Recursive equilibria in an Aiyagari style economy with permanent income shocks

In this paper, we prove the existence of a recursive competitive equilibrium (RCE) for an Aiyagari style economy with permanent income shocks and perpetual youth structure. We show that there exist equilibria where borrowing constraints are never binding. This allows us to establish a non-trivial lower bound on the equilibrium interest rate. To solve the individual’s problem, we present a new approach that uses lattices of consumption functions to deal with the non-compact state space and the unbounded utility function. The approach uses only the first order conditions of the problem (Euler equations). The proof is constructive and it serves as a theoretical foundation for the convergence of a policy function iteration procedure.Permanent income shocks; incomplete markets; dynamic general equilibrium; heterogeneous agents

My Pay is Too Bad (I Quit). Your Pay is Too Good (You're Fired)

This paper is about how surpluses of labour contracts are shared by the employee and her firm. For this purpose, I look at the relationship between individual wages and employeremployee separation patterns. The paper suggests a model which estimates (otherwise unobserved) alternative wage and individual productivity measures from matched employer-employee data. These estimates can be used to address rent sharing hypotheses. Results of an application of the model to a large Danish register data set suggest that firms appropriate large shares of the returns to tenure. There is no evidence of gender discrimination with respect to rent sharing, and no evidence of rent sharing coefficients being different across regions which are distinguished by their labour market thickness.employer-employee separations; rent sharing

Long-Run Effects of Public-Private Research Joint Ventures: The Case of the Danish Innovation Consortia Support Scheme

Subsidized research joint ventures (RJVs) between public research institutions and industry have become increasingly popular in Europe and the US. We study the long-run effects of such a support scheme that has been maintained by the Danish government since 1995. To cope with identification problems we apply nearest neighbor caliper matching and conditional difference-in-difference estimation methods. Our main findings are that (i) program participation effects are instant for annual patent applications and last for three years, (ii) employment effects materialize first after one year and (iii) there are no statistically significant effects on value added or labor productivity. We further show that these overall results are primarily driven by firms that were patent active prior to joining the RJV and that there are no statistically significant effect for large firms. Both types of firms are disproportionally represented in the support program we study.public-private partnership, research joint venture, research and development, research subsidies

Firm Spin-offs in Denmark 1981-2000 - Patterns of Entry and Exit

The motivation of this paper is to add new, large sample evidence on the extent to which the likelihood of business failure or success is related to relationships between parent firms and their 'off-spring'. For this purpose we make use of an exhaustive matched employer-employee data set covering the entire Danish private sector in years 1981 to 2000 to study firm entry and exit. Special focus is on spin-offs, a particular group of small entries, which are founded by groups of persons originating from the same former workplace. We estimate a multinomial logit model in order to examine which characteristics of the founders and the parent firms increase the probability of spinning off. Next, we carry out a duration analysis of the subsequent transitions of the spin-offs, and compare their exit risks with those of other entries, which have less strong parent-progeny relationships in terms of worker flows. With respect to entry, poor performance of the parent firm is found to be a key determinant of the decision to spin off. The spin-offs are shown to have a lower death risk than the comparison group, also after controlling for a host of firm and employee characteristics. The exit risks of spin-offs and the comparison group are observed to converge over time. However, when we cater for unobserved heterogeneity the convergence turns out to be predominantly an outcome of selection rather than the result of other start-ups catching up via some learning process. For the entire sample of entries, we find a positive association between size of the entry and survival probability, and a countercyclical sensitivity of exit risk.Entry; Exit; Spin-offs; Duration analysis

The gains from early intervention in Europe: Fiscal surveillance and fiscal planning using cash data

This paper does two things. First it examines the use of real time inter-annual cash data and the role of early interventions for improving the monitoring of national fiscal policies and the correction of fiscal indiscipline. Early warnings are important because they allow us to spread the necessary adjustments over time. Examples from Germany and Italy show that large corrections are often necessary early on to make adjustments later on acceptable and to keep debt ratios from escalating. There is a credibility issue here; we find the difference between front-loaded and back-loaded adjustment schemes is likely to be vital for the time consistency of fiscal policymaking. Second, without early interventions, the later deficit reductions typically double in size – meaning governments become subject to the excessive deficit procedure and significant improvement tests more often. Thus the budget savings from early intervention and the use of cash data are significant; in our examples they are similar in size to the operating budget of the department of housing and urban development in Germany. Similar results apply in other Eurozone countries. JEL Classification: E62, H50, H68additive vs slope adjustments, cash data, early warning, fiscal credibility, fiscal surveillance

Human Capital Risk, Contract Enforcement, and the Macroeconomy

We develop a macroeconomic model with physical and human capital, human capital risk, and limited contract enforcement. We show analytically that young (high-return) households are the most exposed to human capital risk and are also the least insured. We document this risk-insurance pattern in data on life-insurance drawn from the Survey of Consumer Finance. A calibrated version of the model can quantitatively account for the life-cycle variation of insurance observed in the US data and implies welfare costs of under-insurance for young households that are equivalent to a 4 percent reduction in lifetime consumption. A policy reform that makes consumer bankruptcy more costly leads to a substantial increase in the volume of credit and insurance.

Topics in dynamic macroeconomics

In chapter 1, I provide a new model to study the consumption-saving decision in the presence of permanent income risk. It is an extension of the classical Aiyagari model. Aiyagari style economies are a workhorse model of quantitative research. For this economy, I prove the existence of a recursive competitive equilibrium and show that there exist equilibria where borrowing constraints are never binding. This allows me to establish a non-trivial lower bound on the equilibrium interest rate. To solve the individual consumption-saving problem, I present a new approach that uses lattices of consumption functions to deal with the non-compact state space and the unbounded utility function of the problem. The approach uses only the first order conditions of the problem (Euler equations). The proof is constructive and it serves as a theoretical foundation for the convergence of a policy function iteration procedure. Chapter 2 uses the model presented in chapter 1 for a quantitative analysis. The paper builds on the existing results that in models with transitory income shocks and trade in a riskless asset the welfare loss of missing insurance markets is small, and that with permanent income shocks and no trade in assets the welfare losses can become substantial. I consider an empirically relevant case in between the two extreme cases with permanent income shocks but trade in a riskless asset. I show that welfare losses from missing insurance markets in this model are still substantial. Furthermore, I show that one can closely align the welfare effects in a model without asset trade to the welfare effects in a model with asset trade by scaling the volatility of income uncertainty. I derive a scaling factor that coincides with the labor income share of total income and provide a closed form approximation formula to describe the welfare costs of permanent income shocks in the presence of market incompleteness and self-insurance. From these findings, I conclude that asset trade provides an effective channel for self-insurance also in models with permanent income shocks. In chapter 3, that is joint work with Philip Jung, we document that the firing rate volatility in Germany is 2.5 times as high as in the U.S. and contributes 60 - 70 % to the aggregate unemployment volatility, the opposite of what is found for the US. We show that wage rigidities are not at the root of these large differences. To explain the cross-country differences, we develop a labor market search model with endogenous firings, quits on the job, and match heterogeneity. We calibrate the model for Germany and the US jointly to study the institutional differences that generate the differences in business cycle behavior. We show that the model predicts the observed time-series pattern of important labor market variables for both countries well. We show that institutional differences generating lower average hiring and firing rates amplify the response of the economy to aggregate shocks. At the same time, they are responsible for substantial differences in the persistence of the unemployment rate, explaining the sluggish response to shocks in Germany compared to the US

The gains from early intervention in Europe: Fiscal surveillance and fiscal planning using cash data

oai:ojs2.journals.eurosci.net:article/2The use of real-time cash data allows us to make accurate intra-annual forecasts of an economy’s fiscal position, and to issue early warning signals for the need to correct fiscal imbalances. This paper shows how those signals can be used to design the necessary fiscal corrections, and discusses the gains that can be achieved from such interventions. Examples from Germany and Italy show that large corrections are often necessary early on to make adjustments later on acceptable and to keep debt ratios from escalating. There is a credibility issue here; we find the difference between front-loaded and back-loaded adjustment schemes is likely to be vital for the time consistency of fiscal policymaking. We also show that, without early interventions, the later deficit reductions typically double in size, meaning governments become subject to the excessive deficit procedure and significant improve-ment tests more often. Thus the budget savings from early intervention and the use of cash data are significant; in our examples they are similar in size to the operating budget of the department of housing and urban development in Germany. Similar results apply in other Eurozone countries