Research papers in progress
"Wealth Inequality and Portfolio Choice"
In this project I explore how portfolio choice can be used to explain wealth inequality, a mechanism that so far has been mostly absent in the literature. Recent empirical research based on administrative data has shown that the portfolio composition of wealthy households vastly differs from those of poorer ones, and that there is substantial return heterogeneity across the wealth distribution. Endogenous heterogeneous returns (for example due to differences in portfolio composition) could thus be used an additional mechanism to generate wealth inequality in heterogeneous-agent macro models. Since households choose very similar portfolios with a counterfactually high share of risky assets in standard models, behavioral elements such as biased subjective expectations are added to the framework to generate a higher dispersion in portfolio composition and returns.
"On the Redistributive Effects of Government Bailouts in the Mortgage Market" (with Kurt Mitman and Dirk Krueger)
In this paper we investigate positive and normative implications of bailout guarantees for mortgage lenders. The implicit guarantee for debt issued by Fannie Mae and Freddie Mac in the US prior to 2008 led to lower borrowing costs for financial intermediaries in the mortgage market, which were passed on to households taking out mortgages. This in turn might have affected the distribution of real estate ownership and leverage among US households. On the other hand, the bailouts in 2008 required injections of $187bn of taxpayer money into these companies. The paper attempts to quantify this trade-off of lower borrowing rates and higher taxes to fund bailouts in a model featuring heterogeneous households and aggregate uncertainty in the form of (severe) recessions, identifying beneficiaries and losers of such a policy as well as overall welfare effects.
"Subjective Life Expectancy, Health, and Wealth” (with Jonna Olsson)
Evidence from the US suggests that individuals hold asymmetric subjective beliefs about their own life expectancy: At ages below 75 they on average underestimate survival probabilities compared to population averages (as measured by the life tables), while at higher ages they are overoptimistic. Moreover, within a cohort the expectation errors are not random but highly correlated with self-reported health status. Healthy individuals on average overestimate their expected life-span, while individuals in poor health underestimate it, compared to expected life-span conditioning on self-reported health. On the other hand, households have substantially higher and more dispersed financial asset holdings in higher age compared to what standard life-cycle models would predict. Traditionally, the literature has suggested bequest motives and precautionary savings to insure against medical costs as possible ways to rationalize observed asset levels at high age, while some recent contributions started to explore to what extent overoptimism with respect to survival to high age can help explain the slow decumulation of wealth. We embed the latter approach into a full-featured life-cycle model to assess the quantitative importance of overoptimism and systematic error along the health gradient on asset holdings and wealth distribution.
"Self-selection into Retirement and Social Security Reform" (with Jonna Olsson)
We investigate optimal retirement behavior in a life-cycle model of agents who are heterogeneous with respect to age, assets, productivity, health and social security entitlements. Our model replicates stylized facts observed in the US, such as the delayed retirement of high earners. Furthermore, unlike in earlier work, we carefully model health transitions estimated from a panel of the elderly which allows us to quantify the effects of (expected) longevity on retirement decisions. We use our model to evaluate reforms to the US Social Security system, such as changes to the full retirement age or the earnings test for early retirees, and the heterogeneous effects on high vs low earners. Preliminary results indicate that the earnings test as currently implemented in the US is a major factor in delaying retirement for high earners.