Optimal Welfare-to-Work Programs with Worker Profiling [draft]
Abstract In welfare-to-work programs, profiling the job-finding probability of unemployed workers is essential in order to direct them to the most appropriate employment program. An optimal profiling strategy is achieved by integrating dynamic learning about a worker's skills within a principal-agent framework. The optimal welfare-to-work program is described for each type of worker, including referral to an employment program, unemployment benefits, wage taxes post-reemployment, and the accuracy and timing of profiling, which are tailored to the worker's expected skills and the generosity of the program. Implementing this optimal profiling strategy in the United States in 2014 would have generated average per-capita net present savings of $4,122.
Sustainable Social Security (with Lancia F., Russo A., and Worrall T.) [slides]
Abstract We examine the optimal design of a social security scheme in an economy with stochastic mortality, where younger generations can default on pension entitlements that were previously promised to older generations. The presence of stochastic mortality introduces cohort-specific uncertainty and social security plays a role in hedging longevity risk. We analyze the constrained efficient allocation chosen by a benevolent social planner that maximizes a weighted sum of the utility of current and future generations subject to limited enforcement constraints. We show that the resulting optimal social security scheme is linked to the mortality risk and has both flat-rate and contributory-related elements. The paper quantifies the risk borne by each generation during both the transition period and in the long run. Trends in replacement and contribution rates of pension systems in advanced economies during the period 1960-2020 resemble the optimal sustainable social security scheme.
Public Debt and Growth in a Democracy with Partisan Conflict (with Lancia F. and Russo A.) [slides]
Abstract We examine the strategic relationship between public investments and pork barrel spending, along with public debt, when spending-biased political parties alternate stochastically in power. The driving force of the model is the intergenerational conflict over the allocation and financing of the public budget. Successive generations of voters choose fiscal policies through repeated elections. We characterize the Markov-perfect equilibrium of the voting game and show that the party biased towards public investments exhibits less discipline compared to the party favoring pork barrel spending. The increased growth resulting from public investments raises the likelihood of indebtedness, ultimately restraining public spending in the long run. Our findings shed light on the coexistence of rising debt and political cycles observed in modern economies.
Optimal Climate Coalitions [slides]
Abstract I examine the formation of climate coalitions within a principal-agent framework, where a central authority (the principal) oversees the enforcement of the Coalition Agreement, and member countries (the agents) are required to financially support the development of carbon-reducing technologies. The central agency decides whether these investments should also be financed through common debt and allocates compensation to member countries affected by climate-related damages. My findings show that coalitions result in greater technological advancements and lower carbon concentrations compared to a Laissez-Faire approach. When member countries can fully commit to remaining in the coalition, the agency leverages credit markets to smooth consumption over time, creating additional fiscal space for further technological investments. This outcome remains robust even under partial commitment, provided that the dynamics of carbon concentration lead to a long-term concentration level higher than at the coalition's inception.