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Insurance and Inequality with Persistent Private Information
We study optimal insurance contracts for an agent with Markovian private information. Our main results characterize the implications of constrained efficiency for long-run welfare and inequality. Under minimal technical conditions, there is Absolute Immiseration: in the long run, the agent?s consumption and utility converge to their lower bounds. When types are persistent and utility is unbounded below, there is Relative Immiseration: low-type agents are immiserated at a faster rate than high-type agents, and ?pathwise welfare inequality? grows without bound. These results extend and ...
Inflation at the Household Level
We use scanner data to estimate inflation rates at the household level. Households' inflation rates have an annual interquartile range of 6.2 to 9.0 percentage points. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods. Lower-income households experience higher inflation, but most cross-sectional variation is uncorrelated with observables. Households' deviations from aggregate inflation exhibit only slightly negative serial correlation. Almost all variability in a household's inflation rate ...
The Heterogeneous Effects of Government Spending : It’s All About Taxes
This paper investigates how government spending multipliers depend on the distribution of taxes across households. We exploit historical variations in the financing of spending in the U.S. since 1913 to show that multipliers are positive only when financed with more progressive taxes, and zero otherwise. We rationalize this finding within a heterogeneous-household model with indivisible labor supply. The model results in a lower labor responsiveness to tax changes for higher-income earners. In turn, spending financed with more progressive taxes induces a smaller crowding-out, and thus larger ...
Wealth Distribution and Retirement Preparation Among Early Savers
This paper develops a new combined wealth measure using data from the Survey of Consumer Finances, by augmenting data on net worth with estimates of defined benefit (DB) pension wealth and expected Social Security wealth. We use this combined wealth concept to explore retirement preparation among groups of households in their pre-retirement years (40-49 and 50-59) and also to explore the concentration of wealth. We find evidence of moderate, but rising, shortfalls in retirement preparation. We also show that including DB pension and Social Security wealth results in markedly lower measures of ...
Time-varying Volatility and the Power Law Distribution of Stock Returns
While many studies find that the tail distribution of high frequency stock returns follow a power law, there are only a few explanations for this finding. This study presents evidence that time-varying volatility can account for the power law property of high frequency stock returns. The power law coefficients obtained by estimating a conditional normal model with nonparametric volatility show a striking correspondence to the power law coefficients estimated from returns data for stocks in the Dow Jones index. A cross-sectional regression of the data coefficients on the model-implied ...
Optimal Progressivity with Age-Dependent Taxation
This paper studies optimal taxation of labor earnings when the degree of tax progressivity is allowed to vary with age. We analyze this question in a tractable equilibrium overlapping-generations model that incorporates a number of salient trade-offs in tax design. Tax progressivity provides insurance against ex-ante heterogeneity and earnings uncertainty that missing markets fail to deliver. However, taxes distort labor supply and human capital investments. Uninsurable risk cumulates over the life cycle, and thus the welfare gains from income compression via progressive taxation increase ...
Optimal Tax Progressivity: An Analytical Framework
What shapes the optimal degree of progressivity of the tax and transfer system? On the one hand, a progressive tax system can counteract inequality in initial conditions and substitute for imperfect private insurance against idiosyncratic earnings risk. At the same time, progressivity reduces incentives to work and to invest in skills, and aggravates the externality associated with valued public expenditures. We develop a tractable equilibrium model that features all of these trade-offs. The analytical expressions we derive for social welfare deliver a transparent understanding of how ...
Inflation at the Household Level
We use scanner data to estimate inflation rates at the household level. Households' inflation rates are remarkably heterogeneous, with an interquartile range of 6.2 to 9.0 percentage points on an annual basis. Most of the heterogeneity comes not from variation in broadly defined consumption bundles but from variation in prices paid for the same types of goods - a source of variation that previous research has not measured. The entire distribution of household inflation rates shifts in parallel with aggregate inflation. Deviations from aggregate inflation exhibit only slightly negative serial ...
Inflation at the Household Level: Web Appendix
This appendix contains additional results on using scanner data to estimate inflation rates at the household level. There are three sections. Section 1 shows cross-sectional distributions of Fisher and Paasche inflation rates. Section 2 shows the evolution over time of measures of dispersion of Fisher and Paasche inflation rates. Section 3 shows cross-sectional distributions of two-year inflation rates measured with Fisher and Paasche indexes.
Estimating the marginal propensity to consume using the distributions of income, consumption and wealth
Recent studies of economic inequality almost always separately examine income, consumption, and wealth inequality and, hence, miss the important synergy among the three measures explicit in the life-cycle budget constraint. Using Panel Study of Income Dynamics data from 1999 through 2013, we examine whether these changes are more dramatic at higher or lower levels of wealth and find that the marginal propensity to consume is lower at higher wealth quintiles. This suggests that low-wealth households cannot smooth consumption as much as other households do, which further implies that increasing ...