Research
Recent publications and working papers
Joint Labor Search and the Taxation of Couples (March 2024)
(with Piotr Denderski, Bastian Schulz and Nawid Siassi)
Abstract: In many countries, income is taxed at the household level with a progressive tax schedule. This paper analyzes the impact of joint progressive taxation for employment and wages of dual-earner households in the presence of labor market frictions. We develop a directed search model in which firms offer wage contracts to workers in single and couple households, anticipating that workers may quit into other jobs or non-employment in response to spousal income and the tax system. The model is calibrated to replicate job-finding, job-to-job transition, layoff and quit rates of the U.S. labor market, and a progressive joint tax schedule and UI benefits at the individual level. When comparing the benchmark economy to a counterfactual scenario with individual taxation, we find that replacing the tax rules for couples with those for singles reduces the share of non-employed workers by one-tenth. Furthermore, it increases wages by about 6 percent.
Working Hours and the Child Penalty in an Equilibrium Household Search Model (February 2024)
(with Alessandro Di Nola, Chiara Lacava and Haomin Wang)
Abstract: Recent research identifies parenthood as an important explanation for persistent gender earnings gaps, largely driven by a divergence of male and female labor supply at extensive and intensive margins after childbirth. To quantify the separate role of labor-supply and labor-demand forces for this phenomenon, we build and estimate an equilibrium labor market model featuring decision making in single and couple households and hiring decisions of firms into full-time and part-time jobs. Workers decide job acceptance, job quitting and parental leave after childbirth events, while firms anticipate the joint household choices and adjust their hiring and wage policies accordingly. We decompose gender gaps in hours and wages before and after childbirth into worker skill, household preference and discrimination effects. We further use the model to analyze the effects of parental leave and parental allowance policies.
Firm Expectations, Innovation and Growth (February 2024)
(with Georg Dürnecker, Marek Ignaszak and Jisu Jeun)
Abstract: Using a large and representative panel survey of German firms, we document sizable forecast errors in employment growth which decline with firm age and which are related to investment and R&D activity. Motivated by this evidence, we build an endogenous growth model with heterogeneous firms which learn their productivity from noisy signals, decide about innovation activity, employment, and exit. Aggregate productivity growth responds to a selection channel via firm entry and exit and to an innovation channel via R&D investments of heterogeneous firms. We calibrate the model to replicate the realized and expected firm growth rates over the firms' lifecycle in our data. We use the calibrated model to quantify the role of information frictions in the selection and innovation channels behind aggregate productivity growth.
Understanding Spatial House Price Dynamics in a Housing Boom (March 2024)
(with Georgi Kocharkov and Nicolas Syrichas)
Abstract: We examine the evolution of spatial house price dispersion during Germany's recent housing boom. Using a dataset of sales listings, we find that house price dispersion has significantly increased, which is driven entirely by rising price variation across postal codes. We show that both price divergence across labor market regions and widening spatial price variation within these regions are important factors for this trend. We propose and estimate a directed search model of the housing market to understand the driving forces of rising spatial price dispersion, highlighting the role of housing supply, housing demand and frictions in the matching process between buyers and sellers. While both shifts in housing supply and housing demand matter for overall price increases and for regional divergence, we find that variation in housing demand is the primary factor contributing to the widening spatial dispersion within labor market regions.
(with Etienne Lalé and Nawid Siassi), revise and resubmit at Econometrica
Abstract: This paper develops a macroeconomic model that combines an incomplete-markets overlapping-generations economy with a job ladder featuring sequential wage bargaining, endogenous search effort of employed and non-employed workers, and differences in match quality. The calibrated model offers a good fit to the empirical age profiles of search activity, job-finding rates, wages and savings, so that we use the model to examine the role of age and wealth for worker flows and for the consequences of job loss. We further analyze the impact of unemployment insurance and progressive taxation for labor market dynamics and aggregate economic activity via capital, employment and labor efficiency channels. Lower unemployment benefits or a less progressive tax schedule bring about welfare losses for a newborn worker household.
(with Carlos Carrillo-Tudela and Ben Lochner)
Abstract: Firms and workers predominately match via job postings, networks of personal contacts or the public employment agency, all of which help to ameliorate labor market frictions. We investigate the extent to which these search channels have differential effects on labor market outcomes. Using novel linked survey-administrative data we document their separate roles in matching high-wage firms and high-wage workers. We structurally estimate an equilibrium job ladder model to evaluate implications for firms' recruitment outcomes and labor market sorting. We also assess the importance of the public employment agency on employment and wage inequality, finding a sizeable impact of its removal.
(with Alessandro Di Nola and Haomin Wang), Review of Economic Dynamics, Vol. 51, 579-603, 2023.
Abstract: While the COVID-19 pandemic had a large and asymmetric impact on firms, many countries quickly enacted massive business rescue programs which are specifically targeted to smaller firms. Little is known about the effects of such policies on business entry and exit, investment, factor reallocation, and macroeconomic outcomes. This paper builds a general equilibrium model with heterogeneous and financially constrained firms in order to evaluate the short- and long-term consequences of small firm rescue programs in a pandemic recession. We calibrate the stationary equilibrium and the pandemic shock to the U.S. economy, taking into account the factual Paycheck Protection Program (PPP) as a specific policy. We find that the policy has only a modest impact on aggregate output and employment because (i) jobs are saved predominately in the smallest firms that account for a minor share of employment and (ii) the grant reduces the reallocation of resources towards larger and less impacted firms. Much of the reallocation effects occur in the aftermath of the pandemic episode. By preventing inefficient liquidations, the policy dampens the long-term declines of aggregate consumption and of the real wage, thus delivering small welfare gains.
Journal of Economic Theory, Vol. 212, 105689, 2023.
Abstract: Equilibrium models with heterogeneous agents and aggregate uncertainty are difficult to analyze since policy functions and market prices usually depend on the cross-sectional distribution over agents' state variables which is a high-dimensional object. This paper considers a general model framework in which this curse of dimensionality does not arise because equilibrium prices are determined by market entry conditions and are independent of the cross-sectional distribution (block-recursive equilibrium). The paper first establishes existence and ergodic theorems which are useful for the theoretical analysis and numerical implementation of block-recursive equilibria. Then these results are applied to models of firm dynamics with competitive or frictional input markets and to incomplete-market economies with endogenous asset market participation.
(with Carlos Carrillo-Tudela and Hermann Gartner), Journal of the European Economic Association, Vol. 21, 2413-2459, 2023.
Abstract: Recruitment intensity is important for the matching process in the labor market. Using unique linked survey-administrative data, we investigate the relationships between hiring and recruitment policies at the establishment level. Faster hiring goes along with higher search effort, lower hiring standards and more generous wages. We develop a directed search model that links these patterns to the employment adjustments of heterogenous firms. The model provides a novel structural decomposition of the matching function that we use to evaluate the relative importance of these recruitment policies at the aggregate level. The calibrated model shows that hiring standards play an important role in explaining differences in matching efficiency across labor markets defined as region/skill cross products and for the impact of labor market policy, whereas search effort and wage policies play only a minor role.
(with Georgi Kocharkov, Nawid Siassi and Edgar Preugschat), Journal of the European Economic Association, Vol. 19, 128-164, 2021.
Abstract: The homeownership rate in Germany is one of the lowest among advanced economies. To better understand this fact, we evaluate the role of specific housing policies which tend to discourage homeownership. In comparison to other countries with higher homeownership such as the United States, Germany has an extensive social housing sector with broad eligibility criteria, high transfer taxes when buying real estate, and no tax deductions for mortgage interest payments by owner-occupiers. We build a life-cycle model with uninsurable income and housing risks and endogenous homeownership in order to quantify the policy impact on homeownership and welfare. Adjusting all three policies has a strong impact on housing tenure choices, closing the gap in homeownership rates between Germany and the United States by about two thirds. At the same time, household welfare would be reduced by moving to a policy regime with low transfer taxes, but it would improve in the absence of social housing, in particular when coupled with housing subsidies for low-income households.
(with Wei Cui), Journal of Monetary Economics, Vol. 117, 377-394, 2021.
Abstract: Recessions are often accompanied by spikes of corporate default and credit spreads. This paper develops a tractable macroeconomic model in which credit spreads reflect the fundamental corporate default risk as well as an excess premium which responds to variation in self-fulfilling beliefs about credit conditions. The model is calibrated to evaluate the macroeconomic impact of belief shocks in comparison to standard fundamental shocks. Changes in credit market expectations generate sizable countercyclical responses of default and spreads together with endogenously persistent credit cycles, accounting for most of the volatility of corporate default and close to 40% of output growth volatility.
(with Bihemo Kimasa), International Economic Review, Vol. 62, 1281-1317, 2021.
Abstract: We analyze the joint dynamics of prices, productivity and employment across firms, building a dynamic equilibrium model of heterogeneous firms who compete for workers and customers in frictional labor and product markets. Using panel data on prices and output for German manufacturing firms, the model is calibrated to evaluate the quantitative contributions of productivity and demand for the labor market. Product market frictions decisively dampen the firms' employment adjustments to productivity shocks. We further analyze the impact of aggregate shocks to the first and second moments of productivity and demand and relate them to business-cycle features in our data.
(with Almuth Scholl and Jan Mellert), Journal of International Economics, Vol. 123, 103293, 2020.
Abstract: Sovereign debt crises are often accompanied by deep recessions with sharp declines in external credit to the private sector. In a sample of emerging economies we find that both, sovereign and private risk premia are countercyclical. This paper presents a model of a small open economy that accounts for these empirical regularities. It includes private firms which finance a fraction of imports by external debt and are subject to idiosyncratic and aggregate productivity risk, and a government which borrows internationally and taxes firms to finance public expenditures. The model gives rise to endogenous private and sovereign credit spreads and a dynamic feedback mechanism between sovereign and private default risks through the endogenous response of fiscal policy to adverse productivity shocks.
(with Georgi Kocharkov and Edgar Preugschat), Annals of Economics and Statistics, Vol. 136, 27-54, 2019.
Abstract: The recently published Household Finance and Consumption Survey has revealed large differences in wealth inequality between the countries of the Euro area. We document a strong negative correlation between wealth inequality and homeownership rates across countries. We show that this negative relationship is robust to controlling for other observables using a counterfactual decomposition of cross-country inequality differences based on a recentered influence function regression. Furthermore, by decomposing the Gini coefficient across owners and renters we argue that the negative relationship is mostly driven by large inequality between the two groups. We also find that the cross-country differences in the homeownership rate and its negative correlation with wealth inequality are to a large extent driven by households in the lower half of the wealth distribution. Thus, not only the top percentiles but also the lower tail is important in accounting for overall wealth inequality.
(with Georgi Kocharkov and Edgar Preugschat), Applied Economics Letters, Vol. 26, 1186-1191, 2019.
Abstract: It is well known that homeowners are richer than renters, even after controlling for observable household characteristics. This is often used as an argument for policies that foster homeownership. However, the causal link between homeownership and wealth is difficult to establish due to many potential sources of endogeneity. Utilizing the Household Finance and Consumption Survey for the Euro area, we correct for endogeneity by using inheriting the household’s main residence as an instrument. The exclusion restriction is that conditional on the total amount of inheritance, inheriting a home affects the wealth position of the household only through homeownership. For the sample of inheritors we find that the local average treatment effect for households that inherit a home and stay homeowners is negative. Owning a home reduces riches due to sizable reductions in the net holdings of financial and other real wealth of the treated households.
(with Costas Azariadis and Yi Wen), Review of Economic Studies, Vol. 83, 1364-1405, 2016.
Abstract: In U.S. data 1981-2012, unsecured firm credit moves procyclically and tends to lead GDP, while secured firm credit is acyclical; similarly, shocks to unsecured firm credit explain a far larger fraction of output fluctuations than shocks to secured credit. In this paper we develop a tractable dynamic general equilibrium model in which unsecured firm credit arises from self-enforcing borrowing constraints, preventing an efficient capital allocation among heterogeneous firms. Unsecured credit rests on the value that borrowers attach to a good credit reputation which is a forward-looking variable. We argue that self-fulfilling beliefs over future credit conditions naturally generate endogenously persistent business cycle dynamics. A dynamic complementarity between current and future borrowing limits permits uncorrelated sunspot shocks to unsecured debt to trigger persistent aggregate fluctuations in both secured and unsecured debt, factor productivity and output. We show that these sunspot shocks are quantitatively important, accounting for around half of output volatility.
(with Philipp Kircher), American Economic Review, Vol. 105, 3030-3060, 2015.
Abstract: We develop and analyze a labor market model in which heterogeneous firms operate under decreasing returns and compete for labor by posting long-term contracts. Firms achieve faster growth by offering higher lifetime wages, which allows them to fill vacancies with higher probability, consistent with recent empirical findings. The model also captures several other regularities about firm size, job flows and pay, and generates sluggish aggregate dynamics of labor market variables. In contrast to existing bargaining models, efficiency obtains and the model allows a tractable characterization over the business cycle.
(with Carlos Carrillo-Tudela), Journal of Economic Theory, Vol. 160, 340-386, 2015.
Abstract: We analyze the effects of adverse selection on worker turnover and wage dynamics in a frictional labor market. We consider a model of on-the-job search where firms offer promotion wage contracts to workers of different ability, which is unknown to firms at the hiring stage. With sufficiently strong information frictions, low-wage firms offer separating contracts and hire all types of workers in equilibrium, whereas high-wage firms offer pooling contracts, promoting high-ability workers only. Low-ability workers have higher turnover rates and are more often employed in low-wage firms. The model replicates the negative relationship between job-to-job transitions and wages observed in the U.S. labor market.
Previous version: Wage Dispersion and Labor Turnover with Adverse Selection (IZA Discussion Paper No. 5936)
Economic Theory, Vol. 61, 309-333, 2016.
Abstract: This paper explores the role of public debt and fiscal deficits on factor productivity in an economy with credit market frictions and heterogeneous firms. When credit market conditions are sufficiently weak, low interest rates permit the government to run Ponzi schemes so that permanent primary deficits can be sustained. For small enough deficit ratios, the model has two steady states of which one is an unstable bubble and the other one is stable. The stable equilibrium features higher levels of credit and capital, but also a lower interest rate, lower total factor productivity and output. The model is calibrated to the US economy to derive the maximum sustainable deficit ratio and to examine the dynamic responses to changes in debt policy. A reduction of the primary deficit triggers an expansion of credit and capital, but it also leads to a deterioration of total factor productivity since more low-productivity firms prefer to remain active at the lower equilibrium interest rate.
(with Patrick Pintus and Simon Ray), European Economic Review, Vol. 84, 202-218, 2016.
Abstract: The value of land in the balance sheet of French firms correlates positively with their hiring and investment flows. To explore the relationship between these variables, we develop a macroeconomic model with firms that are subject to both credit and labor market frictions. The value of collateral is driven by the forward-looking dynamics of the land price, which reacts endogenously to fundamental and non-fundamental (sunspot) shocks. We calibrate the model to French data and find that land price shocks give rise to significant amplification and hump-shaped responses of investment, vacancies and unemployment that are in line with the data. We show that both the endogenous movements in the firms' discount factor and the sluggish response of the land price are key elements that drive the results.
For other publications and papers, see my IDEAS page.