Working papers:

Using French administrative data on job-creating entrepreneurs, I estimate a life-cycle model in which risk-averse individuals can start businesses and return to paid employment. I estimate that the unobserved benefits of entrepreneurship represent 6,100 pre-tax euros per year (some 15% of profits), which adds up to 67,000 euros over the average entrepreneurial spell. For new entrepreneurs, the option of returning to paid employment is worth 82,000 euros. The main source of option value is not the unobserved heterogeneity in entrepreneurial abilities but rather the random-walk component of productivity. Together, unobserved benefits and this option value explain 42% of firm creations.

Presented at: Adam Smith, FIRS, EFA
Scheduled at: WFA

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R&R at the Review of Financial Studies

I structurally estimate a life-cycle model of portfolio choices that incorporates the relationship between stock market returns and the skewness of idiosyncratic income shocks. The cyclicality of skewness can explain (i) low stock market participation among young households with modest financial wealth and (ii) why the equity share of participants slightly increases until retirement. With an estimated relative risk aversion of 5 and yearly participation cost of $290, the model matches the evolution of wealth, of participation and of the conditional equity share over the life-cycle. Nonetheless, I find that cyclical skewness increases the equity premium by at most 0.5%.

Presented at: WFA, Texas Finance Festival, CEPR Household Finance, NFA

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with Thomas Chaney, Zongbo Huang, David Sraer and David Thesmar
R&R at the Journal of Finance

While a mature literature shows that credit constraints causally affect firm-level investment, this literature provides little guidance to quantify the economic effects implied by these findings. Our paper attempts to fill this gap in two ways. First, we use a structural model of firm dynamics with collateral constraints, and estimate the model to match the firm-level sensitivity of investment to collateral values. We estimate that firms can only pledge about 19% of their collateral value. Second, we embed this model in a general equilibrium framework and estimate that, relative to first-best, collateral constraints are responsible for 11% output losses.

Presented at: NBER SI (2x), WFA, Capri Labor & Finance

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  • Social Security and Trends in Inequality

with Max Miller and Natasha Sarin

Recent influential work finds large increases in inequality in the U.S., based on measures of wealth concentration that notably exclude the value of social insurance programs. This paper revisits this conclusion by incorporating Social Security retirement benefits into measures of wealth inequality. Wealth inequality has not increased in the last three decades when Social Security is accounted for. When discounted at the risk-free rate, real Social Security wealth increased substantially from $5.6 trillion in 1989 to just over $42.0 trillion in 2016. When we adjust for systematic risk coming from the covariance of Social Security returns with the market portfolio, this increase remains sizable, growing from over $4.6 trillion in 1989 to $34.0 trillion in 2016. Consequently, by 2016, Social Security wealth represented 57% of the wealth of the bottom 90% of the wealth distribution. Redistribution through programs like Social Security increases the progressivity of the economy, and it is important that our estimates of wealth concentration reflect this.

Presented at: Chicago Booth Household Finance Conference
Scheduled at: NYU Stern Conference on Household Finance

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  • Labor Market Risk and the Private Value of Social Security

Social Security provides insurance against idiosyncratic income risk but exposes workers to systematic risk because benefits are indexed to the evolution of aggregate earnings. I calibrate a life-cycle model to compare workers’ certainty equivalent valuation of Social Security to its net present value discounted at the risk-free rate. I show that, overall, labor market risk reduces current workers’ private value of Social Security by 46%. This adjustment sums up to $11.4 trillions on the national scale and the equity premium is its main determinant. For workers under 30, the certainty equivalent of Social Security is negative. Exposure to systematic risk through Social Security peaks relatively late in the life-cycle.

Presented at: LBS Finance Symposium, CEAR-RSI Household Finance Workshop
Scheduled at: FIRS

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Works in progress:

with Paolo Sodini and Yapei Zhang

Using Swedish administrative panel data on individual’s wages and portfolio holdings, we show that countercyclical labor income downside risk reduces households’ willingness to invest in financial market. We start by computing the cross-sectional variance and skewness of wage growth by occupation and year from 2001 to 2013. Then, we show that occupations for which these measures of labor income risk correlate with stock market fluctuations have lower participation rates and invest a smaller share of their financial wealth in risky asset. In line with theoretical predictions, these effects are stronger for individuals with modest financial wealth. Finally, we also show that households invest less in assets whose returns negatively correlates with downside risk in their profession.

Presented at: Labor & Finance Group
Scheduled at: SFS Cavalcade, Adam Smith, MFA, FIRS

with Jean-Noël BarrotDavid Sraer and David Thesmar