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This book is a collection of essays which examine how the properties of aggregate variables are influenced by the actions and interactions of heterogenous individuals in different economic contexts. The common denominator of the essays is a critique of the representative agent hypothesis. If this hypothesis were correct, the behaviour of the aggregate variable would simply be the reproduction of individual optimising behaviour. In the methodology of the hard sciences, one of the achievements of the quantum revolution has been the rebuttal of the notion that aggregate behaviour can be explained on the basis of the behaviour of a single unit: the elementary particle does not even exist as a single entity but as a network, a system of interacting units. In this book, new tracks in economics which parallel the developments in physics mentioned above are explored. The essays, in fact are contributions to the analysis of the economy as a complex evolving system of interacting agents.
"Chapter 1 develops a heterogeneous-agent general equilibrium model that incorporates both intensive and extensive margins of labor supply. A nonconvexity in the mapping between time devoted to work and labor services distinguishes between extensive and intensive margins. We consider calibrated versions of this model that differ in the value of a key preference parameter for labor supply and the extent of heterogeneity. The model is able to capture the key features of the empirical hours worked distribution, including how individuals transit within this distribution. We then study how the various specifications influence labor supply responses to temporary shocks and permanent tax changes, with a particular focus on the intensive and extensive margin elasticities in response to these changes. We find important interactions between heterogeneity and the extent of curvature in preferences. Chapter 2 builds a model of family labor supply in which individuals choose between full-time work, part-time work, and nonemployment. The model is calibrated to replicate the movements of both male and female workers among these states. The willingness to substitute hours over time (the so-called intertemporal elasticity of labor supply) is critical for many economic analysis. A common strategy for uncovering the value of this willingness is to carry out structural estimation on micro panel data. One general issue in this estimation exercises using micro data is that misspecification of the constraints that individuals face is likely to influence inference about preference parameters. In the model economy, although the individual labor supply problem is a discrete choice problem, individuals are able to adjust hours along the intensive margin by moving between part-time and fulltime work. Intuitively, adjustment along the intensive margin potentially allows one to estimate the true value of the underlying curvature parameter describing the utility from leisure. We explore the extent to which standard labor supply methods can achieve this in our setting. Although these methods deliver precise estimates that are significantly different from zero, the estimates are effectively unrelated to the true underlying values. These methods also deliver elasticity estimates for women, even when the underlying preference parameters are the same for men and women. Chapter 3 investigates the optimal progressive tax code in an incomplete-market economy in which households are linked intergenerationally by altruism and earning ability. The model economy is calibrated to that of the US with the progressive tax code suggested by Gouviea and Strauss (1994). First, I compute the equilibrium with the optimal progressive tax code. Second, I investigate the extent to which the size of government welfare programs affects the optimal progressivity of the income tax code. I find that the optimal tax code for an economy populated with altruistic households is approximately equivalent to a proportional tax of 23.1% with a fixed deduction of approximately $17,000 in 1990 US dollars. For an economy populated with non-altruistic households, however, these numbers are 18.8% and $12,000 respectively. This result implies that inequality is more severe in an economy with intergenerational links so that the policy maker requires a more progressive tax system to provide insurance. Additionally, I find that when the size of the government welfare program is chosen carefully, the additional insurance benefits from the progressive income tax code disappear"--Pages iv-v.
This dissertation consists of two chapters that explore how micro-level heterogeneity helps us understand the dynamics of macroeconomic variables. Chapter 2 shows that the evolving likelihood of marriage and divorce is an essential factor in accounting for the changes in housing decisions over time in the United States. I build and estimate a life-cycle model of single and married households who face exogenous age-dependent marital transition shocks and then conduct a decomposition analysis between 1970 and 1995. The results show that household formation shocks could account for about 30% of the increase in the single's homeownership rate and play a crucial role in generating the observed sign of change in portfolio share of married households. The extended analysis on recent years after 1995 shows that the continuing decrease in marriage prospects contributed to push up the single's homeownership rate during the housing boom in the mid 2000s. Chapter 3 develops a state-space model with a state-transition equation that takes the form of a functional vector autoregression and stacks macroeconomic aggregates and a cross-sectional density. The measurement equation captures the error in estimating log densities from repeated cross-sectional samples. The log densities and the transition kernels in the law of motion of the states are approximated by sieves, which leads to a finite-dimensional representation in terms of macroeconomic aggregates and sieve coefficents. We illustrate how the model works based on the simulation of the Krusell-Smith economy and conduct an empirical analysis on the joint dynamics of technology shocks, per capita GDP, employment rates, and the earnings distribution.
"The first chapter of this dissertation is based on the observation that during the past 50 years, the US economy has been characterized by a rapid decline of labor unions and a substantial rise in wage inequality. The chapter proposes that the rise in the skill premium in the non-union sector, for instance, due to technical change, can potentially explain these trends. Based on the premise that labor unions compress wages between skilled and unskilled workers, a larger skill premium encourages skilled workers to withdraw from the union. If this is accompanied by a fall in the productivity of unskilled workers, firms become more reluctant to hire the relatively expensive union workers, reinforcing the decline in the unionization rate. To evaluate this hypothesis, we develop a macroeconomic model of endogenous union membership with heterogenous agents, where union members are selected from the middle of the skill distribution and have significant wage gains that are decreasing in skill, consistent with US evidence. The model predicts that the rise in skill prices in the non-union sector explains 30-60% of the decline in the unionization rate. It was argued that the declining union activity contributed to the rise in wage inequality by changing the labor force composition. We find this effect to be much smaller due to selection into union jobs. In the second chapter, I investigate the role of heterogeneity and misaggregation in explaning the empirically missing correlations between the relative consumption and real exchange rates between countries, referred to as the Backus-Smith puzzle. I construct a two-country general-equilibrium model with heterogeneous households that choose to consume either an imported good, or its domestic variant. I show that upon aggregation, the corresponding 'representative agent'' acts as if he is subject to taste shocks, which works towards weakening the tight link between relative prices and quantities. The model therefore constitutes a microfoundation for what shows up as taste shocks in the data. I argue that the missing correlations could be an artifact of heterogeneity"--Page v-vi.
This dissertation studies macroeconomics with regional heterogeneity in three general dimensions. First, it documents some novel empirical patterns of regional heterogeneity (in Chapter 1, 2, 3). Second, these empirical facts are used to identify key economic forces underlying theoretical models (in Chapter 1 and 3). Third, aggregate implications of regional heterogeneity are also studied (in Chapter 1). In the first chapter of this dissertation, I highlight time-varying regional risk and federal fiscal transfer policy as two competing forces driving regional risk sharing over the business cycle and in turn quantify their impacts on aggregate fluctuations. I find that during an economic downturn, increased regional risk worsens risk sharing and amplifies the impact of aggregate productivity shocks. However, state-contingent federal government transfers provide additional risk sharing and help stabilize the aggregate economy, by providing insurance to the regions that need it the most. In the second chapter (joint with Noah Williams), we first estimate a quarterly dataset for state-level aggregates by building a novel empirical framework that allows for mixed-frequency raw data with measurement errors. We then apply this dataset to study the monetary policy effects at the state levels. We find that states behave remarkably homogeneous with each other in their responses of output and price to an unanticipated monetary policy shock. In the third chapter (joint with Noah Williams), we use the state-level quarterly dataset to analyze the impact of unexpected changes in federal personal and corporate income taxes. We find substantial heterogeneity in the impact of federal fiscal policy across states, with more than half having no significant response to the tax cuts. In addition, less capital-intensive states have larger responses to corporate tax cuts. Although puzzling in standard models, a model with corporate and non-corporate sectors is consistent with this evidence. Overall, our results suggest the importance of variation and reallocation across states in evaluating federal policy.