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Working Paper
Rising inequality: transitory or permanent? New evidence from a U.S. panel of household income 1987-2006
We use a new and large panel dataset of household income to shed light on the permanent versus transitory nature of rising inequality in individual male labor earnings and in total household income, both before and after taxes, in the United States over the period 1987-2006. Due to the quality and the significant size of our dataset, we are able to conduct our analysis using rich and precisely estimated error-components models of income dynamics. Our main specification finds evidence for a quadratic heterogeneous income profiles component and a random walk component in permanent earnings, and ...
Working Paper
The properties of income risk in privately held businesses
Our paper represents the first attempt in the literature to estimate the properties of business income risk from privately held businesses in the US. Using a new, large, and confidential panel of US income tax returns for the period 1987-2009, we extensively document the empirical stylized facts about the evolution of various business income risk measures over time. We find that business income is much riskier than labor income, not only because of the probability of business exit, but also because of higher income fluctuations, conditional on no exit. We show that business income is less ...
Working Paper
Capital taxation with entrepreneurial risk
This paper studies the effects of capital taxation in a dynamic heterogeneous-agent economy with uninsurable entrepreneurial risk. Although it allows for rich general-equilibrium effects and a stationary distribution of wealth, the model is highly tractable. This permits a clear analysis, not only of the steady state, but also of the entire transitional dynamics following any change in tax policies. Unlike either the complete-markets paradigm or Bewley-type models where idiosyncratic risk impacts only labor income, here it is shown that capital taxation may actually stimulate capital ...
Working Paper
Investment, idiosyncratic risk, and ownership
High-powered incentives may induce higher managerial effort, but they also expose managers to idiosyncratic risk. If managers are risk averse, they might underinvest when firm-specific uncertainty increases, leading to suboptimal investment decisions from the perspective of well-diversified shareholders. We empirically document that when idiosyncratic risk rises, firm investment falls, and more so when managers own a larger fraction of the firm. This negative effect of managerial risk aversion on investment is mitigated if executives are compensated with options rather than with shares or if ...
Working Paper
Financial integration, entrepreneurial risk and global dynamics
How does financial integration impact capital accumulation, current-account dynamics, and cross-country inequality? This paper investigates this question within a two-country, general-equilibrium, incomplete-markets model that focuses on the importance of idiosyncratic entrepreneurial risk---a risk that introduces, not only a precautionary motive for saving, but also a wedge between the interest rate and the marginal product of capital. Our contribution is then to show that this friction provides a simple explanation for the emergence of global imbalances, a simple resolution to the empirical ...
Working Paper
Optimal capital taxation with idiosyncratic investment risk
We examine the optimal taxation of capital in a Ramsey setting of a general-equilibrium heterogeneous-agent economy with uninsurable idiosyncratic investment or capital-income risk. We prove that the ex ante optimal tax, evaluated at steady state, maximizes human wealth, namely the present discounted value of agents' income from sources that are not subject to capital risk. Furthermore, when the amount of idiosyncratic risk in the economy is higher than a minimum lower bound, the optimal tax is positive and it is precisely the tax that maximizes the economy-wide aggregates, such as the ...