Publications
How Important Is Preference Heterogeneity for Wealth Inequality?
Forthcoming, Journal of Economic
Dynamics & Control.
This paper investigates the role of discount rate heterogeneity for
wealth inequality. The key idea is to infer the distribution of
preference parameters from the observed age profile of wealth
inequality. The contribution of preference heterogeneity to wealth
inequality can then be measured using a quantitative life-cycle
model. I find that discount rate heterogeneity increases the Gini
coefficient of wealth by 0.06 to 0.11. The share of wealth held by
the richest 1% of households rises by 0.03 to 0.13. The larger
changes occur when altruistic bequests are large and when
preferences are strongly persistent across generations. Discount
rate heterogeneity also helps account for the large wealth
inequality observed among households with similar lifetime earnings.
Key words: Wealth inequality, preference heterogeneity. JEL: E21
[PDF paper] [Version: Oct-12, 2006] |
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Earnings are a key determinant of household wealth, both in theory
and in the data. This article argues that a satisfactory theory of
wealth inequality should therefore account not only for the marginal
distribution of wealth, but also for the joint distribution of
wealth and earnings. The paper has two objectives: (i) It describes
the joint distribution of retirement wealth and lifetime earnings in
the Panel Study of Income Dynamics. (ii) It evaluates the ability of
a stochastic life-cycle model, which attributes wealth inequality to
earnings and inheritances, to account for key features of this
distribution. Focussing on wealth at retirement is particularly
informative because lifetime earnings are fully known at this point
and wealth is no longer affected by expectations about future
earnings.
The life-cycle model fails to account for three key features of the
data. (i) The correlation between lifetime earnings and retirement
wealth is too high. (ii) The wealth gaps between earnings rich and
earnings poor households are too large. (iii) A striking feature of
the data, which the model fails to replicate, is the wide range of
wealth holdings observed among households with similar lifetime
earnings. The paper then studies extensions that could help the
model account for the data. One promising extension is heterogeneity
in households' rates of return to saving or time discount rates. In
the data, rates of return are strongly correlated with retirement
wealth. Models in which households differ in rates of return or time
preferences account much better for the joint distribution of
retirement wealth and lifetime earnings. JEL E2
Previous title: "Accounting for Patterns of Wealth Inequality."
[PDF paper] [Version: April 2006] [First draft: August 2001] |
The Intergenerational Persistence of Lifetime Earnings
Forthcoming,
European Economic Review.
This paper proposes a new method for estimating the
intergenerational persistence of lifetime earnings from data that
contain only short sections of individual earnings histories. The
approach infers lifetime earnings persistence from the persistence
of short earnings averages together with information about the
stochastic process governing individual earnings. I find that
lifetime earnings are substantially more persistent than previous
estimates based on short panel data suggest. About 54% of lifetime
earnings differences between fathers persist into their sons'
generation. This persistence estimate exceeds previous estimates
based on five year earnings averages by one third. These findings
are robust against alternative assumptions about the data generating
process for earnings.
Key words: Intergenerational mobility
PDF paper,
Tables. |
Taxation and Human Capital Accumulation
Macroeconomic
Dynamics 2004, 8(3)
Recent estimates of the effects of tax reforms in the presence of human capital differ
greatly. This paper examines which model features and parameter values are critical for
the conclusions about the long-run and transitional effects of tax changes. I find that
the conflicting results of the previous literature are in large part due to implicit
assumptions about intergenerational links that differ between life-cycle and infinite
horizon models. I develop a model that explicitly incorporates intergenerational links in
human and physical capital and show that conventional life-cycle models understate the
long-run level effects of taxation and the length of transitional dynamics, whereas both
are overstated in infinite horizon models.
JEL: E62, H2, J24
Keywords: Taxation, human capital, infinite horizon, life-cycle model
[PDF paper] |
Taxation
and the Intergenerational Transmission of Human Capital
Journal
of Economics Dynamics and Control 2003, 27(9): 1639-1662.
Two classes of models are commonly used to study the effects of taxes on human capital
accumulation: overlapping generations (OLG) models and infinite horizon (IH) models. This
paper shows that IH models yield larger responses of human capital to tax changes than do
OLG models. Analytical solutions are derived that allow to identify precisely which model
features contribute to the larger tax elasticities found in IH models. The main finding is
that the different findings are due to two assumptions that are implicit in IH models:
parents are altruistically linked to their children and intergenerational earnings
persistence is complete. Moreover, OLG models with realistic degrees of intergenerational
persistence yield smaller tax elasticities than do IH models, even if parents are
altruistic.
Keywords: Human capital; taxation; OLG models; IH models; intergenerational mobility
JEL: H2, J24, J62
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How Important is Human
Capital for Development? Evidence from Immigrant Earnings
American Economic
Review 2002, 92(1): 198-219.
[Technical Appendix]
Data table with Mincer regressions and other source
country data (MS Excel format).
This
paper offers new evidence on the sources of cross-country income
differences. It exploits the idea that observing immigrant workers
from different countries in the same labor market provides an
opportunity to estimate their human capital endowments. These
estimates suggest that human and physical capital account for only a
fraction of cross-country income differences. For countries below 40
percent of U.S. output per worker, less than half of the output gap
relative to the U.S. is attributed to human and physical capital.
JEL: O15, O41, F22
Keywords: Human capital; immigrant earnings |
How Do Taxes Affect Human
Capital? The Role of Intergenerational Mobility
Review
of Economic Dynamics 2001, 4(3): 695-735.
A
recent literature studies the effects of income taxation on human capital in the context
of life-cycle models. Such models abstract from the intergenerational persistence of human
capital. A body of empirical evidence, by contrasts, suggests that human capital is
transmitted from parents to children. This paper investigates the effects of factor income
taxes in the presence of intergenerational persistence. Specifically, it seeks answers to
two questions: (i) How large are the effects of income taxes in models with realistic intergenerational mobility properties? (ii)
How well do conventional life-cycle models approximate the properties of such
models? A dynamic general equilibrium model is developed which matches features of the
intergenerational transmission of earnings and education estimated from a panel of U.S.
workers. Numerical simulations are used to evaluate the consequences of replacing a
progressive with a proportional income tax system. The main finding is that the
intergenerational persistence of human capital is not an important determinant of either
steady state or transitional effects of this tax reform. The tax elasticities of aggregate
output, capital stocks, and of inequality measures are nearly invariant over a wide range
of persistence. As a result, conventional life-cycle models closely approximate the
predictions generated by a model with realistic intergenerational mobility properties.
JEL: H2, J24, J62
Keywords: Human capital, taxation, intergenerational mobility
[Technical Appendix
(PDF)] |
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A number of recent studies suggest that flat rate taxes may have
important effects on long-run growth in the neoclassical growth model with human capital.
In contrast to the traditional human capital literature, these studies assume that agents
are infinitely lived and face constant returns in training. This paper shows that
abstracting from life-cycle features and diminishing returns distorts growth effects in
important ways. Analytical solutions for the growth effects of wage taxes are compared for
finite and infinite horizon versions of the neoclassical growth model. The notion that
growth effects with long, but finite horizons are well approximated by infinite horizons
is shown to be invalid, except in special cases. Generically, the assumptions made in the
literature lead to a systematic overstatement of growth effects. Illustrative numerical
results suggest that the discrepancies may be large.
JEL: J24, O41. Keywords: Economic growth; human capital; taxation. |
The Economic Performance of Immigrants: A
Theory of Assortative Matching
International
Economic Review, 2001, 42(2): 417-49.
The economic performance of U.S. immigrants differs substantially from
that of natives. Immigrants cluster geographically and are often employed together.
Immigrant earnings differ by origin and time spent in the U.S., even after controlling for
education and experience. A large fraction of immigrants eventually returns home, even to
low-wage countries. This paper develops a theoretical framework consistent with these
observations. If worker skills are complementary in production but not perfectly
observable by firms, it is optimal to match workers by origin which serves as an indicator
of skill. An important implication is that wages and the incentives for skill upgrading
depend on the average skill level of a worker’s ethnic group. Migration and
geographic clustering then arise as workers attempt to escape a reservoir of mostly
unskilled workers in their home countries.
JEL: F22, J24, O15. Keywords: Migration, human capital. |
Equipment Investment and Growth in Developing
Countries
Journal of
Development Economics 2000, (61)2:
335-364.
What is the mechanism underlying the cross-country correlations between growth rates
and variables related to equipment investment? Could this be an important channel for the
link between openness and growth? The paper develops an applied model of learning and
technology adoption to address these questions.
Keywords: Economic growth; equipment investment; technology adoption. |
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How large are the growth effects of flat rate taxes? The previous literature used
models of infinitely lived dynasties to address this question. Results were extremely
sensitive to parameter choices. This paper reconsiders the issue in the context of an
overlapping generations model - a more natural framework for modeling human capital
accumulation. It is shown that results are much less sensitive, in particular because
life-cycle profiles of wages, earnings and human capital investments reveal diminishing
returns to private inputs.
Keywords: Economic growth; human capital; taxation.
The Technical Appendix contains details on computation and
analytics.
Program files are available in the following zip files:
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