Research
PUBLISHED AND ACCEPTED PAPERS
Rescue Policies for Small Businesses during the COVID-19 Recession (Latest draft, online appendix) (Earlier CESifo working paper) (Twitter)
with Leo Kaas and Haomin Wang, Review of Economic Dynamics, vol. 51, 2023. https://doi.org/10.1016/j.red.2023.06.003 (link)
While the COVID-19 pandemic had a large and asymmetric impact on firms, many countries quickly enacted massive business rescue programs which are specically targeted to smaller firms. Little is known about the effects of such policies on business entry and exit, investment, factor reallocation, and macroeconomic outcomes. This paper builds a general equilibrium model with heterogeneous and financially constrained firms in order to evaluate the short- and long-term consequences of small firm rescue programs in a pandemic recession. We calibrate the stationary equilibrium and the pandemic shock to the U.S. economy, taking into account the factual Paycheck Protection Program (PPP) as a specic policy. We find that the policy has only a modest impact on aggregate output and employment because (i) jobs are saved predominately in the smallest firms that account for a minor share of employment and (ii) the grant reduces the reallocation of resources towards larger and less impacted firms. Much of the reallocation effects occur in the aftermath of the pandemic episode. By preventing inefficient liquidations, the policy dampens the long-term declines of aggregate consumption and of the real wage, thus delivering small welfare gains.
Replication package available on Github: link
Presentations: SED 2022, Mannheim Workshop on Firm Heterogeneity and Macro (June 2022), CEF 2022, University of Barcelona (January 2022), Munich Center for the Economics of Ageing (January 2022), Winter Meeting of the Econometric Society (Dec 2021), IMF-TARC Conference (Dec 2021)
The Aggregate Consequences of Tax Evasion with G. Kocharkov, A. Scholl and A.Tkhir, (older wp), (published version) Review of Economic Dynamics 2021 (40) pp. 198-227
There is a sizeable overall tax gap in the U.S., albeit tax noncompliance differs sharply across income types. While only small percentages of wages and salaries are underreported, the estimated misreporting rate of self-employment business income is substantial. This paper studies how tax evasion in the self-employment sector affects aggregate outcomes and inequality. To this end, we develop a dynamic general equilibrium model with incomplete markets in which heterogeneous agents choose between being a worker and being self-employed. Self-employed agents may hide a share of their business income but are confronted with the probability of being detected by the tax authority. Our model replicates important quantitative features of U.S. data, in particular, the misreporting rate, wealth inequality, and the firm size distribution. Our quantitative findings suggest that tax evasion induces self-employed businesses to stay small. In the aggregate, tax evasion increases the size but decreases the productivity of the self-employment sector. Moreover, it increases aggregate savings and reduces wealth inequality. We show that tax revenues follow a Laffer curve in the size of the tax evasion penalty.
Replication package available on Github: link
Presentations: University of Augsburg (November 2019), T2M (March 2019), VfS (September 2018), TU Dortmund (June 2018), Computations in Economics and Finance (June 2018), University of Konstanz (December 2017), Humboldt University Berlin (February 2018)
Envelope Wages, Hidden Production and Labor Productivity with G. Kocharkov and A. Vasilev, B.E. Journal of Macroeconomics (Advances) 2019 19(2), pp.1-30 (older wp)
We evaluate the relative importance of aggregate labor productivity versus income taxes and social contributions for tax compliance in an economy with a large degree of informality. Empirical evidence points out that tax evasion in Europe happens through partially concealing wages and profits in formally registered enterprises. To this end, we build a model in which employer-employee pairs of heterogeneous productive capacities make joint decisions on the degree of tax evasion. The quantitative model is used to analyze the case of Bulgaria which has the largest informal economy in Europe and underwent a number of important tax reforms over the period 2000-2014, including the introduction of a flat income tax in 2008. The estimation strategy relies on matching the empirical series for the size of the informal economy and other aggregate outcomes for 2000-2014. Our counterfactual experiments show that the most important factor for the changing size of the informal economy is labor productivity, which accounts for more than 75% of the change. The variation in corporate income tax accounts for the rest. We find that the 2008 flat tax reform did not play any visible role in coping with informality.
Replication package available on Github: link
Presentations: EEA Cologne (August 2018), ZEW Public Finance Conference (May 2017), 21st T2M Conference in Lisbon (March 2017), 2016 Marie Curie/IAPP Informal Economy Conference in Sofia, 2016 Summer School at Balkanski-Panitza Institute for Advanced Study (BPIAS) with Prof. Philippe Aghion, University of Konstanz (2016)
WORKING PAPERS
Taxation of Top Incomes and Tax Avoidance draft CEPR working paper revise and resubmit at the International Economic Review
with G.Kocharkov, A.Scholl, A.Tkhir and Haomin Wang
This paper studies the aggregate and distributional effects of raising the top marginal income tax rate in the presence of tax avoidance. To this end, we develop a quantitative macroeconomic model with heterogeneous agents and occupational choice in which entrepreneurs can avoid taxes in two ways. On the extensive margin, entrepreneurs can choose the legal form of their business organization to reduce their tax burden. On the intensive margin, entrepreneurs can shift their income between different tax bases. In a quantitative application to the US economy, we find that tax avoidance lowers productive efficiency, generates sizable welfare losses, and reduces the effectiveness of the top marginal tax rate at lowering inequality. Tax avoidance reduces the optimal top marginal income tax rate from 47% to 43%.
Presentations: SED (2023, planned), Free University Berlin (2022), Goethe University Frankfurt (2022), University of Wisconsin-Madison (2022), ASSA 2022 Virtual Annual Meeting , Munich Center for the Economics of Ageing (MEA), CEF 2021: 27th International Conference on Computing in Economics and Finance
NEW Gendered Effects of the Minimum Wage, with Luke Haywood and Haomin Wang
Women are more likely to work in jobs with low hours than men. Low-hour jobs are associated with lower hourly wages and are more likely impacted by minimum wages that set a floor on hourly wages. We document that the first German minimum wage significantly increased women's transition towards jobs with higher weekly hours. We construct and estimate an equilibrium search model with demographic and firm productivity heterogeneity. The model replicates observed gender gaps in employment, hours and wage and the positive relationship between hours and hourly wages. We implement the minimum wage in our model with a penalty to address non-compliance. Based on our model, the minimum wage primarily reduces the gender income gap through the gender wage gap. At its 2022 level, the German minimum wage reduces the gender employment and hours gap due to an upward reallocation effect, resulting in women's increased participation in higher-hour jobs with lower separation rates. The upward reallocation effect is the strongest for women with children and varies by marital state and spousal income. While the minimum wage only modestly discourages firms from posting jobs, it shifts job offers toward full-time positions.
Presentations: UB 2nd Macro Workshop 2023, Lisbon Macro workshop 2023, Universitat Autonoma de Barcelona UAB (May 2023), Universitat de Barcelona UB (May 2023), Goethe Frankfurt University (Nov 2021), University of Konstanz (Feb 2021)
Teenage Childbearing and the Welfare State, revise and resubmit at Macroeconomic Dynamics
with Georgi Kocharkov, Jan Mellert and Haomin Wang
Teenage childbearing is a common incident in developed countries. However, teenage births are much more likely in the United States than in any other industrialized country. Most of these births are delivered by female teenagers from low-income families. The hypothesis put forward here is that the welfare state (a set of redistributive institutions) has a significant influence on teenage childbearing behavior. We develop an economic theory of parental investments and the risky sexual behavior of teenagers. The model is estimated to fit stylized facts about income inequality, intergenerational mobility, and the sexual behavior of teenagers in the United States. The welfare state institutions are introduced via tax and public education expenditure functions derived from U.S. data. In a quantitative experiment, we impose Norwegian taxes and education spending in the economic environment. The Norwegian welfare state institutions go a long way in explaining the differences in teenage birth rates between the United States and Norway.
Idiosyncratic firm risk, cash holdings and lumpy investment
This paper explores the hypothesis that the increase in firm-level risk is the main driver of the long-run increase in cash holdings by firms over the last decades. I document a novel stylized fact: the impact of firm level uncertainty on cash holdings is stronger for firms that belong to sectors with greater lumpiness in investment rates. To rationalize this empirical finding I build a dynamic model in which financially constrained firms face uncertainty about future revenues and are subject to fixed adjustment costs of investment. In the model the degree of investment lumpiness is key to amplify the effects of volatility on cash holdings. The model is estimated on the Compustat data and used in a number of counterfactual experiments. I find that the increase in firm level volatility can explain almost 90 of the observed increase in cash holdings in the period 1980-2010. Furthermore, if non-convex investment frictions are absent, the increase in cash generated by higher uncertainty is reduced by half.
Presentations: University of Barcelona (January 2019), University of Bath (March 2018), University of Pavia (March 2018), University of Konstanz (January 2018), ETH Zürich KOF Research seminar (June 2017), BPIAS 2017 Summer School of Economics (August 2017), Bocconi macro lunch workshop (June 2016)
Capital Misallocation during the Great Recession
In this paper I evaluate the contribution of financial frictions in explaining the drop in aggregate TFP through misallocation during the Great Recession. I build a quantitative model with heterogeneous establishments; with the help of the model I compute the counterfactual drop in misallocation: by how much would aggregate TFP have decreased if the credit crunch had been absent. I find that a "real recession" would have caused a drop of only 0.16 percent, as opposed to 1.04 percent found in the data; therefore financial frictions account for a significant part of the drop in aggregate TFP. The key mechanism is the following: the increase in the cost of external finance affects negatively the reallocation of productive inputs from low to high productivity firms, by dampening the growth of small-highly productive firms.
Blog mentions: NEP - DGE
Presentations: Computing in Economics and Finance (June 2018), EEA Lisbon 2017 (August 2017), RES Annual Conference, University of Sussex (March 2016), Workshop of the DFG- Priority Program 1578 (Cologne, March 2016), Bank of Chile (2015), DeNederlandscheBank (2015), University of Konstanz (2015), SAEe, Palma de Mallorca, Spain (2014), EDGE Jamboree, University of Copenhagen (2014), Ph.D. Seminar, Prof. A. Alesina, Bocconi University (2014,2015)
Economic Growth and Wealth Inequality: the Role of Differential Fertility Slides
with A. Ferrari (Bank of Italy)
The intra-cohort inequality among young increased in the last twenty years contributing to the overall increase in wealth inequality. This paper quantitatively assesses the role of parents' expectations and their subsequent fertility decision in explaining wealth inequality. To this end we solve the Barro-Becker model of fertility in a setup with aggregate and idiosyncratic shocks with incomplete markets a la Bewley. We show that a negative aggregate shock determines a fall of fertility and an increase in per-capita bequests which is greater in magnitude for the right tail of the wealth distribution thus determining an increase in wealth inequality. We calibrate the model to the U.S. economy and find that the slowdown in economic growth and the subsequent decline in fertility can explain around 40 percent of the increase in wealth inequality observed in the data. We then revisit the micro data (from SCF and PSID) and we find empirical evidence that strongly supports the model mechanism.
Presentations: Computing in Economics and Finance (June 2019), Workshop on Household Heterogeneity and Macroeconomics, ECB (May 2018), 22nd T2M Conference (March 2018, Paris), Bank of Italy (February 2018)
WORK IN PROGRESS
"Working Hours and the Child Penalty in an Equilibrium Household Search Model," with Leo Kaas, Chiara Lacava and Haomin Wang.
"Joint Taxation and Household Job-Search over the Business Cycle," with Robert Kirkby and Haomin Wang
Housing over the Life Cycle: Expectations, Inheritance and Policy, joint with Christina Barcelo, Olympia Bover, Nezih Guner, Georgi Kocharkov and Ernesto Villanueva
Income Taxation and Entrepreneurial Human Capital, joint with Almuth Scholl and Haomin Wang
DISCUSSIONS
(at the 2017 T2M Conference in Lisbon)
Giuliano Curatola and Ester Faia: "Divergent Risk-Attitudes and Endogenous Collateral Constraints"
(at the 2017 SPP workshop in Konstanz)
(at the 2014 EDGE workshop in Copenhagen)
(at the 2016 Young Swiss Economist workshop in Zurich)
F. Buera and B. Moll: "Aggregate implications of a Credit Crunch"
(at the Macro Reading Group held by L.Sala and A.Trigari, Bocconi University)