Distortions, Efficiency and the Size Distribution of Firms

We develop a model of firms’ growth in which the tax and credit environment acts as a selection mechanism.

Journal of Macroeconomics, 45, 202-221, 2015

With
Jonathan Goyette

Abstract

We develop a model of firms’ growth in which the tax and credit environments act as selection mechanisms. Such a model, parameterized and validated using a variety of data restrictions, can rationalize observations about input choices and size patterns typical of many developing countries. Using counterfactual experiments, we show that firms’ optimal responses to the tax environment are effective in reducing efficiency losses. As a consequence, tax distortions only account for 13% of the gap in output per worker between an undistorted economy and the benchmark. Credit constraints account for 44% of this gap. However, the interaction between the cost of capital and credit constraints appears to be the most important source of misallocation and can explain up to 85% of the difference in output per worker between the benchmark and first-best.

PAPER (PDF)

Citation

@article{goyette2015distortions,
  title={Distortions, Efficiency and the Size Distribution of Firms},
  author={Goyette, Jonathan and Gallipoli, Giovanni},
  journal={Journal of Macroeconomics},
  volume={45},
  pages={202--221},
  year={2015},
  publisher={North-Holland}
}

Education and Crime over the Life Cycle

We compare two large-scale policy interventions aimed at reducing crime: subsidizing high school completion and increasing the length of prison sentences.

Review of Economic Studies, 81 (4), 1484-1517, October 2014

With
Giulio Fella

Abstract

We compare two large-scale policy interventions aimed at reducing crime: subsidizing high school completion and increasing the length of prison sentences. To this purpose we use a life-cycle model with endogenous education and crime choices. We apply the model to property crime and calibrate it to U.S. data. We find that targeting crime reductions through increases in high school graduation rates entails large efficiency and welfare gains. These gains are absent if the same crime reduction is achieved by increasing the length of sentences. We also find that general equilibrium effects explain roughly one half of the reduction in crime from subsidizing high school.

PAPER (PDF)

DATA AND CODE

Citation

@article{fella2014education,
  title={Education and Crime over the Life Cycle},
  author={Fella, Giulio and Gallipoli, Giovanni},
  journal={The Review of Economic Studies},
  volume={81},
  number={4},
  pages={1484--1517},
  year={2014},
  publisher={Oxford University Press}
}

Unobservable Skill Dispersion and Comparative Advantage

We study a theoretical mechanism linking comparative advantage to the distribution of skills in the working population.

Journal of International Economics, 92 (2), 317-329, March 2014

With
Matilde Bombardini and German Pupato

Abstract

This paper investigates a theoretical mechanism linking comparative advantage to the distribution of skills in the working population. We develop a tractable multi-country, multi-industry model of trade with unobservable skills in the labor market and show that comparative advantage derives from (i) cross-industry differences in the substitutability of workers’ skills and (ii) cross-country differences in the dispersion of skills. We establish the conditions under which higher skill dispersion leads to specialization in industries characterized by higher skill substitutability across tasks. The main results are robust when the model is extended to allow for partial observability of skills. Finally, we use distributions of literacy scores from the International Adult Literacy Survey to approximate cross-country productivity differences due to skill dispersion and we carry out a quantitative assessment of the impact of skill dispersion on the pattern of trade.

PAPER (PDF)

DATA AND CODE

Citation

@article{bombardini2014unobservable,
  title={Unobservable Skill Dispersion and Comparative Advantage},
  author={Bombardini, Matilde and Gallipoli, Giovanni and Pupato, Germ{\'a}n},
  journal={Journal of International Economics},
  volume={92},
  number={2},
  pages={317--329},
  year={2014},
  publisher={North-Holland}
}

Social Security, Endogenous Retirement and Intra-household Cooperation

We model the retirement incentives induced by the U.S. Social Security system in a framework which allows for different degrees of cooperation and strategic interaction between spouses.

With
Laura Turner

Abstract
This paper studies the retirement incentives induced by the U.S. Social Security system in a framework which allows for different degrees of cooperation and strategic interaction between spouses. We develop a model in which spouses maximize joint household utility, subject to the additional constraint that neither partner  finds it optimal to deviate from the best constrained household allocation. We show that accounting for \non- cooperative” behavior through this additional constraint can rationalize various choices of older couples observed in the 1932-42 cohort of the Health and Retirement Study. Non-cooperative behavior helps with two puzzles in the retirement literature:  (i) the clustering of benefit claiming at age 62 despite significant gains associated to delayed claiming by husbands; and (ii) the joint benefit claiming of couples. We contrast our  findings to those from a unitary model of the household, extended to include a process for declining health, and show that the latter can rationalize neither early nor joint claiming behavior if individuals can independently make benefit and labor force participation decisions.

DRAFT (PDF)

Citation

@techreport{turner2008social,
  title={Social Security, endogenous retirement and intrahousehold cooperation},
  author={Turner, Laura and Gallipoli, Giovanni and others},
  year={2013},
  institution={UBC Working paper}
}

Non-Convexities in Dynamic Programming Problems

We study the properties of models where agents choose over non-convex budget sets due to extensive margin decisions and  fixed costs.

With
Lars Nesheim

Abstract
Models where agents choose over non-convex budget sets are commonly used in the analysis of economic problems with extensive margin decisions and  fixed costs. Their solutions have interesting and distinctive features that are especially relevant in quantitative applications.  We describe how problems with non-convex choice sets differ from standard problems and investigate under which circumstances the inclusion of random shocks makes their solution identical to the solution of standard problems. A simple framework is provided for the analysis of these problems and a numerical example is illustrated.

DRAFT (PDF)

Citation

@article{gallipoli2008non,
  title={Non-convexities in dynamic programming problems},
  author={Gallipoli, Giovanni and Nesheim, Lars},
  year={2013}
}

Ability, Parental Valuation of Education and the High-School Drop Out Decision

We study how parental preferences for education affect the likelihood that a child graduates from high school. We derive new results on the identification of unobserved factor models.

Journal of Human Resources, 49 (4), 906-944, October 2014

With
Kelly Foley and David Green

Abstract

The probability of dropping out of high school varies considerably with parental education. Using a rich Canadian panel dataset, we examine the channels determining this socio-economic status effect. We estimate an extended version of Carneiro, Hansen and Heckman (2003)’s factor model, incorporating effects from cognitive and non-cognitive ability and parental valuation of education (PVE). We find that cognitive ability and PVE have substantial impacts on dropping-out and that parental education has little direct effect on dropping-out after controlling for these factors. Our results confirm the importance of determinants of pre-high school ability stocks but also indicate an important role for PVE during teenage years.

PAPER (PDF)

DATA AND CODE

Citation

@article{foley2014ability,
  title={Ability, Parental Valuation of Education, and the High School Dropout Decision},
  author={Foley, Kelly and Gallipoli, Giovanni and Green, David A},
  journal={Journal of Human Resources},
  volume={49},
  number={4},
  pages={906--944},
  year={2014},
  publisher={University of Wisconsin Press}
}

How Robust is the Skill-Dispersion-Complementarity Hypothesis?

We examine the empirical robustness of the hypothesis that countries with higher skill dispersion specialize in sectors characterized by a submodular production function.

With
Matilde Bombardini and German Pupato

Abstract
We explore the robustness of the hypothesis, First put forward by Grossman and Maggi (2000) (GM), that countries with higher skill dispersion specialize in the sector characterized by a submodular production function, i.e. the industry that cross-matches workers of different skills (henceforth referred to as SDC hypothesis). We relax the assumption of constant returns to skill, breaking the link between submodularity and the concavity of isoquants, a key feature in GM. We show that when a submodular sector displays convex isoquants, it no longer benefits from higher skill dispersion and higher skill dispersion countries may specialize in the supermodular sector. We investigate this theoretical possibility by performing a variety of simulations, based on empirical skill distributions, and find that in the vast majority of cases the SDC hypothesis is not violated.

DRAFT (PDF)

Citation

@misc{bombardini2015robust,
  title={How Robust is the Skill-Dispersion-Complementarity Hypothesis?},
  author={Bombardini, Matilde and Gallipoli, Giovanni and Pupato, Germ{\'a}n},
  year={2015}
}

Macroeconomic Effects of Job Reallocations: A Survey

We provide a critical overview of the approaches that have characterized the empirical literature on the macroeconomic effects of job reallocations.

Review of Economic Analysis, 5 (2), 127-176, 2013

With
Gigi Pelloni

Abstract

This paper critically appraises the approaches that have characterized the literature on the macroeconomic effects of job reallocations. Since Lilien’s (1982) seminal contribution there has been a flourishing of empirical analysis but no unifying theoretical framework has obtained consensus in the scientific debate. We face a corpus of research which is heterogeneous in variables’ selection and experimental design. This heterogeneity makes the evaluation of results a daunting task. As a guiding principle for our excursion we track down the methodological development of the solutions to the crucial problem of observational equivalence of aggregate and sectoral reallocation shocks. We draw two main conclusions from our analysis. The first is that the non-directional nature of reallocation shocks holds the key to the solution of the fundamental identification problem. In this sense the recent perspective on job creation and destruction
shows much promise. The second conclusion is that sectoral reallocation of labor has been responsible for no less that 1/4 and no more that 2/3 of the variance of aggregate unemployment in postwar data. While this range may seem wide it is an indication that the importance of labor reallocation may have changed over time, being quite large at particular historical junctures.

PAPER (PDF)

DATA AND CODE

Citation

@article{gallipoli2013macroeconomic,
  title={Macroeconomic Effects of Job Reallocations: a Survey},
  author={Gallipoli, Giovanni and Pelloni, Gianluigi},
  journal={Review of Economic Analysis},
  volume={5},
  number={2},
  pages={127--176},
  year={2013},
  publisher={RCEA}
}

Household Responses to Individual Shocks: Disability and Labour Supply

We study how changes in health status affect the labor supply and consumption choices of individuals and couples. We find evidence of non-cooperative behavior in couples and quantify its implications for marital insurance.

With
Laura Turner

Abstract
How do people respond to idiosyncratic shocks? Using longitudinal data from the Canadian Survey of Labour and Income Dynamics we use variation in health status to develop and estimate a life cycle framework which rationalizes observed responses of individuals and couples to disability shocks. Two puzzling findings associated with disability onset motivate our work: (1) the almost complete absence of added worker e effects within households and, (2) the fact that single workers’ labor supply responses to disability shocks are larger and more persistent than those of married workers. We argue that these facts are consistent with optimal life cycle behavior when we account for the interaction of two mechanisms: first, a dynamic human capital accumulation motive linking wages to labor supply; second, the ability of spouses to transfer time through home production. We provide evidence supporting the empirical relevance of both these mechanisms and show that dynamic labor supply decisions depend crucially on the interaction of the two. Our findings suggest that the persistence of measured wage shocks may be in part a by-product of optimal individual responses.

DRAFT (PDF)

Citation

@article{gallipoli2009household,
  title={Household Responses to Individual Shocks: Disability and Labour Supply},
  author={Gallipoli, Giovanni and Turner, Laura},
  year={2009}
}

Skill Dispersion and Trade Flows

We ask whether skill dispersion is a source of comparative advantage. We find evidence of sizable effects linking the dispersion of skills to industry specialization.

American Economic Review, 102 (5), 2327-2348, August 2012

With
Matilde Bombardini and German Pupato

Abstract

Is skill dispersion a source of comparative advantage? In this paper we use microdata from the International Adult Literacy Survey to show that the effect of skill dispersion on trade flows is quantitatively similar to that of the aggregate endowment of human capital. In particular we investigate, and find support for, the hypothesis that countries with a more dispersed skill distribution specialize in industries characterized by lower complementarity of workers’ skills. The result is robust to the introduction of controls for alternative sources of comparative advantage, as well as to alternative measures of industry-level skill complementarity.

PAPER (PDF)

DATA AND CODE

Citation

@article{BGP2012skill,
  title={Skill Dispersion and Trade Flows},
  author={Matilde Bombardini, Giovanni Gallipoli, Germ{\'a}n Pupato},
  journal={The American Economic Review},
  volume={102},
  number={5},
  pages={2327--2348},
  year={2012}
}