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Working Paper
Why Does Consumption Fluctuate in Old Age and How Should the Government Insure it?
In old age, consumption can fluctuate because of shocks to available resources and because health shocks affect utility from consumption. We find that even temporary drops in income and health are associated with drops in consumption and most of the effect of temporary drops in health on consumption stems from the reduction in the marginal utility from consumption that they generate. More precisely, after a health shock, richer households adjust their consumption of luxury goods because their utility of consuming them changes. Poorer households, instead, adjust both their necessary and luxury ...
Working Paper
Rationally Inattentive Savers and Monetary Policy Changes: A Laboratory Experiment
We present a model where rationally inattentive agents decide how much to save while imperfectly tracking interest rate changes. Suitable assumptions on agents’ preferences and interest rate distribution allow us to derive testable theoretical predictions and their implications for monetary policy. We probe these predictions using a laboratory experiment with induced inattention that closely reflects the theoretical assumptions. We find that, empirically, the laboratory data corroborates the results of the theoretical model. In particular, we show that experimental subjects respond to ...
Working Paper
Bundling Time and Goods: Implications for Hours Dispersion
We document the large dispersion in hours worked in the cross-section. We account for this fact using a model in which households combine market inputs and time to produce a set of nonmarket activities. To estimate the model, we create a novel data set that pairs market expenditures and time use at the activity level using data from the Consumer Expenditure Survey and the American Time Use Survey, respectively. The estimated model can account for a large fraction of the dispersion of hours worked in the data. The substitutability between market inputs and time within an activity and across a ...
Working Paper
Luxuries, Necessities, and the Allocation of Time
Households enjoy utility from activities that require a combination of time and goods. We classify activities into two types: luxuries and necessities. Luxuries (necessities) are activities for which time and expenditure shares rise (decline) with income. We develop and estimate a model with nonhomothetic preferences and find that time and goods are substitutable in producing activities. Activities are also substitutable among themselves. Hence, wage and price changes cause large reallocations of time and expenditures across activities. This effect is quantitatively important for welfare ...
Working Paper
The Downward Spiral
To analyze the opioid epidemic, we construct a model where individuals, with and without pain, choose whether to misuse opioids knowing the probabilities of addiction and dying. These odds are functions of opioid use. Markov chains are estimated from the US data for the college and non–college educated that summarize the transitions into and out of opioid addiction as well as to a deadly overdose. We construct a structural model that matches the estimated Markov chains. We also examine the epidemic’s drivers and the impact of medical interventions.
Working Paper
Welfare Evaluation in a Heterogeneous Agent Model: How Representative is the CES Representative Consumer?
The present paper investigates the impact of asymmetric price changes on welfare in a model with heterogeneous consumers. I consider consumer heterogeneity a la Anderson et al. (1992). The standard welfare equivalence between the CES representative consumer and the discrete choice model breaks down in presence of asymmetric price changes. In fact, asymmetric variation in prices produce differential gains among heterogeneous consumers. I show that there exists no feasible Kaldor-Hicks income transfer such that the gains are equally redistributed. Intuitively, in presence of decreasing marginal ...
Working Paper
Optimal Monetary Policy Under Bounded Rationality
Optimal monetary policy under discretion, commitment, and optimal simple rules regimes is analyzed through a behavioral New Keynesian model. Flexible price level targeting dominates under discretion; flexible inflation targeting dominates under commitment; and strict price level targeting dominates when using optimal simple rules. Stabilizing properties and bounded rationality-independence generally affect the regime's optimality. The policymaker's knowledge of an agent's myopia is decisive, whereas bounded rationality is not necessarily associated with decreased welfare. Several forms of ...
Journal Article
Restoring confidence and growth
Working Paper
Continuous Markov equilibria with quasi-geometric discounting
We prove that the standard quasi-geometric discounting model used in dynamic consumer theory and political economics does not possess continuous Markov perfect equilibria (MPE) if there is a strictly positive lower bound on wealth. We also show that, at points of discontinuity, the decision maker strictly prefers lotteries over the next period's assets. We then extend the standard model to have lotteries and establish the existence of an MPE with continuous decision rules. The models with and without lotteries are numerically compared, and it is shown that the model with lotteries behaves ...
Journal Article
Electric Vehicles, Potholes, and Taxes: Who Pays the Price?
Automobile manufacturers and even some states have ambitious goals to phase out gas-powered cars. Currently, a primary source of automobile infrastructure funding is gasoline taxes. But as electric vehicles replace gasoline-powered cars, less gasoline will be purchased and revenues from the gasoline tax will fall short of what is needed to maintain roads. Consumers who do not purchase electric vehicles—perhaps because they can't afford them—are left to bear the burden of the gasoline tax. This Policy Hub article illustrates the inherent regressivity of the gasoline tax and then simulates ...