Optimal Delegation, Unawareness, and Financial Intermediation

We study the delegation problem between an investor and a financial intermediary. The intermediary has private information about the state of the world that determines the return of the investment. Moreover, he has superior awareness of the available investment opportunities and decides whether to reveal some of them to the investor. We show that the intermediary generally has incentives to make the investor aware of investment opportunities at the extremes, e.g. very risky and very safe projects, while leaving the investor unaware of intermediate investment options. We study how the extent to which the intermediary reveals available investment opportunities to the investor depends on the investor's initial awareness and the degree of competition between intermediaries in the market.Universidad de Málaga. Campus de Excelencia Internacional Andalucía Tech

Optimal Income Taxation and Hidden Borrowing and Lending: The First-Order Approach in Two Periods

We provide sufficient conditions for the validity of the first-order approach for two period dynamic moral hazard problems, where the agent can save and borrow secretly. We show that in addition to the concavity requirements for the standard moral hazard problem, non-increasing absolute risk aversion (NIARA) utility functions and Frisch elasticity of leisure less than one imply that the agent's problem is jointly concave in effort and asset decisions when facing the optimal contract. We also characterize the optimal contract in detail. One of the key observations is that the possibility of hidden asset accumulation makes the supporting tax-transfer system more regressive (or the optimal compensation scheme more convex) under a general class of preferences (HARA).Moral Hazard, Hidden Savings, First Order Approach, Optimal Income Taxation

Risk Sharing in Private Information Models with Asset Accumulation: Explaining the Excess Smoothness of Consumption

We derive testable implications of model in which first best allocations are not achieved because of a moral hazard problem with hidden saving. We show that in this environment agents typically achieve more insurance than that obtained under autarchy via saving, and that consumption allocation gives rise to 'excess smoothness of consumption', as found and defined by Campbell and Deaton (1987). We argue that the evidence on excess smoothness is consistent with a violation of the simple intertemporal budget constraint considered in a Bewley economy (with a single asset) and use techniques proposed by Hansen et al. (1991) to test the intertemporal budget constraint. We also construct closed form examples where the excess smoothness parameter has a structural interpretation in terms of the severity of the moral hazard problem. Evidence from the UK on the dynamic properties of consumption and income in micro data is consistent with the implications of the model.

Optimal welfare-to-work programs

A Welfare-to-Work (WTW) program is a mix of government expenditures on “passive” (unemployment insurance, social assistance) and “active” (job search monitoring, training, wage taxes/subsidies) labor market policies targeted to the unemployed. This paper provides a dynamic principal-agent framework suitable for analyzing the optimal sequence and duration of the different WTW policies, and the dynamic pattern of payments along the unemployment spell and of taxes/subsidies upon re-employment. First, we show that the optimal program endogenously generates an absorbing policy of last resort (that we call “social assistance”) characterized by a constant lifetime payment and no active participation by the agent. Second, human capital depreciation is a necessary condition for policy transitions to be part of an optimal WTW program. Whenever training is not optimally provided, we show that the typical sequence of policies is quite simple: the program starts with standard unemployment insurance, then switches into monitored search and, finally, into social assistance. Only the presence of an optimal training activity may generate richer transition patterns. Third, the optimal benefits are generally decreasing or constant during unemployment, but they must increase after a successful spell of training. In a calibration exercise based on the U.S. labor market and on the evidence from several evaluation studies, we use our model to analyze quantitatively the features of the optimal WTW program for the U.S. economy. With respect to the existing U.S. system, the optimal WTW scheme delivers sizeable welfare gains, by providing more insurance to skilled workers and more incentives to unskilled workers.

Social Preferences, Skill Segregation, and Wage Dynamics

Social Preferences, Skill Segregation, Internal Labor Market.

Intergenerational disagreement and optimal taxation of parental transfers

We study optimal taxation of bequests and inter vivos transfers in a model where altruistic parents and their offspring disagree on intertemporal trade-offs. We show that laissez-faire equilibrium is Pareto inefficient, and whenever offspring are impatient from their parents’ perspective, optimal policy involves a positive tax on parental transfers. Cautioned by the technical complications present in this class of models, our normative prescriptions do not rely on the assumption of differentiability of the agents’ policy functions

Optimal life-cycle capital taxation under self-control problems

We study optimal taxation of savings in an economy where agents face self-control problems, and we allow the severity of self-control to change over the life cycle. We focus on quasi-hyperbolic discounting with constant elasticity of inter-temporal substitution utility functions and linear Markov equilibria. We derive explicit formulas for optimal taxes that implement the efficient (commitment) allocation. We show, analytically, that if agents’ ability to self-control increases concavely with age, then savings should be subsidised and the subsidy should decrease with age. We also study the quantitative effects of age-dependent self-control problems and find that the optimal subsidies in our environment are much larger than those implied by models with constant self-control. Finally, we compare our optimal subsidies with those implied by the 401(k) plan. Although the subsidy levels in the two cases are of comparable magnitudes, the 401(k) plan implies an increasing pattern of subsidies while the optimal subsidies decrease over the life cycle

Efficient child care subsidies

We study the design of child care subsidies in an optimal welfare problem with heterogeneous private market productivities. The optimal subsidy schedule is qualitatively similar to the existing US scheme. Efficiency mandates a subsidy on formal child care costs, with higher subsidies paid to lower income earners and a kink as a function of child care expenditure. Marginal labor income tax rates are set lower than the labor wedges, with the potential to generate negative marginal tax rates. We calibrate our simple model to features of the US labor market and focus on single mothers with children aged below 6. The optimal program provides stronger participation but milder intensive margin incentives for low-income earners with subsidy rates starting very high and decreasing with income more steeply than those in the United States