Research

Abstract: This study develops an endogenous growth model in which workers and entrepreneurs invest in physical and human capital and both face uninsurable income risks. In the economy, we investigate the optimal tax adjustments when entrepreneurs' wealth share is increasing. We demonstrate that the laissez-faire economy is constrained inefficient due to pecuniary externality: private agents ignore the effects of their decision on the aggregate state of the economy---entrepreneurs' wealth share (A). The Ramsey taxes on capital and labor income are contingent on A. Quantitative analysis indicates that optimal tax adjustments during the transition are approximately 5–7 percent in the most significant cases.

Abstract: This paper studies the long-run implications of entrepreneurship on top marginal income tax rates. Raising the top marginal tax rate has a negative long-term effect on business income at the top through wealth distribution change. This paper argues that this negative long-term effect is potentially important in driving down the optimal top marginal tax rate. The baseline results suggest that the recent top marginal tax rates in the US are close to optimal for entrepreneurs.

Abstract: This study quantifies the insurance provided by social security against idiosyncratic income risk for households. A common rationale for social security is that it provides insurance against lifetime income uncertainty; however, this study finds that it does not. I show that, while social security reduces expected consumption dispersion during retirement, thereby providing some insurance, it can increase expected consumption dispersion during working years. Quantifying these two opposing effects in an overlapping generations model with an incomplete asset market, I find that the negative effect during working years dominates. The primary reason social security fails to provide overall insurance is the regressive nature of the payroll tax, which exacerbates after-tax income dispersion. If the payroll tax were purely flat, this study finds significant insurance provided by social security, consistent with the findings in existing literature.

Abstract: The unfunded social security has long been criticized for reducing capital stock and social welfare. In this paper, we study the aggregate and welfare effects of reforms that make social security tax (SST) age dependent. We characterize the optimal age-dependent SST schedule that maximizes social welfare and find that it increases capital and social welfare significantly. In addition, we propose a simple two-bracket SST schedule that captures the most of welfare gains from a fully age-dependent SST schedule. The welfare gains from the optimal schedule mainly comes from the increase in consumption level and better consumption smoothing over the life cycle, while the insurance effect of the age-dependent schedule is small. 

Abstract: I investigate the optimal taxation on capital and labor in a neoclassical growth model with uninsured idiosyncratic shocks to human capital. I show that uninsurable idiosyncratic income risk does not necessarily invalidate the zero-capital-tax rate result from Judd (1985) and Chamley (1986), which contrasts the existing view in the literature. More generally, whether capital income should be taxed depends on the government's debt position: capital tax should be positive given that government owes debt. However, if government debt and capital income tax are jointly chosen in optimal, then a negative capital income tax is found when taking the model to the U.S. economy.

Abstract: Models with entrepreneurship can reproduce high wealth concentration at the top. The key assumption is the borrowing constraint, that is, households are unable to borrow enough assets to start a business or to invest at optimal level. More recent evidence, however, shows that borrowing constraints do not matter for the majority of households in the US. This paper seeks to generate high wealth concentration without assuming borrowing constraints. The baseline model that introduces heterogeneous abilities of entrepreneurs is able to match the wealth distribution while the model assuming same entrepreneurial ability fails. Besides wealth distribution, the baseline model generates other moments that are consistent with data. 

Abstract: Executive compensation closely tracked the evolution of firm size from the 1980s to the 2000s: the increase in average firm value was accompanied by a corresponding increase in executive compensation by a similar factor—a size of stakes of one, as noted by Gabaix et al. (2014). However, we find that this close relationship between executive compensation and firm size has substantially weakened; the size of stakes is now only about 0.5 to 0.6 after the 2008 crisis. We also propose a tentative explanation for this new trend.