Copyright (c) 2008 All rights reserved. http://works.bepress.com/kjetil_storesletten Recent documents in Kjetil Storesletten en-us Thu, 03 Jan 2008 07:08:18 PST 3600 http://works.bepress.com/kjetil_storesletten/17 http://works.bepress.com/kjetil_storesletten/17 Mon, 29 Jan 2007 08:17:35 PST What is the effect of non-tradeable idiosyncratic risk on asset-market risk premiums? Constantinides and Duffie (1996) and Mankiw (1986) have shown that risk premiums will increase if the idiosyncratic shocks become more volatile during economic contractions. We add two important ingredients to this relationship: (i) the life cycle, and (ii) capital accumulation. We show that in a realisticallycalibrated life-cycle economy with production these ingredients mitigate the ability of idiosyncratic risk to account for the observed Sharpe ratio on U.S. equity. While the Constantinides-Duffie model can account for the U.S. value of 41% with a risk-aversion coefficient of 8, our model generates a Sharpe ratio of 33%, which is roughly half-way to the complete-markets value of 25%. Almost all of this reduction is due to capital accumulation. Life-cycle effects are important in our model -- we demonstrate that idiosyncratic risk matters for asset pricing because it inhibits the intergenerational sharing of aggregate risk -- but their net effect on the Sharpe ratio is small. Kjetil Storesletten Work in Progress http://works.bepress.com/kjetil_storesletten/15 http://works.bepress.com/kjetil_storesletten/15 Mon, 29 Jan 2007 07:59:30 PST This paper investigates the welfare costs of business cycles in a heterogeneous agent, overlapping generations economy which is distinguished by idiosyncratic labor market risk. Aggregate variation arises both in terms of aggregate productivity shocks and countercyclical variation in the volatility of idiosyncratic shocks. Based on both aggregate data and microeconomic data from the Panel Study on Income Dynamics, we "nd the welfare bene"ts of eliminating aggregate variation to be large } an order of magnitude larger than those originally documented by Lucas (1987). The key di!erence is countercyclical variation in idiosycratic risk, which both ampli"es the welfare cost of aggregate productivity shocks and imposes a cost of its own. The magnitude of these e!ects increases non-linearly in risk aversion. Our results, therefore, are consistent with the increasingly popular notion that distributional e!ects are an important aspect of understanding the welfare cost of business cycles. Kjetil Storesletten Published Papers http://works.bepress.com/kjetil_storesletten/14 http://works.bepress.com/kjetil_storesletten/14 Mon, 29 Jan 2007 07:48:32 PST Focusing on the net fiscal effects, the gain from admitting immigrants is computed for a welfare state with large expenditures and a large tax burden (Sweden). Prices and behavior are held constant, which allows a detailed analysis of the effects of immigration. The present value of future tax revenues minus outlays is potentially large; USD 23,500 per young working-age immigrant, but an average new immigrant represents a net government loss of USD 20,500. The dominant factors are employment rates and age. For young working-age immigrants, the ''break-even'' participation rate for which the gain would be zero is 60%, well below the empirical rate for this group Kjetil Storesletten Published Papers http://works.bepress.com/kjetil_storesletten/13 http://works.bepress.com/kjetil_storesletten/13 Mon, 29 Jan 2007 07:31:26 PST We model income redistribution with dynamic distortions as determined by rational voting without commitment among individuals of different types and income realizations. We find that redistribution is too persistent relative to that chosen by a planner with commitment. The difference is larger, the lower is the political influence of young agents, the lower is the altruistic concern for future generations, and the lower is risk-aversion. Furthermore, there tends to be too much redistribution in the political equilibrium. Finally, smooth preference aggregation, as under probabilistic voting, produces less persistence and does not admit multiple equilibria, which occur under majority-voting aggregation. Kjetil Storesletten Published Papers http://works.bepress.com/kjetil_storesletten/12 http://works.bepress.com/kjetil_storesletten/12 Mon, 29 Jan 2007 06:46:58 PST This article presents a tractable dynamic general equilibrium model explaining cross-country data on geographical mobility, unemployment, and labor market institutions. Rational forward-looking agents vote on unemployment insurance (UI). Agents with higher moving costs (larger attachment to their location) prefer more generous UI. Attachment is assumed to increase with the duration of residence. UI mitigates incentives for moving and increases, therefore, the fraction of attached agents and the political support for UI. This self-reinforcing mechanism can yield two steady-states: one "European" and one "American." The former (latter) features high (low) unemployment, low (high) geographical mobility, and high (low) UI. Kjetil Storesletten Published Papers http://works.bepress.com/kjetil_storesletten/11 http://works.bepress.com/kjetil_storesletten/11 Mon, 29 Jan 2007 05:05:53 PST A striking feature of U.S. data on income and consumption is that inequality increases with age. This paper asks if individual-specific earnings risk can provide a coherent explanation. We find that it can. We construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes. Earnings inequality is exogenous and is calibrated to match data from the U.S. Panel Study on Income Dynamics. Consumption inequality is endogenous and matches well data from the U.S. Consumer Expenditure Survey. The total riskhouseholds face is decomposed into that realized before entering the labor market and that realized throughout the working years. In welfare terms, the latter is found to be more important than the former. Kjetil Storesletten Published Papers http://works.bepress.com/kjetil_storesletten/10 http://works.bepress.com/kjetil_storesletten/10 Mon, 29 Jan 2007 04:45:23 PST This paper analyzes an overlapping generation model of redistribution and public good provision under repeated voting. Expenditures are financed through age-dependent taxation that distorts human capital investment. Taxes redistribute income both across skill groups and across generations.We focus on politicoeconomic Markov equilibria and contrast these with the Ramsey allocation under commitment. The model features indeterminate equilibria, with a key role of forward-looking strategic voting. Due to the lack of commitment to future policies, the tax burden may be on the wrong side of the dynamic Laffer curve. Moreover, restrictions on government policies can in some cases be welfare improving. John Hassler Submitted Papers http://works.bepress.com/kjetil_storesletten/8 http://works.bepress.com/kjetil_storesletten/8 Mon, 29 Jan 2007 03:54:35 PST Using a calibrated general equilibrium overlapping generations model, which explicitly accounts for differences between immigrants and natives, this paper investigates whether a reform of immigration policies alone could resolve the fiscal problems associated with the aging of the baby boom generation. Such policies are found to exist and are characterized by an increased inflow of working-age high- and medium-skilled immigrants. One particular feasible policy involves admitting 1.6 million 40-44-year-old highskilled immigrants annually. These findings are illustrated by computing the discounted government gain of admitting additional immigrants, conditional on their age and skills. Kjetil Storesletten Published Papers http://works.bepress.com/kjetil_storesletten/7 http://works.bepress.com/kjetil_storesletten/7 Mon, 29 Jan 2007 03:27:11 PST This paper provides an analytical characterization of Markov perfect equilibria in a model with repeated voting, where agents vote over distortionary income redistribution. A key result is that the future constituency for redistributive policies depends positively on current redistribution, since this affects both private investments and the future distribution of voters. The model features multiple equilibria. In some equilibria, positive redistribution persists forever. In other equilibria, even a majority of beneficiaries of redistribution vote strategically so as to induce the end of the welfare state next period. Skill-biased technical change makes the survival of the welfare state less likely. John Hassler Published Papers http://works.bepress.com/kjetil_storesletten/6 http://works.bepress.com/kjetil_storesletten/6 Mon, 29 Jan 2007 02:34:41 PST Is individual labor income more risky in recessions? This is a difficult question to answer because existing panel data sets are so short. To address this problem, we develop a generalized method of moments estimator that conditions on the macroeconomic history that each member of the panel has experienced. Variation in the cross-sectional variance between households with differing macroeconomic histories allows us to incorporate business cycle information dating back to 1930, even though our data do not begin until 1968. We implement this estimator using household-level labor earnings data from the Panel Study of Income Dynamics. We estimate that idiosyncratic risk is (i) highly persistent, with an annual autocorrelation coefficient of 0.95, and (ii) strongly countercyclical, with a conditional standard. Kjetil Storesletten Published Papers