Assistant Professor of Finance
Kellogg School of Management
Household Finance, Public Finance,
Macroeconomics, Consumption Behavior
Abstract: We use the Anti-Alcohol Campaign in 1986 and the rapid expansion of the beer market after the collapse of the Soviet Union as two quasi-natural experiments to identify highly persistent habit formation in alcohol consumption among Russian males. Importantly, these results apply to all levels of alcohol consumption and are not driven by heavy drinking or alcoholism. The two large shocks combined with persistent habits lead to large cohort differences in consumer behavior even decades later. We derive a basic model of habit formation with homogeneous preferences over two habit-forming goods, which is consistent with these facts. Using placebo tests as well as simple descriptive statistics, we show that habits are formed during early adulthood and remain largely unaffected afterward. The main alternative hypotheses such as income effects, unobserved taste heterogeneity, stepping-stone effects, and changes in culture or social norms are inconsistent with those patterns. Using the experiments as IVs, we estimate the first-order autoregressive coefficient to be 0.83, which is almost three times larger than its OLS estimate. Finally, our results suggest that male mortality in Russia will decrease by one quarter within twenty years even under current policies and prices due to the long-run consequences of the large changes in the alcohol market.
with Evgeny Yakovlev, May 2015: new version! [local copy][online appendix] [NBER Working Paper]
In the media: Voxeu.org, The Motley Fool, New York Times
Abstract: Although theoretical models of household behavior often emphasize fiscal foresight, most empirical studies neglect the role of news, thereby potentially underestimating the total effect of tax changes. Using novel high-frequency bond data, I develop a model of the term structure of municipal yield spreads as a function of future top income tax rates and a risk premium. Testing the model using the presidential elections of 1992 and 2000 as two natural experiments shows that financial markets forecast future tax rates remarkably well in both the short and long run. Combining these market-based tax expectations with consumption data from the Consumer Expenditure Survey, I find that consumption of high-income households increases by close to 1% in response to news of a 1% increase in expected after-tax lifetime income, consistent with the basic rational-expectations life-cycle theory.
Abstract: We study the effects and historical contribution of monetary policy shocks to consumption and income inequality in the United States since 1980. Contractionary monetary policy actions systematically increase inequality in labor earnings, total income, consumption and total expenditures. Furthermore, monetary shocks can account for a significant component of the historical cyclical variation in income and consumption inequality. Using detailed micro-level data on income and consumption, we document the different channels via which monetary policy shocks affect inequality, as well as how these channels depend on the nature of the change in monetary policy.
Abstract: Even with well-developed capital markets, there is no private market mechanism for trading between current and future generations, so a potential role for public old-age pension systems is to spread economic and demographic shocks among different generations. This paper evaluates the risk-spreading effects of three pay-as-you-go public pension schemes, based on the actual U.S. and German systems, which vary in the extent to which they rely on tax adjustments versus benefit adjustments to provide annual cash-flow budget balance. Modifying the Auerbach-Kotlikoff (1987) dynamic general-equilibrium overlapping generations model to incorporate realistic patterns of fertility and mortality and shocks to productivity, fertility and mortality, we evaluate the effectiveness at the three public pension systems at spreading the effects of such shocks. We find that the systems, particularly those that rely to some extent on tax adjustments, are effective at spreading fertility and mortality shocks, but that this is not the case for productivity shocks, for which the pension systems actually tend to concentrate the economic impact. These results suggest that both system design and the source of shocks are important factors in determining the potential risk-spreading capacity of public pension arrangements.
with Mu-Jeung Yang and Bryan Hong, October 2014: under revision. [local copy] [NBER Working Paper]