The Optimal Dole with Risk Aversion, Job Destruction, and Worker Heterogeneity

This paper extends earlier research on optimal unemployment insurance (UI) by developing an equilibrium search model that encompasses simultaneously several theoretical and institutional features that have been treated one-by-one (or not at all) in previous discussions of optimal UI. In particular, the model we develop allows us to determine the optimal potential duration of UI benefits as well as the optimal UI benefit amount; assumes (realistically) that not all workers are eligible for UI benefits; allows examination of various degrees of risk aversion by workers; models labor demand so that the job destruction effects of UI are taken into account; and treats workers as heterogeneous. The model suggests that the current statutory replacement rate of 50 percent provided by most states in the United States is close to optimal, but that the current potential duration of benefits (which is usually 26 weeks) is probably too short. This basic result--that the optimal UI system is characterized by a fairly low replacement rate and a long potential duration-- conflicts with most of the existing literature on optimal UI. We argue, however, that the result is consistent with a large literature on optimal insurance contracts in the presence of moral hazard.unemployment insurance, job destruction, Davidson, Woodbury

A Stochastic-Dynamic Model of Costly Reversible Technology Adoption

We develop a stochastic-dynamic model of technology adoption that imposes fewer restrictions on behavior than do previous studies of similar decision problems. Like these previous studies, our model is forward-looking and can be used to demonstrate the additional "hurdle rate" that must be met before adoption will take place when the future state of the world is uncertain. Unlike these previous studies, our approach does not impose the untenable assumptions that investment in a new technology is irreversible or that technologies have unlimited useful lifetimes. Rather, we address the more reasonable situation of costly reversibility and limited lifetimes. Our solution method utilizes Bellman's equation and standard dynamic programming techniques. Similar methods have been used previously to examine irreversible investment and adoption problems, but to our knowledge no application to costly reversible adoption has yet to appear in the literature. Our behavioral simulations, calibrated for irrigated cotton farming in California's San Joaquin Valley, demonstrate that the more restrictive approach can produce significant model prediction errors and can overlook important features of the adoption problem when decisions are reversible and technologies eventually become obsolete. Policy implications are discussed.dynamic optimization, irrigation, reversible, technology adoption, water, Research and Development/Tech Change/Emerging Technologies,

Simulating the deep decarbonisation of residential heating for limiting global warming to 1.5C

Whole-economy scenarios for limiting global warming to 1.5C suggest that direct carbon emissions in the buildings sector should decrease to almost zero by 2050, but leave unanswered the question how this could be achieved by real-world policies. We take a modelling-based approach for simulating which policy measures could induce an almost-complete decarbonisation of residential heating, the by far largest source of direct emissions in residential buildings. Under which assumptions is it possible, and how long would it take? Policy effectiveness highly depends on behavioural decision- making by households, especially in a context of deep decarbonisation and rapid transformation. We therefore use the non-equilibrium bottom-up model FTT:Heat to simulate policies for a transition towards low-carbon heating in a context of inertia and bounded rationality, focusing on the uptake of heating technologies. Results indicate that the near-zero decarbonisation is achievable by 2050, but requires substantial policy efforts. Policy mixes are projected to be more effective and robust for driving the market of efficient low-carbon technologies, compared to the reliance on a carbon tax as the only policy instrument. In combination with subsidies for renewables, near-complete decarbonisation could be achieved with a residential carbon tax of 50-200Euro/tCO2. The policy-induced technology transition would increase average heating costs faced by households initially, but could also lead to cost reductions in most world regions in the medium term. Model projections illustrate the uncertainty that is attached to household behaviour for prematurely replacing heating systems

Implications of diverging social and private discount rates for investments in the German power industry: a new case for nuclear energy?

For power-plant investments, utilities rely after liberalisation on private financial markets, which are in general distorted. The (related) split of social and private time-preference rates provides a new reason for a welfare-enhancing policy intervention, complementary to environmental policy (Heinzel and Winkler 2007). This paper quantifies it and studies its relevance for the German power industry around 2015. The distortions remain moderate as compared to other investment subsidies. However, in contrast to environmental policy alone, its additional implementation makes nuclear power the first option even in the nuclear high-cost scenario. Both policies enhance ecological structural change, which end-of-pipe abatement delays. --distorted time preferences,environmental and technology policy,conventional energy technologies

Are Americans Saving "Optimally" for Retirement?

This paper examines the degree to which Americans are saving optimally for retirement. Our standard for assessing optimality comes from a life-cycle model that incorporates uncertain lifetimes, uninsurable earnings and medical expenses, progressive taxation, government transfers, and pension and social security benefit functions derived from rich household data. We solve every household''s decision problem from death to starting age and then use the decision rules in conjunction with earnings histories to make predictions about wealth in 1992. Ours is the first study to compare, household by household, wealth predictions that arise from a life-cycle model that incorporates earnings histories for a nationally representative sample. The results, based on data from the Health and Retirement Study, are striking we find that the model is capable of accounting for more than 80 percent of the 1992 cross-sectional variation in wealth. Fewer than 20 percent of households have less wealth than their optimal targets, and the wealth deficit of those who are undersaving is generally small.

The effects of aging and myopia on the pay-as-you-go social security systems of the G7

The Social Security systems of the G7 countries were established in an era when populations were young and the number of contributors far outweighed the number of beneficiaries. Now, for each beneficiary there are fewer contributors, and this downward trend is projected to accelerate. To evaluate the prospects for these economies we develop an overlapping generations model in which growth is endogenously fueled by individuals' investments in physical and human capital and by the government's investment in human capital via public education expenditures. We analyze individuals' behavior when their expectations over their length of life are rational and adaptive (myopic). We examine for each of the economies and for each of the expectation assumptions whether policies exist that can offset the effects of aging, should they be adverse. Further, we examine how policies aimed at a specific target group affect the welfare of the economy as a whole.Social security ; Group of Seven countries

Optimal Warranty Period for Free-replacement Policy of Agm Batteries

The objective of this study is to analyze the suitability of the age-based warranty model and a millage based warranty model for absorbent glass mat batteries (AGM) for the automobile industry. The battery life expectancy can be assessed and described by a combination of different terms such as: state of health (SOH), deep of discharge (DOD), state of energy (SOE) and state of charge (SOC). However, using actual data from the field, the implementation of reliability engineering and statistical modeling we aim to calculate optimal limits for warranty policies that minimize warranty costs. The outcomes of this research will enable battery manufacturers, motor companies and warranty managers in decisions making strategies for cost savings in warranty projects without negatively affecting customer satisfaction

Taxing capital? : not a bad idea after all!

In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that the optimal capital income tax rate is not only positive, but is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of$35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system. Klassifizierung: E62, H21, H2

The gender gap of returns on education across West European countries

"We study the returns on education in Europe in a comparative perspective. We extend the model of de la Fuente [(2003). Human Capital in a Global and Knowledgebased Economy. part II: Assessment at the EU Country Level. Report for the European Commission], by estimating the values of the relevant parameters for men and women and introducing several variables specifically related to maternity leaves and benefits. As a preliminary step, we evaluate the effect of education on the wage profile. We estimate the Mincerian coefficients for 12 West European countries using the EU-SILC data for 2007 and use them as input in the optimisation problem of the individual to calibrate the model. Finally, we analyse the impact and relevance of several public policy variables. In particular, we evaluate the elasticities of the returns on education with respect to unemployment benefits, marginal and average tax rates, maternity leaves and childcare benefits." (Author's abstract, IAB-Doku) ((en))Bildungsertrag - internationaler Vergleich, Humankapital, geschlechtsspezifische Faktoren, Westeuropa, Österreich, Belgien, Dänemark, Frankreich, Bundesrepublik Deutschland, Irland, Italien, Luxemburg, Niederlande, Portugal, Spanien, Schweden

Replacing the U.S. Income Tax with a Progressive Consumption Tax: A Sequenced General Equilibrium Approach

This paper examines the welfare consequences of changing the current U.S. income tax system to a progressive consumption tax. We compute a sequence of single period equilibria in which savings decisions depend on the expected future return to capital. In the presence of existing income taxes, the U.S. economy is assumed to lie on a balanced growth path. With the change to a consumption tax, individuals save more and initially consume less. As the capital stock grows, consumption eventually overtakes that of the original path, and the economy approaches the new balanced growth path with higher consumption and a greater capital stock. Both the transition and the balanced growth paths enter our welfare evaluations. We find that the discounted present value of the stream of net gains is approximately $650 billion in 1973 dollars, just over one percent of the discounted present value of national income. Larger gains occur if further reform of capital income taxation accompanies the change. We examine the sensitivity of the results, both to the design of the consumption tax and to the values of elasticity and other parameters. The paper also contains estimates of the time required to adjust from one growth path to the other.