Research

Naïve Consumers and Financial Mistakes with Florian Exler
Job Market Paper [latest version]

Financial contracts are complicated and consumers often do not grasp them in their entirety. This may lead to financial mistakes when borrowers do not fully internalize the cost of credit. We develop a quantitative framework that incorporates both sophisticated and naïve borrower behavior in a model of unsecured credit and equilibrium default. Borrowers select contracts that balance interest rates and penalty fees which make financial shocks - such as late payments or overdrawing - costly. While sophisticated borrowers correctly anticipate penalty fees, naïve borrowers face a higher risk without internalizing this fact. Thus, they make financial mistakes by choosing inefficiently high penalty fees. In equilibrium, penalty fees paid by naïves cross-subsidize interest rates for sophisticates. We use this framework to study consumer protection policies aimed at reducing financial mistakes such as borrowing limits, and also two unexplored features of the CARD act: transparency requirements and penalty fee limits. More transparency makes financial contracts easier to understand, reducing the financial risk for naïve borrowers. Thus, naïves pay lower penalty fees. Fee limits directly ban high-fee contracts for everyone. Both policies reduce the expected revenue from naïve fee payments and consequently interest rates rise. In both cases, naïves make fewer financial mistakes and enjoy a welfare gain. Sophisticates, in contrast, suffer: Since naïves pay lower fees, sophisticates lose cross-subsidization and experience welfare losses. 

Quantifying the Effects of Basic Income Programs in the Presence of Automation  [latest version]

The trend towards increasing automation and robotization is a challenge for the labor market, especially for the demand for low skilled labor. Concepts of a Universal Basic Income (UBI) are often brought up as potential reforms to current welfare systems which could provide additional insurance against this trend. I develop a quantitative theory of the labor market where firms endogenously decide on their investment in robots, while workers can insure themselves against the risk of automation induced job-loss by obtaining a college degree. This framework allows for an analysis of the interaction between unconditional transfers and automation and reveals a negative relationship between the generosity of the basic income and the investment in robots. UBI lowers the effective marginal tax rates for unemployed and reduces the incentives for obtaining a college degree. Both effects lead to an increase in participation and search effort in the automation sector and investment in robots is discouraged while employment increases.  Concerning worker welfare, my framework highlights a generational conflict: When comparing stationary equilibria, workers would always prefer being born into an economy without a basic income. However, older cohorts who are already alive during the introduction of the basic income can expect welfare gains during the transition to the new equilibrium.

The Distributional Effects of Tax Evasion

This paper quantifies and discusses the distributional effects of tax evasion. I set up a general equilibrium model with heterogeneous households who can invest in their own business and pay capital gains taxes on realized gains. However, these capital taxes can be evaded by under-reporting the real tax base which bears the risk of being detected and having to pay a punishment fee. The model parameters are first calibrated to Scandinavia to exploit the rich estimates on tax evasion for Norway, Sweden and Denmark and is then taken to the US. The benchmark economy exhibits high wealth inequality as reported for the US and leads to a realistic evasion behavior. A counterfactual analysis then shows that if individuals can try to evade some of their tax payments, wealth inequality is higher under a tax regime with positive capital gains taxes. Comparing welfare, however, I find that the socially optimal tax rate is still strictly positive.