All individuals face some risk of ending up old, sick, alone and poor. Is there a role for social insurance for these risks and if so what is a good program? A large literature has analyzed the costs and benefits of pay-as-you-go public pensions and found that the costs exceed the benefits. This paper, instead, considers means-tested social insurance programs for retirees such as Medicaid and food stamp programs. We find that the welfare gains from these programs are large. Moreover, the current scale of means-tested social insurance in the U.S. is too small in the following sense. If we condition on the current Social Security program, increasing the scale of means-tested social insurance by 1/3 benefits both the poor and the affluent when a payroll tax is used to fund the increase.
The Impact of Medical and Nursing Home Expenses on Savings, American Economic Journal: Macroeconomics, v. 6, July 2014, pp: 29-72.
previously circulated under title "The Impact of Medical and Nursing Home Expenses and Social Insurance Policies on Savings and Welfare."
Joint with Karen Kopecky
We consider a life-cycle model with idiosyncratic risk in earnings, out-of-pocket medical and nursing home expenses, and survival. Partial insurance is available through welfare, Medicaid, and social security. Calibrating the model to the US we show that (1) savings for old-age, out-of-pocket expenses account for 13.5 percent of aggregate wealth, half of which is due to nursing home expenses; (2) cross-sectional out-of-pocket nursing home risk accounts for 3 percent of aggregate wealth and substantially slows down wealth decumulation at older ages; (3) the impact of medical and nursing home expenses on private savings varies significantly across the lifetime earnings distribution; and (4) all newborns would benefit if social insurance for nursing home stays was made more generous.
How Important Is Human Capital? A Quantitative Theory Assessment of World Income Inequality
Review of Economic Studies, Vol. 77(4), October 2010, pp: 1421-1449
Joint with Andrés Erosa and Diego Restuccia
We build a model of heterogeneous individuals—who make investments in schooling quantity and quality—to quantify the importance of differences in human capital vs. total factor productivity (TFP) in explaining the variation in per capita income across countries. The production of human capital requires expenditures and time inputs; the relative importance of these inputs determines the predictions of the theory for inequality both within and across countries. We discipline our quantitative assessment with a calibration firmly grounded on US micro evidence. Since in our calibrated model economy human capital production requires a significant amount of expenditures, TFP changes affect disproportionately the benefits and costs of human capital accumulation. Our main finding is that human capital accumulation strongly amplifies TFP differences across countries: to explain a 20-fold difference in the output per worker, the model requires a 5-fold difference in the TFP of the tradable sector, vs. an 18-fold difference if human capital is fixed across countries.
Progressive Taxation in a Dynastic Model of Human Capital, Journal of Monetary Economics, Vol. 54(3), April 2007, pp: 667-685
Joint with Andrés Erosa
We develop a quantitative theory of economic inequality to investigate the effects of replacing the current U.S. progressive income tax system with a proportional one. The cross-sectional implications of the theory are used to discipline the assessment of the effects of tax policy and circumvent the lack of conclusive micro-evidence on the parameterization of the human capital production technology. We find that the elimination of progressive taxation increases steady state level of output by 12.6%, capital by 21.8%, and consumption by 13.2%. Moreover, it increases economic inequality and its persistence across generations.
A Quantitative Analysis of Inflation as a Tax on the Underground Economy, Journal of Monetary Economics, Vol. 53(4), May 2006, pp: 773-796
Inflation rates are more dispersed and are persistently higher in developing countries. This paper quantifies the importance of the public-finance motive for inflation in the presence of a tax-evading sector, the underground economy. The approach is motivated by the observation that the underground economy is especially large in poor countries. The analysis builds on a general equilibrium monetary model with two production sectors, where income in one of the sectors cannot be taxed. A benevolent government finances its budget using an optimal combination of the income tax rate and the inflation rate. The model is first calibrated to the U.S. economy and is then used for a cross-country simulation. The resulting relationships between the size of an underground economy, inflation rate, income tax rate and the share of seigniorage in the government revenue rationalize the cross-country data quantitatively well.