Sergio Ocampo

Recent Research Papers

[New! First completed draft] Self-employment and development policies

With Juan Herreño

We study how the response of developing countries to economic policies –such as job guarantee programs, unemployment insurance, and micro-finance– depends on the prevalence of low-earning self-employed individuals. To this end, we develop a new general equilibrium occupational choice model that is consistent with the behavior and composition of self-employment. Our model differs from previous work by allowing unemployment risk to shape the selection of agents into self-employment. Models that rely only on financial frictions are at odds with crucial features of self-employment in developing economies. In particular, the concentration of self-employed agents among the lowest earners of the economy, and their willingness to take on salaried jobs when offered to them. These features support the prevalence of subsistence entrepreneurs in developing economies, who play a critical role in shaping policy responses. Their willingness to accept jobs at market wages leads to a muted response of wages to labor demand shocks as in job guarantee programs. Additionally, offering small unemployment benefits reduces subsistence entrepreneurship, increasing productivity and output. In contrast, micro-finance exacerbates this phenomenon, reducing productivity.

Use it or lose it: Efficiency gains from wealth taxation

With Fatih Guvenen, Gueorgui Kambourov, Burhan Kuruscu and Daphne Chen (NBER working paper version)

This paper studies the quantitative implications of wealth taxation (tax on the stock of wealth) as opposed to capital income taxation (tax on the income flow from capital) in an overlapping-generations incomplete-markets model with rate of return heterogeneity across individuals. With such heterogeneity, capital income and wealth taxes have opposite implications for efficiency and some key distributional outcomes. Under capital income taxation, entrepreneurs who are more productive, and therefore generate more income, pay higher taxes. Under wealth taxation, on the other hand, entrepreneurs who have similar wealth levels pay similar taxes regardless of their productivity, which expands the base and shifts the tax burden toward unproductive entrepreneurs. This reallocation increases aggregate productivity and output. In the simulated model calibrated to the U.S. data, a revenue-neutral tax reform that replaces capital income tax with a wealth tax raises welfare by about 8% in consumption-equivalent terms. Moving on to optimal taxation, the optimal wealth tax is positive, yields even larger welfare gains than the tax reform, and is preferable to optimal capital income taxes. Interestingly, optimal wealth taxes result in more even consumption and leisure distributions (despite the wealth distribution becoming more dispersed), which is the opposite of what optimal capital income taxes imply. Consequently, wealth taxes can yield both efficiency and distributional gains.

Coverage: Financial Times (Free Lunch, Article), The Economist (Article), Bloomberg (Noah Smith: 2016, 2019), St. Louis Fed (interview with Fatih Guvenen)

A task-based theory of occupations (Job Market Paper)

I develop an assignment model of occupations with multidimensional heterogeneity in production tasks and worker skills. Tasks are distributed continuously in the skill space, whereas workers have a discrete distribution with a finite number of types. Occupations arise as a bundle of tasks optimally assigned to a type of worker. The model allows us to study how occupations evolve—e.g., changes in their boundaries, wages, and employment—in response to changes in the economic environment, making it useful for analyzing the implications of automation, skill-biased technical change, offshoring, and skill upgrading by workers, among others. I characterize how the wages and marginal product of workers, the substitutability between worker types, and the labor share depend on the assignment. In particular, I show that these properties depend on the productivity of workers in tasks along the boundaries of their occupations. As an application, I study the rise in automation observed in recent decades. Automation is modeled as a choice of the optimal size and location of a mass of identical robots in the task space. The firm trades off the cost of the robots, which varies across the space, against the benefit of reducing the mismatch between tasks’ skill requirements and workers’ skills. The model rationalizes observed trends in automation and delivers implications for changes in wage inequality, unemployment, and the labor share.