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Heterogeneity in Macroeconomics: Households and Firms

Paper Session

Friday, Jan. 5, 2018 2:30 PM - 4:30 PM

Marriott Philadelphia Downtown, Meeting Room 410
Hosted By: Econometric Society

MPC Heterogeneity and Household Balance Sheets

Andreas Fagereng
,
Statistics Norway
Martin Blomhoff Holm
,
BI Norwegian Business School
Gisle James Natvik
,
BI Norwegian Business School

Abstract

Using Norwegian administrative data, we study how lottery prizes of substantial and variable size affect
household expenditure and savings. Expenditure responses (MPCs) spike in the year
of winning, and thereafter fall markedly. Controlling
for all items on the household balance sheet and characteristics such as education and
age, MPCs vary with the amount won and liquid assets only. Shock size matters: The
MPC among the 25 percent winning least is twice as high as among the 25 percent
winning most. Many households are wealthy, illiquid and have high MPCs, consistent
with two-asset models of consumer choice.

The Distributions of Income and Consumption Risk: Evidence From Norwegian Registry Data

Elin Halvorsen
,
Statistics Norway
Hans Aasnes Holter
,
University of Oslo
Serdar Ozkan
,
University of Toronto
Kjetil Storesletten
,
University of Oslo

Abstract

Using the Norwegian Registry Data, containing income and wealth information for the entire Norwegian population, we study the distributions of idiosyncratic income and consumption risk over the life-cycle and over the business-cycle. For this purpose, we first document moments (including higher order moments) from the distributions of growth rates of labor income, business income and capital income, and after taxes and transfer income both at the individual level, for males and females, and at the household level. We then decompose the growth in labor earnings into changes in wages and changes in labor hours, in particular, changes in extensive and intensive margins. At the household level, we also study the distribution of consumption risk and the degree of consumption insurance towards labor market risk.

We find that for individual labor income the Norwegian data is qualitatively remarkably similar to the recent studies on population wide U.S. registry data by Guvenen et al. (2015,
2014) (quantitatively there is more inequality and larger risk in the U.S.). The much richer
Norwegian data, however, allows us to go beyond individual labor income. So far we find (i) The strong negative skewness of individual labor income, which have previously been documented, is due to negative skewness of work hours. (ii) Both the progressive Norwegian tax- and transfer system and spousal income contribute signicantly towards removing the
effect of the negatively skewed labor income on the distribution of disposable household income, which is much closer to normally distributed.

Taxes, Regulations of Businesses and Evolution of Income Inequality in the United States

Sebastian Dyrda
,
University of Toronto
Benjamin Wild Pugsley
,
Federal Reserve Bank of New York

Abstract

From 1980 to 2012 the share of U.S.~business receipts from businesses organized as pass-through entities (for example LLCs and S-corporations) rather than traditional C-corporations nearly triples following a sequence of tax reforms that reduced the tax rate on business income that "passes through" to an entrepreneur's individual income tax form. We show this shift in the pattern of business organization is economically significant. We propose a novel reduced form decomposition of data from the Survey of Consumer Finances, which reveals the increase in pass through entities explains over 50 percent of the increase in the share of pre-tax income for the top 1 percent of households. Importantly, this increase is not just accounting: there is an economic trade-off when choosing a legal form that affects the investment behavior of the entrepreneurs. We develop a heterogeneous agent equilibrium model with workers, entrepreneurs and endogenous choice of legal forms to capture a key trade-off between tax benefits and diversification of investment risk. We test the model using confidential firm-level microdata from the U.S.~ Census, and with the model calibrated to capture the actual firm dynamics across legal forms following several tax reform episodes, we quantify the contribution of tax reforms through the business reorganization channel on the evolution of income, wealth and consumption inequality of workers and entrepreneurs.
JEL Classifications
  • A1 - General Economics