"Search,
Moral Hazard, and Price Dispersion" (with Brennan C. Platt) (Under review)
We characterize optimal contracts for insurance coverage of a service whose
price may vary across service providers. Households must engage in costly
search to learn the price of a particular service firm, and the presence of insurance reduces incentive to search. We construct a general equilibrium model
where the interaction of the insurer, consumers, and service firms endogenously
determine the distribution of service prices and the intensity of search. We find
that when the insurance firm is a monopolist, the equilibrium contract results
in full insurance and no price dispersion among service firms. A perfectly contestable insurance market results in a contract with partial insurance coverage
at a competitive premium and significant price dispersion. Moreover, household ex-ante utility is maximized. Reductions in search effort not only decrease
the likelihood of the household finding a low price, but indirectly weaken price
competition among service firms. We find that the indirect effect is far more
important than the direct effect, responsible for at least 89% of the cost of
moral hazard in search.
"Immigration Policies and the Social Security System in Germany" (Previously distributed under the title "Population aging, social security, and immigration policy in
Germany") (Under review)
I evaluate the effects of exogenous changes in immigration policy on individual welfare by constructing a heterogeneous agent overlapping generations model with agents differing in age, origin, and skills. Calibrating the model to Germany, I match the main features of the social security and tax systems, and account for differences in inter-generational transmission of skills and fertility between immigrants and natives. I find that a prohibition on immigration reduces welfare for the natives, whereas a policy that allows an annual inflow equal to 0.4 percent of the population increases welfare for all agents on the new balanced growth path (by 0.1 to 2.8 percent depending on the type of the agent). The key is the interaction between the social security system, taxes, and equilibrium prices: immigration reduces wages, but generates a rise in the rental rate of capital and in the number of workers per retiree, which allows for higher pension benefits and a lower consumption tax rate.
"The n-person Kalai-Smorodinsky bargaining solution manipulated via
predonations is Concessionary" (with Murat R. Sertel) (Under review)
This study examines the manipulability of simple n-person bargaining problems by pre-donations where the
Kalai-Smorodinsky (KS) solution is operant. We extend previous results on the manipulation of two-person
bargaining problems to the n-person case and show that in a world where a pre-bargaining stage is instituted
in which the bargainers are allowed to sign contracts which alter the bargaining set, agents with greater
ideal payoffs transform the bargaining set into one on which KS distributes payoffs in accordance with the
Concessionary Division Rule of disputed property. The resulting payoff distribution is efficient in that every
individual is strictly better-off relative to the original payoff allocation.
"Optimal Unemployment Insurance: Revealing Offers" (with Brennan C. Platt)
Preliminary Abstract:
Under the current unemployment insurance system in the United States, unemployed persons do not have to reveal any job offers that they receive. As long as they stay unemployed, they are covered to the full extent of insurance. However, this pushes individuals to turn down jobs because they hope to find a better one in the near future, extending the duration of unemployment. Therefore, in an environment where the insurer cannot observe the agent's search effort, lack of truthful revelation aggravates the information problem. In particular, the insurer cannot distinguish between an unemployed agent who is actually searching rather intensely for a job, getting offers while doing so, but rejecting them as he draws low wage observations (relative to the reservation wage) and another agent who simply is not searching enough. In this paper we set up a dynamic general equilibrium model to characterize the optimal unemployment insurance contract where unemployed agents voluntarily and truthfully reveal any job offers they receive, signaling the intensity of their search.
"Costly Search, Unemployment Benefits, and the Wage Distribution"
Preliminary Abstract:
In this project, we analyze equilibrium wage distribution in a market where the generosity of unemployment benefits and costly search distort the intensity of an unemployed agent's effort to find a job. In our environment an unemployment contract consists of a tax rate that the agent pays when he is employed and a benefit that he receives when he is unemployed. Benefits are a fixed fraction of the pre-unemployment wage earned by the agent. There is a continuum of firms and workers. All firms and all workers are ex-ante identical. Whenever unemployed, an agent participates in a costly search for jobs and simultaneously draws wage observations from a distribution that is determined in equilibrium. He then accepts the highest among them. Our intuition is that as unemployment insurance coverage gets more generous (when insurance reimburses a bigger percentage of the pre-unemployment wage), not only the unemployed will draw fewer observations from the wage distribution, but also firms will feel free to reduce wage offers as they realize that their chances of being undercut by another firm is lower. Hence, the wage distribution will concentrate on the left tail. This theory might have the potential to explain the longer spells of unemployment and lower wages (for workers of the same education level) in Europe relative to the U.S.
"Optimal Immigration Policy"
Preliminary Abstract:
Output maximization in an economy is a goal for a benevolent government. Since unemployment beyond the natural rate reduces the economy's potential output, one objective for the government is to maximize employment. However, sometimes job openings cannot be filled by the native population in the country for two reasons. First, the position might be offering a very low-wage with long working hours, as would be the case in field related work in agriculture or janitorial work. Second, even though the position comes with a good pay, it might require extremely high abilities that the natives do not have. In both of these cases, the vacancy has to be filled by an immigrant. However, all industrialized nations have laws that constrict immigrant inflows. In this paper, I aim to endogenously determine the immigrant inflows, depending on age and education level, that would maximize output in an in an overlapping generations economy. I would like to calibrate the model to two industrialized nations: the US and Germany. I believe this choice of countries will give me a chance to compare outcomes of two very different immigration policies. Germany is moving towards a very restrictive policy which is designed to attract very high-educated workers, but not the low-skilled, even though the latter will be much needed as demographic imbalance increases the need for their services, especially in the health care sector.
My approach is to model a single country where the objective is output maximization, assuming that there is a high enough supply of immigrants who can fill the vacancies at any time. In other words, I assume that when the United States opens its doors to foreign nationals, any available jobs will be taken by the newcomers. This is different from another excellent paper in the literature by Benhabib and Jovanovic (2008), where the objective is to maximize welfare in the world which is measured by a weighted sum of average utilities of the citizen's of the world. They find that the observed migrant flows in the world are far behind the levels that would be welfare maximizing. I expect to find a similar result for Germany.