Working Papers

"Permanent Primary Deficits, Idiosyncratic Long-Run Risk, and Growth" with Erzo G.J. Luttmer 

We consider an economy with perpetual youth and inelastic labor supply that grows endogenously. Consumers are subject to idiosyncratic capital accumulation risk and markets are incomplete. The government purchases consumption goods, makes transfers in the form of baby bonds, and it can use consumption and wealth taxes. The wealth distribution is given in closed form. When the intertemporal elasticity of substitution ɛ is equal to 1, the government can run a permanent primary deficit, up to a finite upper bound, if the coefficient of relative risk aversion is high enough and the factor share of labor is not too close to 1. This causes the risk-free rate r to be below the growth rate g of the economy. But the government can implement Pareto improvements when r - g does not exceed zero by enough. If ɛ ≠ 1, then there may not be an upper bound on the permanent primary deficits of the government. If ɛ Є (0,1), this happens when the economy is relatively unproductive, and then taking deficits to be very large makes all consumers worse off. If ɛ Є (1,∞), very large deficits are possible if the economy is sufficiently productive, and then they imply unbounded Pareto improvements. 

Publications

"Pension, possible phaseout, and endogenous fertility in general equilibrium", with Monisankar Bishnu and Tridip Ray, Journal of Public Economic Theory

The rich literature on Pay-As-You-Go (PAYG)-type pensions provides a notion that when pension return is dominated by the market return, generally it is impossible to phase pension out without hurting any generation. We show that PAYG pensions can indeed be phased out in a much richer framework where fertility is endogenous and general equilibrium effects are present. Interestingly, the factor that helps us to phase the pension out in a Pareto way is hidden in the structure of PAYG pension itself. Individualistic agents fail to recognize the benefits of their fertility decision on these programs and, therefore, end up in an allocation that is strictly dominated by the allocations that internalize this externality. Exploiting this positive externality, competitive economy can improve its allocations and can reach the planner's steady-state in finite time where each generation secures as much utility as in the competitive equilibrium. Clearly, it is possible to transition in a Pareto way to an economy either with no pension or with pensions whose return is not dominated by market return.