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Title: Inequality, Skills, Asset Choice, and Business Cycles

Citation Type: Dissertation/Thesis

Publication Year: 2017

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Abstract: In these essays, I study the causes and implications of differences in household wealth, income, and consumption using quantitative general equilibrium settings that are consistent with household-level data. I explore frictions that are necessary to reconcile differences in household behavior, over age, income and wealth, with micro data. Moreover, within these environments, I evaluate the aggregate implications of differences across households for the long-run and recessions. In the first chapter, “Inequality, Portfolio Choice, and the Great Recession”, I study the effect of heterogeneity, in both the level and composition of wealth, in a dynamic stochastic overlapping-generations economy where households face uninsurable unemployment, earnings, and liquidity risk. Households pay transactions costs when they adjust savings held in high expected return assets, which make such savings illiquid. They also hold liquid, lower return assets. I show that household-level disparities in liquidity are important for understanding differences in their behavior, as well as aggregate changes in consumption and investment, over the Great Recession. When I allow for a rise in both unemployment and disaster risk, reducing households’ expected income and the expected return on their illiquid savings, aggregate consumption and investment fall to levels seen in the recession. The response of aggregate consumption is sensitive to the behavior of wealth poor households with a high marginal utility of consumption. Facing a large possible fall in earnings, they build precautionary savings in liquid assets. However, in a typical incomplete markets model with a single asset, all households would respond to the fall in the expected return on savings following a rise in disaster risk. The resulting substitution effect would offset much of the negative wealth effect on aggregate consumption. In contrast, when much of wealth is illiquid, many households do not respond to a fall in its expected return, substantially dampening the substitution effect. Moreover, wealthier households, more likely to adjust their portfolios, increase their shares of liquid assets. This results in a large fall in aggregate investment. In the second chapter, “Skill Premia, Wage Risk, and the Distribution of Wealth”, I challenge the conventional assumption of i.i.d wage shocks in a standard heterogeneous household economy with uninsurable idiosyncratic risk and studies the implications of unobserved heterogeneity, both in the mean and variance of wage processes, on aggregate wealth and income inequality and life-cycle profiles of earnings, income, and wealth by education groups. I document strong evidence of conditional means and variances of wage processes that rise with skills from the PSID using minimum distance estimation. The implications of these estimated skill-specific wage processes are studied in an incomplete-markets quantitative general equilibrium OLG model wherein households choose their education level. A discrete skill choice partly endogenizes earnings risk across households and introduces a channel through which households’ schooling decision affects their earnings as well as wealth. I show that, in contrast to a model with a common wage shock, the model with empirically consistent wage processes that differ by skills successfully explains much of aggregate inequality as well as life-cycle earnings, income, and wealth of skilled and unskilled households. Furthermore, I find that college education subsidies directed at the poor decrease wealth inequality. However, these subsidies reduce the quality of college graduates and increase the quality of those left behind. In the third chapter, “Segmented Asset Market and the Distribution of Wealth”, with Aubhik Khan, we study the effects of segmented asset markets on wealth distribution in a quantitative OLG model. Using the 2004 SCF data, we find significant heterogeneity in household portfolio choice across ages and wealth levels. First, 30 percent of the U.S. households hold high-yield assets defined as stocks, bonds, and mutual and hedge funds. Second, the probability of a household participating in highyield asset markets is rising with age and wealth level. Lastly, wealthy households tend to hold more of their financial assets as high-yield assets. Solving for stationary equilibrium, we find that asset market segmentation is an important source of wealth inequality. Segmented asset markets lead to a substantial increase in wealth dispersion across households. Specifically, an alternative model without market segmentation generates a Gini coefficient for wealth that is approximately 7 to 10 percent lower. Second, we reproduce the empirical findings that households are more likely to hold high-yield assets if they are older and wealthier.

Url: https://etd.ohiolink.edu/!etd.send_file?accession=osu1492448320261651&disposition=inline

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Authors: Kim, Heejeong

Institution: The Ohio State University

Department: Economics

Advisor: Aubhik Khan

Degree: Doctor of Philosophy

Publisher Location: Columbus, OH

Pages: 200

Data Collections: IPUMS CPS

Topics: Family and Marriage, Labor Force and Occupational Structure

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