Abstract: [+]

We study the distributional consequences of student debt forgiveness in present value terms, accounting for differences in repayment behavior across the earnings distribution. Full or partial forgiveness is regressive because high earners took larger loans, but also because, for low earners, balances greatly overstate present values. Consequently, forgive- ness would benefit the top decile as much as the bottom three deciles combined. Blacks and Hispanics would also benefit substantially less than balances suggest. Enrolling house- holds who would benefit from income-driven repayment is the least expensive and most progressive policy we consider.

Abstract: [+]

This paper quantifies the aggregate effects of financing constraints. We start from a standard dynamic model of investment with collateral constraints. In contrast to the existing quantitative literature, our estimation does not target the mean leverage ratio to identify the scope of financing frictions. Instead, we use a reduced-form coefficient from the recent corporate finance literature that connects exogenous shocks to debt capacity to corporate investment. We embed the estimated model in a simple general equilibrium framework and find that, relative to a frictionless benchmark, collateral constraints induce output losses of 7.1%, and TFP (misallocation) losses of 1.4%. We show that these estimated economic losses tend to be more robust to misspecification than estimates obtained by targeting leverage.

  • Countercyclical Labor Income Risk and Portfolio Choices over the Life Cycle  [pdf]
    Review of Financial Studies, 2022
Abstract: [+]

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 6 and yearly participation cost of $250, 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%.


  • Keeping Options Open: What Motivates Entrepreneurs? [pdf]
    Journal of Financial Economics, 2022
    Editor’s Choice April 2022
Abstract: [+]

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. Then, I use the dynamic model to value the option of returning to the labor market in case of failure. For new entrepreneurs, this option is worth 6.4x the average net wage in the country, which represented 136,000 euros in 2018. This option value is explained by the unobserved heterogeneity in entrepreneurial abilities and the random-walk component of productivity. Estimated unobserved benefits of entrepreneurship represent 38.6% of the average net wage pre-tax per year (some 15% of profits), or 8,250 euros in 2018. Unobserved benefits add up to 90,700 euros over the average entrepreneurial spell. Together, unobserved benefits and the option value of returning to paid employment explain 42% of firm creations.


  • Relaxing Household Liquidity Constraints through Social Security [pdf]
    with Max Miller and Natasha Sarin, Journal of Public Economics, 2020
Abstract: [+]

More than a quarter of working-age households in the United States do not have sufficient savings to cover their expenditures after a month of unemployment. Recent proposals suggest giving workers early access to a small portion of their future Social Security benefits to finance their consumption during the COVID-19 pandemic. We empirically analyze their impact. Relying on data from the Survey of Consumer Finances, we build a measure of households’ expected time to cash shortfall based on the incidence of COVID-induced unemployment. We show that access to 1% of future benefits allows 75% of households to maintain their current consumption for three months in case of unemployment. We then compare the efficacy of access to Social Security benefits to already legislated approaches, including early access to retirement accounts, stimulus relief checks, and expanded unemployment insurance.


Working papers:

  • Countercyclical Income Risk and Portfolio Choices: Evidence from Sweden [pdf]
    with Paolo Sodini and Yapei Zhang
    Revise & Resubmit at the Journal of Finance
Abstract: [+]

Using Swedish administrative panel data, we document that workers facing higher left-tail income risk when equity markets perform poorly are less likely to participate in the stock market and, conditional on participation, have lower equity shares. In line with theory, the relationship between cyclical skewness and stock holdings is proportional to the share of human capital in a worker’s total wealth and vanishes as workers get closer to retirement. Cyclical skewness also predicts portfolio differences within pairs of identical twins. Our findings show that households hedge against correlated tail risks, an important mechanism in asset pricing and portfolio choice models.



  • Social Security and Trends in Wealth Inequality [pdf]
    with Max Miller and Natasha Sarin
    Revise & Resubmit at the Journal of Finance
    Best Paper – Red Rock Finance Conference
    Best Asset Pricing Paper – SFS Cavalcade
    Marshall Blume Prize in Financial Research
Abstract: [+]

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.

Distribution of Wealth by Age (1989-2016)



Abstract: [+]

Falling interest rates increase wealth inequality by raising the market value of long-duration assets held by wealthy households. To understand this phenomenon, we present a life-cycle model in which households can invest in short- or long-term assets to hedge against interest-rate risk. Our model matches important stylized facts. First, the share of long-term assets in households’ wealth is hump-shaped over the life-cycle. Within cohorts, it increases with wealth and earnings. Second, wealth inequality grows when interest rates fall, but only when wealth does not include the value of Social Security. Hedging demand against interest-rate risk can explain 40% of long-run changes in wealth inequality since 1960.

Abstract: [+]

Robustness checks, such as adding controls or sample splits, are a standard feature of reduced-form empirical research. Because of computational costs of reestimating alternative models, they are much less common in structural re- search using simulation-based methods. We propose a simple methodology to bypass this computational cost. Our approach is based on estimating a flexible approximation of the relation between moments and parameters. It provides a computationally cheap way to run the potentially large number of structural estimations required for such robustness checks. We demonstrate the validity and usefulness of this methodology in the context of two standard applications in economics and finance: (1) dynamic corporate finance (2) portfolio choice over the life cycle.

Abstract: [+]

In the United States, the median Black household earns 24% less per adult than the median White household. Yet, the latter has six times more marketable wealth than the former. We revisit this puzzle by expanding our wealth concept to include the present value of social security payments. We find that, once social security wealth is accounted for, the wealth gap between the median Black and White American is much closer to the income gap and has narrowed over the last thirty years. We reach similar conclusions when comparing White and Hispanic households. We argue for the importance of including social security in our study of wealth inequality because of the role it plays in shaping the marketable wealth distribution and the recent rise in its value.

  • Labor Market Risk and the Private Value of Social Security [pdf]
Abstract: [+]

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.