When is a wealth tax preferable to a capital income tax? We study this question theoretically in a perpetual youth model with entrepreneurs and workers, in which entrepreneurial firms are subject to idiosyncratic productivity shocks and collateral constraints. We focus on the steady state equilibrium that features heterogeneous returns and misallocation of capital. In this equilibrium, increasing the wealth tax always increases aggregate productivity if and only if entrepreneurial productivity is positively auto-correlated. The gains result from the use-it-or-lose-it effect, which causes a reallocation of capital from entrepreneurs with low productivity to those with high productivity. Furthermore, if the capital income tax is adjusted to balance the government's budget, aggregate capital, output, and wages increase. (...)

# Summersemester 23

This paper shows that price dispersion matters for shaping individual household consumption. Using detailed scanner data, I document that the high-earning employees pay from 2 to 7% higher prices than the low-earning ones for exactly the same or very similar goods. The causal link between the income level and paid prices is established by exploiting a quasi-experimental setup of the Economic Stimulus Act of 2008. Between 8 and 22% ofthe increase in household spending after a transitory income shock is explained by positive changes in the paid prices. Next, I present a novel and tractable theory to study search for consumption as part of the optimal savings problem. Due to retail-market frictions, households have to exert search effort to purchase the consumption goods. The proposed framework reconciles the documented patterns in a quantitatively meaningful way. (...)

We document systematic differences in macroeconomic expectations across U.S. households and rationalize our findings with a theory of information choice. We embed this theory into an incomplete-markets model with aggregate risk. Our model is quantitatively consistent with the pattern of expectation heterogeneity in the data. Relative to a full-information counterpart, our model implies substantially increased macroeconomic volatility and inequality. We show through the example of a wealth tax that neglecting the information channel leads to erroneous conclusions about the effects of macroeconomic policies. While in the model without information choice a wealth tax reduces wealth inequality, in our framework it reduces information acquired in the economy, leading to increased volatility and higher top-end wealth inequality in equilibrium. Coauthors: Tobias Broer, Kurt Mitman, Kathrin Schlafmann

Economists typically make simplifying assumptions to make the solution and estimation of their highly complex models feasible. These simplifications include approximating the true nonlinear dynamics of the model, disregarding aggregate uncertainty or assuming that all agents are identical. While relaxing these assumptions is well-known to give rise to complicated curse-of-dimensionality problems, it is often unclear how seriously these simplifications distort the dynamics and predictions of the model. We leverage the recent advancements in machine learning to develop a solution and estimation method based on neural networks that does not require these strong assumptions. We apply our method to a nonlinear Heterogeneous Agents New Keynesian (HANK) model with a zero lower bound (ZLB) constraint for the nominal interest rate to show that the method is much more efficient than existing global solution methods and that the estimation converges to the true parameter values.(..)

We study optimal tax design based on the idea that policy-makers face trade-offs between multiple margins of redistribution. Within a Mirrleesian economy with labor income, consumption, and retirement savings, we derive a novel formula for optimal non-linear income and savings distortions based on redistributional arbitrage. We establish a sufficient statistics representation of the labor income and capital tax rates on top earners, which relies on comparing the Pareto tails of income and consumption. Because consumption is more evenly distributed than income, it is optimal to shift a substantial fraction of the top earners’ tax burden from income to savings. We extend our representation of tax distortions based on redistributional arbitrage to economies with general preferences over an arbitrary number of periods and commodities, and we allow for return heterogeneity, age-contingent taxes, and stochastic evolution of types. Coauthor: Christian Hellwig

We use population data on capital income and wealth holdings for Norway to measure asset positions and wealth returns before individuals marry and after the household is formed. (...) First, individuals sort on personal wealth rather than parents' wealth. Assortative mating on own wealth dominates, and in fact renders assortative mating on parental wealth statistically insignificant. Second, people match also on their personal returns to wealth and assortative mating on returns is as strong as that on wealth. Third, post- marriage returns on family wealth are largely explained by the return of the spouse with the highest pre-marriage return. This suggests that family wealth is largely managed by the spouse with the highest potential to grow it. This is particularly true for households at the top of the wealth distribution at marriage. (...)

In a broad class of sticky price models, theory predicts that the ratio of the kurtosis to the frequency of price changes is a sufficient statistic for the cumulative impulse response of prices (CIRP) to a nominal shock. Using several millions of daily gasoline prices in France, we provide supporting evidence of this prediction. The CIRP correlates with the kurtosis to frequency ratio, but also with both frequency and kurtosis taken separately. The sign and the magnitude of the correlations are fully in line with theoretical predictions. Other moments of the price change distribution do not correlate with CIRP. Coauthors: Magali MARX, Paul VERTIER

We develop a method that identifies the effects of nationwide policy, i.e., policy implemented across all regions at the same time. In our method, we put forward the idea of tracking outcome paths in terms of stages rather than time, where a stage of a regional outcome at time t is its location on the support of a reference path. Through a normalization that maps the time paths of regional outcomes onto a reference path---using only pre-policy data---we uncover cross-regional heterogeneity in the stage at which policy is implemented. This stage variation identifies policy effects inside a window of stages where a stage-leading region provides the no-policy counterfactual path for non-leading regions that are subject to policy inside that window. We assess our method’s performance with Monte-Carlo experiments, and illustrate it with empirical applications. Stage-Based Identification captures heterogeneous policy effects across stages and the aggregate effects of policy.

We study the consequences of “regime-induced” exchange rate depreciations by comparing outcomes for peggers versus floaters to the US dollar in response to a dollar depreciation. Pegger currencies depreciate relative to floater currencies and these depreciations are strongly expansionary. The boom is not associated with an increase in net exports, or a fall in nominal interest rates in the pegger countries. This suggests that expenditure switching and domes- tic monetary policy are not the main drivers of the boom. We develop a financially driven exchange rate (FDX) model in which multiple shocks originating in the financial sector drive exchange rates and households and firms can borrow in foreign currencies. Following a depreciation, UIP deviations lower the costs of borrowing from abroad and stimulate the economy, as in the data. The model is consistent with (unconditional) exchange rate disconnect and the Mussa facts, even though exchange rates have large effects on the economy.

The most popular method to acquire a job is to use one’s circle of acquaintances or social networks to find a position. However, in the current research, there is still no clear conclusion if this job search method has positive implications for different job outcomes such as starting wages. Assuming that the effects are non-monotonic and depend on the type of utilized networks allows accommodating both types of evidence. In line with the assumption, this paper studies the effects of this job search approach in the context of Germany compared to the formal individual application procedure using the county-level data from the SOEP. (...)

Combining a variety of survey and administrative data, this paper measures the progressivity of taxes and transfers for each of the US states and contrasts it to progressivity at the federal level. Our findings are fourfold: (i) the tax and transfer system is progressive at the federal level; (ii) state and local tax and transfer systems are close to proportional, on average: the regressivity of state consumption and property taxes neutralizes the progressivity of state income taxes and transfers; (iii) there is substantial heterogeneity across states, and its key determinant is the choice of the tax base (sales and property vs income); (iv) Democrat-leaning states tend to have more progressive systems, but richer and more unequal states tend to me more regressive.

It is a well-known fact that the college share in advanced countries has been increasing in the past several decades. This is generally attributed to the cohort succession model; whereby successive cohorts obtain more education. Despite this consensus, using a shift-share decomposition we show that a large and increasing fraction of the aggregate increase in the college share is driven by the within-cohort component in the United States. This contrasts with the general view in the literature that once individuals quit school, they never return to acquire more schooling. We use panel data from the NLSY79 to analyze the consequences of delayed education. In terms of returns to late education, we show that late graduates experience a significant increase in earnings after attending college, although the returns are lower than for early college graduates, especially for men. (...)

This paper develops a macroeconomic model that combines an incomplete-markets overlapping-generations economy with a job ladder featuring strategic wage bargaining and endogenous search effort of employed and non-employed workers. The model is able to capture the empirical relationships between search activity, labor market transition, earnings and wealth that we document in German data. We use the calibrated model to analyze the determinants of job mobility, income and wealth dynamics over the life cycle. We further examine the impact of unemployment insurance and progressive taxation for labor market dynamics, wage inequality and macroeconomic outcomes. Coauthors: Etienne Lalé and Nawid Siassi.

There have been more than 500,000 opioid overdose deaths since 2000. To analyze the opioid epidemic, a model is constructed where individuals, with and without pain, choose whether to misuse opioids knowing the probabilities of addiction and dying. These odds are functions of opioid use. Markov chains are estimated from the US data for the college and non-college educated that summarize the transitions into and out of opioid addiction as well as to a deadly overdose. A structural model is constructed that matches the estimated Markov chains. The epidemic's drivers, and the impact of medical interventions, are examined.