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Heterogeneous Agents in Macroeconomics

Paper Session

Saturday, Jan. 6, 2018 8:00 AM - 10:00 AM

Marriott Philadelphia Downtown, Meeting Room 309
Hosted By: Korea-America Economic Association
  • Chair: Yoosoon Chang, Indiana University

Taxing Top Earners: A Human Capital Perspective

Mark Huggett
,
Georgetown University
Alejandro Badel
,
U.S. Bureau of Labor Statistics
Wenlan Luo
,
Tsinghua University

Abstract

An established view is that the revenue maximizing top tax rate for the US
is approximately 73 percent. We argue that theory and evidence suggest a lower
value. First, theory provides a robust formula where three elasticities determine this top rate. Second, theory and measurement suggest that the two new elasticities in the formula are positive and reduce the revenue maximizing rate. Third, a human capital model is provided that follows the logic of the formula, is consistent with regression evidence on the response of income and tax revenue to changes in the top tax rate and yet features a revenue maximizing top rate well below 73 percent.

Financial Frictions, Asset Prices, and the Great Recession

José-Víctor Ríos-Rull
,
University of Pennsylvania
Zhen Huo
,
Yale University

Abstract

We study financial shocks to households' ability to borrow in an economy that quantitatively replicates U.S. earnings, financial, and housing wealth distributions and the main macro aggregates. Such shocks generate large recessions via the negative wealth effect associated with the large drop in house prices triggered by the reduced access to credit of a large number of households. The model incorporates additional margins that are crucial for a large recession to occur: that it is difficult to reallocate production from consumption to investment or net exports, and that the reductions in consumption contribute to reductions in measured TFP.

On Worker and Firm Heterogeneity in Wages and Employment Mobility: Evidence From Danish Register Data

Rasmus Lentz
,
University of Wisconsin-Madison
Suphanit Piyapromdee
,
University College London
Jean-Marc Robin
,
Sciences Po

Abstract

In this paper, we propose an estimation method that allows for unrestricted interactions between worker and firm unobserved characteristics in both wages and the mobility patterns. Related to Bonhomme, Lamadon and Manresa (2014) (BLM), our method identifies double sided unobserved heterogeneity through an application of the EM-algorithm where the firm classification is repeatedly updated so as to improve on the likelihood function. In Monte Carlo simulations, we demonstrate that the cyclic updating of the firm classification provides a significant performance improvement. Firm classification is a result of both wage and mobility patterns in the data. We estimate the model on Danish matched employer-employee data for the period 1985-2011. The estimation includes gender, education, age and time controls. We find an increased sorting pattern over time, although overall sorting is modest. The wage gap between genders is decreasing over time. The contribution to the wage gap from mobility differences between the genders is also decreasing over time.

Identifying and Estimating the Long Run Effect of Income Distribution on Aggregate Consumption

Hwagyun Hagen Kim
,
Texas A&M University
Yoosoon Chang
,
Indiana University
Changsik Kim
,
Sungkyunkwan University
Joon Park
,
Indiana University and Sungkyunkwan University

Abstract

This paper identifies and estimates the longrun effect of income distribution on aggregate consumption, using income and expenditure data from the US Consumer Expenditure Survey. The permanent and transitory components of income and consumption distributions are obtained by the functional Beveridge-Nelson decomposition. The permanent income distribution consists of two stochastic trends, from which we identify two factors, the level and spread factors, determining the permanent consumption. The level and spread factors change the permanent consumption through the changes in aggregate income and in redistribution of income, respectively.
Discussant(s)
Hye Mi You
,
State University of New York-Buffalo
Soojin Kim
,
Purdue University
Serena Rhee
,
University of Hawaii-Manoa
Yoosoon Chang
,
Indiana University
JEL Classifications
  • E2 - Consumption, Saving, Production, Investment, Labor Markets, and Informal Economy
  • D1 - Household Behavior and Family Economics