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Working Paper
Human Capital and Long-Run Labor Income Risk
This review article examines the role of labor income risk in determining the value of a person?s human capital. We draw on the existing literature to present a model that incorporates various types of shocks to earnings. Within this framework, we highlight the implications of different assumptions about the correlation between market returns and labor income growth for the value of human capital and its riskiness. Further, the article surveys other work that applies similar ideas to assess the value and risk of pension promises. Finally, we discuss how to enrich the environment with ...
Working Paper
Credit card utilization and consumption over the life cycle and business cycle
The revolving credit available to consumers changes substantially over the business cycle, life cycle, and for individuals. We show that debt changes at the same time as credit, so credit utilization is remarkably stable. From ages 20?40, for example, credit card limits grow by more than 700 percent, and yet utilization holds steadily at around 50 percent. We estimate a structural model of life-cycle consumption and credit use in which credit cards can be used for payments, precautionary smoothing, and life-cycle smoothing, uniting their monetary and revolving credit functions. Our estimates ...
Report
Labor-dependent capital income taxation that encourages work and saving
This paper proposes a simple mechanism of capital taxation that is negatively correlated with labor supply. Using a life-cycle model of heterogeneous agents, I show that this tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life cycle, when they would otherwise work less. This reformed system also adds to the saving motive and raises aggregate capital. Moreover, the increased economic activities expand the tax base, and the revenue-neutral reform results in a lower average tax rate. My findings show that this tax scheme ...
Working Paper
Fertility Choice in a Life Cycle Model with Idiosyncratic Uninsurable Earnings Risk
This paper studies the link between rising income uncertainty and household fertility patterns in an Aiyagari-Bewley-Huggett framework augmented to include fertility decisions and infertility risk. Building on Becker and Tomes (1976), I model fertility decisions as sequential, irreversible choices over the number of children, accompanied by parental choices of time and money invested toward improving children's quality. The calibrated model is used to quantify the contribution of earnings uncertainty to the changes in the key fertility indicators between steady states. I show that realistic ...
Working Paper
Personal Bankruptcy as a Real Option
We provide a novel explanation to the longstanding puzzle of the ?missing bankruptcy ?lings.? Even though a household with a negative net worth will receive contemporaneous bene?t from bankruptcy, there may be greater insurance value from delaying the ?ling. Household bankruptcy is thus an American-style put option, which is not necessarily exercised even if the option is "in the money." Based on the value functions in the household?s dynamic programming problem, we formulate the value of the bankruptcy option as well as the exercise price. We estimate a life-cycle model in which households ...