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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.
Working Paper
Private Information and Optimal Infant Industry Protection
We study infant industry protection using a dynamic model in which the industry's cost is initially higher than that of foreign competitors. The industry can stochastically lower its cost via learning by doing. Whether the industry has transitioned to low cost is private information. Using a mechanism-design approach, we solve for the optimal protection policy that induces the industry to reveal its true cost. We show that (i) the optimal protection, measured by infant industry output, declines over time and is less than that under public information, (ii) the optimal protection policy is ...
Working Paper
Private Information and Optimal Infant Industry Protection
We study infant industry protection using a dynamic model in which the industry's cost is initially higher than that of foreign competitors. The industry can stochastically lower its cost via learning by doing. Whether the industry has transitioned to low cost is private information. We use a mechanism-design approach to induce the industry to reveal its true cost. We show that (i) the optimal protection, measured by infant industry output, declines over time and is less than that under public information, (ii) the optimal protection policy is time consistent under public information but not ...
Working Paper
Stochastic optimal growth with a non-compact state space
This paper studies the stability of a stochastic optimal growth economy introduced by Brock and Mirman [J. Econ. Theory 4 (1972)] by utilizing stochastic monotonicity in a dynamic system. The construction of two boundary distributions leads to a new method of studying systems with non-compact state space. The paper shows the existence of a unique invariant distribution. It also shows the equivalence between the stability and the uniqueness of the invariant distribution in this dynamic system.
Journal Article
Unemployment insurance fraud
Concealed Earnings fraud accounts for almost two-thirds of the total overpayments due to all fraud.
Working Paper
Optimal auditing and insurance in a dynamic model of tax compliance
We study the optimal auditing of a taxpayer?s income in a dynamic principal- agent model of hidden income. Taxpayers in our model initially have low income and stochastically transit to high income that is an absorbing state. A low-income taxpayer who transits to high income can underreport his true income and evade his taxes. With a constant absolute risk-aversion utility function and a costly and imperfect auditing technology, we show that the optimal auditing mechanism in our model consists of cycles. Within each cycle, a low-income taxpayer is initially unaudited, but if the duration of ...
Briefing
The Differing Effects of the Business Cycle on Small and Large Banks
Small banks and large banks respond differently to business cycle fluctuations. The average net interest margin (NIM) at large banks is negatively correlated with the business cycle, while the average NIM at small banks is positively correlated with the business cycle. In a popular view, small banks are different from large banks because of their close relationships with their borrowers. But a decomposition of the cyclical properties of NIM into the asset and liability sides of the balance sheet suggests that small banks' procyclical NIM is due to their ability to keep funding costs less ...
Journal Article
Who is concealing earnings and still collecting unemployment benefits?
Concealed earnings represent the largest source of fraud in the U.S. unemployment insurance system. Individuals with relatively low earnings constitute a larger fraction of those committing such fraud. High-earnings individuals, however, account for larger dollar amounts of this fraud.
Working Paper
Market-based incentives
We study optimal incentives in a principal-agent problem in which the agent's outside option is determined endogenously in a competitive labor market. In equilibrium, strong performance increases the agent's market value. When this value becomes sufficiently high, the threat of the agent's quitting forces the principal to give the agent a raise. The prospect of obtaining this raise gives the agent an incentive to exert effort, which reduces the need for standard incentives, like bonuses. In fact, whenever the agent's option to quit is close to being "in the money," the market-induced ...
Journal Article
Unemployment insurance: payments, overpayments and unclaimed benefits
In the U.S. unemployment insurance program, most of the overpayments due to fraud arise from individuals collecting benefits while they are gainfully employed. In addition, the overpayments are dwarfed by payments unclaimed by some who are eligible for unemployment benefits.