:
We explore the robustness of the hypothesis, first put forward by Grossman and Maggi (2000) (GM), that countries with higher skill dispersion specialize in the sector characterized by a submodular production function, i.e. the industry that cross-matches workers of different skills (henceforth referred to as SDC hypothesis). We relax the assumption of constant returns to skill, breaking the link between submodularity and the concavity of isoquants, a key feature in GM. We show that when a submodular sector displays convex isoquants, it no longer bene.ts from higher skill dispersion and higher skill dispersion countries may specialize in the supermodular sector. We investigate this theoretical possibility by performing a variety of simulations, based on empirical skill distributions, and find that in the vast majority of cases the SDC hypothesis is not violated.
joint with B Abbott, UBC, C Meghir, Yale University, and
G Violante, New York University
Abstract:
This paper compares partial and general equilibrium effects of alternative financial aid policies
intended to promote college participation. We build an overlapping generations life-cycle,
heterogeneous-agent, incomplete-markets model with education, labor supply, and consumption/saving decisions. Altruistic parents make inter vivos transfers to their children. Labor
supply during college, government grants and loans, as well as private loans, complement
parental transfers as sources of funding for college education. We find that the current financial
aid system in the U.S. improves welfare, and removing it would reduce GDP by two
percentage points in the long-run. Any further relaxation of government-sponsored loan limits
would have no salient effects. The short-run partial equilibrium effects of expanding tuition
grants (especially their need-based component) are sizeable. However, long-run general equilibrium
effects are 3-4 times smaller. Every additional dollar of government grants crowds out
20-30 cents of parental transfers.
Distortions,
Efficiency and the Size
Distribution of Firms
(pdf)
joint with J Goyette, Universite' de Sherbrooke
Abstract:
Differences in factor productivity across countries are both large and persistent.
In this paper we investigate how weak institutions, limited
accountability in the tax collection system and missing credit markets
may be reflected into ex-ante suboptimal production decisions, reduced
output and lower productivity. Using information about an institutional
distortion typical of many developing countries, we investigate
the determinants of the equilibrium distribution of firms' sizes and
quantify the extent of resource mis-allocation. We consider an
heterogeneous firms model where the tax environment acts as a selection
mechanism restricting the growth of all but the most productive firms.
We calibrate the model by Indirect Inference using firm-level data from
Uganda. We test the fit of the model through a set of
over-identifying restrictions and provide further validation by showing
that it can match some unusual data patterns in capital-labour ratios,
a dimension which is not explicitly targeted in our calibration.
Through counterfactual experiments we quantify the efficiency losses
associated to the institutional distortion and credit market
imperfections and compare the effectiveness of alternative policy
changes.
Education and Crime over the Life
Cycle (pdf)
joint with G Fella, Queen Mary, University of London
Abstract:
In this paper we ask whether policies targeting a reduction
in crime rates through changes in education outcomes can be considered
an effective and cost-viable alternative to interventions based on
harsher punishment alone. In particular we study
the effect of subsidizing high school completion. Most econometric
studies of the impact of crime policies ignore equilibrium effects and
are often reduced-form. This paper provides a framework within which to
study the equilibrium impact of alternative policies. We develop an
overlapping generation, life-cycle model with endogenous education and
crime choices. Education and crime depend on different dimensions of
heterogeneity, which takes the form of differences in innate ability
and wealth at birth as well as employment shocks. PSID, NIPA and CPS
data are used to estimate the parameters of a production function with
different types of human capital and to approximate a distribution of
permanent heterogeneity. These estimates are used to pin down some of
the model's parameters. The model is calibrated to match education
enrolments, aggregate (property) crime rate and some features of the
wealth distribution. In our numerical experiments we find that policies
targeting crime reduction through increases in high school graduation
rates are more cost-effective than simple incapacitation policies.
Furthermore, the cost-effectiveness of high school subsidies increases
significantly if they are targeted at the wealth poor. We also find
that financial incentives to high school
graduation have radically different implications in general and partial
equilibrium (i.e. the scale of the programmes can substantially change
its outcomes).
Ability, Parental Valuation of
Education and the High-School Drop Out Decision
(pdf)
joint with K Foley, Copenhagen Business School,
and D Green, University of British Columbia
Abstract:
The probability of dropping out of high school varies considerably with parental education.
Using a rich Canadian panel dataset, we examine the channels determining this socio-economic
status effect. We estimate an extended version of Carneiro, Hansen and Heckman (2003) factor
model, incorporating effects from cognitive and non-cognitive ability, and parental valuation
of education (PVE). We find that cognitive ability and PVE have substantial impacts on dropping-out
and that parental education has no direct effect on dropping-out after controlling for these factors.
Our results confirm the importance of determinants of ability by age 15 but also indicate an important
role for PVE during teenage years.
Household
Responses to Individual
Shocks: Disability and Labour Supply (pdf )
joint with L Turner, University of Toronto and
University of Cambridge
Abstract:
What are idiosyncratic shocks and how do people react to them? This
paper starts from the observation that idiosyncratic shocks are
experienced at the individual level, while responses to shocks can
encompass the whole household. Understanding and accurately modeling
these responses is essential to the analysis of intra-household
allocations, especially labor supply. Using longitudinal data from the
`Canadian Survey of Labor and Income Dynamics' (SLID) we exploit
information about disability and health status to develop a life-cycle
framework which rationalizes observed responses of household members to
idiosyncratic shocks. Two puzzling findings associated to disability
onset motivate our work: (1) the almost complete absence of `added
worker' effects within households and, (2) the fact that single agents'
labor supply responses to disability shocks are larger and more
persistent than those of married agents. We show that a first-pass,
basic model of the household has predictions about dynamic labor supply
responses which are at odds with these facts; despite such failure, we
argue that these facts are consistent with optimal household behavior
when we account for two simple mechanisms: the first mechanism relates
to selection into and out of marriage, while the second hinges on
insurance transfers taking place within households. We show that these
mechanisms arise naturally when we allow for three features: a linkage
between human capital accumulation and life-cycle labor supply,
endogenous marriage contracts and the possibility of time transfers
between partners. We also provide evidence that our extended model with
endogenous marriage contracts can fit divorce patterns observed in
Canadian data, as well as correlations between disability prevalence
and marital status, providing an ideal framework to study
intra-household risk-sharing with limited commitment.
Social Security, Endogenous Retirement and
Intra-household Cooperation
(pdf)
joint with L Turner, University of Toronto and
University of Cambridge
Abstract:
This paper frames the joint retirement decision of couples in a framework which allows for
different degrees of cooperation and strategic interaction between spouses. We use this structure
to gauge the relative performance of models specified under different assumptions and assess
their ability to replicate a large set of economic choices observed at or around the time of
retirement. Our results suggest a role for non-cooperative behavior in households in which
main-earners are subject to large transfer liabilities towards second-earners, which effectively
introduce a `tax wedge' on earned income and affect both labor supply and retirement decisions.
The models are also used to analyze the dynamic incentives, to both individuals and households,
Disability in Canada: A Longitudinal Household Analysis
(pdf )
joint with L Turner, University of Toronto and
University of Cambridge
Abstract:
Health shocks represent a substantial part of individual life-cycle
risk. Stephens [2001], Charles [2005] and Meyer and Mok [2006] have
documented changes in hours worked, labor market participation,
household income, consumption and wages for a prolonged period
following disability onset using data available in the Panel Study of
Income Dynamics. We examine similar trends for the case of Canada,
using the Survey of Labour and Income Dynamics (SLID). The short
(six-year) panel dimension of the SLID requires us to take an
unbalanced panel approach: we resort to a combination of propensity
score matching and sample selection methods based on chronicity of
disability reports, to create appropriate samples for longer-run
longitudinal analysis. A clear advantage of the SLID is its large
cross-sectional component, which allows us to disaggregate the analysis
by demographic characteristics, notably marital and family status. We
document striking differences in responses and economic outcomes
between single and married individuals. Singles, both men and women,
generally experience larger drops in labour supply and participation
following disability onset than their married counterparts. Such
differences persist when controlling for health-related fixed effects
and for the chronicity of the disability itself. Our analysis also
suggests that married individuals with children are slightly more
responsive than those without children to disability onset, and that
``added worker effects'' -- increases in the labour supply of one
spouse following disability onset in the other spouse -- are small and
insignificant, especially for wives. The latter finding is consistent
with recent papers in the U.S. disability literature, including Coyle
[2004] and Charles [2002]. In general, the findings outlined above are
inconsistent with the predictions of a first-pass life cycle model of
the household, in which (a) the insurance value of marriage should
allow married individuals experiencing disability to reduce their
labour supply more than singles while their spouses increase work to
replace the lost income, and (b) the wealth effects of disability onset
are larger in the presence of children, mitigating any expect drops in
labour supply. Our findings suggest that a more sophisticated model of
the household may be necessary to rationalize long-run responses to
disability shocks.
Aggregate
Shocks vs Reallocation
Shocks: an
Appraisal of the Applied Literature (pdf)
joint with G Pelloni, Universita’ di Bologna
Abstract:
This paper critically appraises the different approaches that have characterized the
literature on the macroeconomic effects of job reallocations from
Lilien's seminal work to recent developments rooted in structural
general equilibrium models, nonlinear econometric techniques and the
concepts of job creation and destruction. Despite a flourishing of
empirical analysis no unifying theoretical framework has obtained
consensus in the scientific debate. We face a corpus of research which
is heterogeneous in variables' selection and experimental design. This
widespread heterogeneity makes the evaluation of results a daunting
task. Reliability of outcomes becomes almost impossible to assess when,
even within models of the same generation, the lack of a rigorous
theoretical background hinders well defined experimental design and
makes comparisons difficult. The strong pace at which the empirical
literature on the macroeconomic effects of job reallocations has been
growing in recent years suggests that a general assessment of the state
of the art is valuable and maybe indispensable. As a guiding principle
for our excursion we track down the methodological development of the
proposed solutions to the crucial problem of observational equivalence.
We do not linger on specific econometric methods nor on strictly
theoretical issues not relevant to our main purpose. We draw the
conclusion that the asymmetric and non-directional nature of allocative
shocks, which holds the key to the solution of the problem, is better
captured by multivariate, non-linear, dynamic econometric models and
numerical simulation techniques. Davis and Haltiwanger's perspective on
job creation and destruction seems to us of paramount importance for
future research because of its potential to encompass a wealth of
micro-level data sets within a rigorous analytical framework.
Non-Convexities in Dynamic Programming
Problems (pdf)
joint with L Nesheim, University College London
Abstract:
Models where agents choose over non-convex budget sets are commonly
used in the analysis of economic problems entailing extensive margin
decisions and fixed costs. Their solutions have interesting and
distinctive features that are especially relevant in quantitative
applications. We describe how non-convex problems differ from standard
problems and under which circumstances the inclusion of random shocks
makes their solution identical to the solution of standard problems. A
simple framework is provided for the analysis of non-convex choice
problems and different numerical examples are illustrated. A simple
numerical algorithm that is effective in finding solutions for
non-convex maximisation problems is also described.