure on the government to raise revenue, the optimal marginal tax schedule becomes first flatter and then U-shaped, reconciling various findings in the literature. A power function parametric tax schedule outperforms an affine one, indicating that tax progressivity is more important than lump-sum transfers. We also explore various social welfare objectives and Pareto-improving reforms.
•This paper builds a model of structural change in labor supply.•We estimate the model to cross-country employment and hours data.•Sectoral reallocation out of self employment helps explains why employment rates fall between low- and middle-income countries.•Declining fixed costs of work help explain why employment rates rise and hours per worker fall between middle-income and rich countries. This paper studies how structural change in labor supply along the development spectrum shapes cross-country differences in hours worked. We emphasize two main forces: sectoral reallocation from self-employment to wage work, and declining fixed costs of wage work. We show that these forces are crucial for understanding how the extensive margin (the employment rate) and intensive margin (hours per worker) of aggregate hours worked vary with income per capita. To do so we build and estimate a quantitative model of labor supply featuring a traditional self-employment sector and a modern wage-employment sector. When estimated to match cross-country data, the model predicts that sectoral reallocation explains more than half of the total hours decrease at lower levels of development. Declining fixed costs drive the rise in employment rates at higher levels of income per capita, and imply higher hours in the future, in contrast to the lower hours resulting from income effects and expansions in tax-and-transfer systems.
We study how technological change affects between- and within-education-group inequality in the United States. We develop a model with heterogeneous workers and firms in which the demand for skills is characterized by firms' recruiting behavior. We use the model to quantify the relative contribution of two types of technological change that affect the relative demand for skilled labor: technological change in firm-specific productivity and technological change in labor productivity. We find that technological change in labor productivity, in the form of higher returns to skill in production, is the main driver of the increase in between- and within-group inequality. Technological change in firm productivity, in the form of higher firm productivity dispersion, plays a less important role in explaining rising inequality, except for the increase in within-group inequality for workers without a college degree.