Working Papers

Permanent-Income Inequality

Apr 26, 2018

With
Brant Abbott

Abstract
We estimate the level and evolution of inequality in assets, human capital wealth and permanent income. Our definition of the latter variable does not rely on a specific utility function and imposes no restrictions on income processes. We characterize the distribution of human wealth using nonparametric identification results that allow for state-dependent stochastic discounting and unobserved heterogeneity. Accounting for the value of human capital delivers a different view of inequality. We find that (i) in 2016 the top 10% shares of total wealth and permanent income were roughly 1/3 lower than the corresponding share of assets; (ii) between 1989 and 2016 the top 10% shares of total wealth and permanent income grew significantly faster than the corresponding share of asset wealth. Hence, human wealth has had a mitigating influence on overall inequality but this mitigating effect has declined over time. We show that households at the top of the assets distribution have not increased their share of human wealth. Instead, higher concentration of permanent income is due to the growing importance of assets in lifetime wealth portfolios.
DRAFT (PDF)

Citation

@techreport{abbott-gallipoli-2018PI,
  title={Permanent-Income Inequality},
  author={Abbott, Brant and Gallipoli, Giovanni},
  year={2018},
  institution={University of British Columbia}
}

Match Quality, Contractual Sorting and Wage Cyclicality

Jul 24, 2017

With
João Alfredo Galindo da Fonseca and Yaniv Yedid-Levi

Abstract
This paper studies the role of match quality for contractual arrangements, wage dynamics and workers’ retention. We develop a model in which profit maximizing firms offer a performance-based pay arrangement to retain workers with relatively high match-specific productivity. The key implications of our model hold in data from the NLSY79, where information about job histories and performance pay is available. We relate our findings to the literature on occupation heterogeneity and provide evidence that jobs in “cognitive” occupations have better match quality, exhibit higher prevalence of performance pay, display significant sensitivity of wages to business cycle conditions and last longer.

DRAFT (PDF)

Citation

@techreport{fgy2017contracts,
  title={Match Quality, Contractual Sorting and Wage Cyclicality},
  author={Galindo da Fonseca, Joao and Gallipoli, Giovanni and Yedid-Levi, Yaniv},
  year={2017},
  note = {Working Paper},
  institution={UBC, Vancouver School of Economics}
}

Markov-Chain Approximations for Life-Cycle Models

May 3, 2017

With
Giulio Fella, Jutong Pan

Abstract
Non-stationary income processes are standard in quantitative life-cycle models, prompted by the observation that within-cohort income inequality increases with age. This paper generalizes Tauchen (1986) and Rouwenhorst’s (1995) discretization methods to non-stationary AR(1) processes. We evaluate the performance of both methods in the context of a canonical finite-horizon, income-fluctuation problem with a non-stationary income process. We find that the generalized Rouwenhorst’s method performs extremely well even with a relatively small number of states.

DRAFT (PDF)

Citation

@techreport{fgp2017approximations,
  title={Markov-Chain Approximations for Life-Cycle Models},
  author={Fella, Giulio and Gallipoli, Giovanni and Pan, Jutong},
  year={2017},
  note = {Working Paper},
  institution={UBC, Vancouver School of Economics}
}

Revisiting the Relationship Between Unemployment and Wages

Jul 15, 2016

With
Joao Galindo da Fonseca and Yaniv Yedid-Levi

Abstract
We investigate the empirical relationship between wages and labor market conditions. Following work histories in the NLSY79 we document that the relationship between wages and unemployment rate differs across occupations. The results hold after controlling for unobserved match quality. This suggests that evidence about history-dependence of wages obtained from pooled samples conceals significant differences and provides an imprecise description of earning dynamics. We examine these discrepancies and offer new evidence suggesting that the sensitivity of wages to current unemployment is linked to the prevalence of performance pay.

DRAFT (PDF)

Citation


Interactive Procedural Decision Making: Experimental Evidence

May 2, 2016

With
Guidon Fenig, Yoram Halevy

Abstract
We examine coordination in private provision of public goods when agents’ contributions are complementary. When complementarity is sufficiently high an additional full-contribution equilibrium emerges, even when agents are selfish. We experimentally investigate subjects’ behavior using a between-subject design that varies complementarity. When two equilibria exist, subjects tend to coordinate on contributions close to the efficient equilibrium. When complementarity is sizable but only a zero-contribution selfish-equilibrium exists, subjects persistently contribute above it. Observed choices and other nonchoice data indicate heterogeneity among subjects and two distinct types. Homo pecuniarius maximizes profits by best-responding to beliefs, while Homo behavioralis identifies this strategy but chooses to deviate from it, sacrificing pecuniary rewards to support altruism or competitiveness.

DRAFT (PDF)

Citation

@techreport{IPDM-2018,
  title={Interactive Decision Making: Experimental Evidence},
  author={Fenig, Guidon and Gallipoli, Giovanni and Meghir, Costas and Halevy, Yoram},
  year={2018},
  institution={University of British Columbia}
}

Social Security, Endogenous Retirement and Intra-household Cooperation

Sep 16, 2013

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

Sep 1, 2013

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}
}

How Robust is the Skill-Dispersion-Complementarity Hypothesis?

Aug 1, 2013

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}
}

Household Responses to Individual Shocks: Disability and Labour Supply

Jun 6, 2011

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}
}