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  3. 2023
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  5. Topics in Quantitative Macroeconomics
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Topics in Quantitative Macroeconomics

Paper Session

Friday, Jan. 6, 2023 2:30 PM - 4:30 PM (CST)

Hilton Riverside, Eglington Winton
Hosted By: Econometric Society
  • Chairs:
    Ellen R. McGrattan, University of Minnesota
  • Ming Xu, Queen's University

Are Bank Bailouts Welfare Improving?

Malik Shukayev
,
University of Alberta
Alexander Ueberfeldt
,
Bank of Canada

Abstract

The financial sector bailouts seen during the Great Recession generated substantial opposition and controversy. We assess the welfare benefits of government-funded emergency support to the financial sector, taking into account its effects on risk-taking incentives. In our quantitative general equilibrium model, the financial crisis probability depends on financial intermediaries' balance sheet choices, influenced by capital adequacy constraints and ex ante known emergency support provisions. These policy tools interact to make financial sector bailouts welfare improving when capital adequacy constraints are consistent with the current Basel III regulation, but potentially welfare decreasing with looser capital adequacy regulation existing before the Great Recession.

Personal Income Taxation and Entrepreneurship

Han Gao
,
University of New South Wales
Lichen Zhang
,
University of Hong Kong

Abstract

We show that the current U.S. progressive personal income tax system is superior to a counterfactual flat tax reform in terms of promoting entrepreneurship in a heterogeneous agent life cycle model with occupational choice and financial frictions. Our key innovation is to introduce non-trivial uncertainty faced by entrepreneurs and an endogenous learning process about their innate entrepreneurial ability such that the uncertainty can be reduced via learning over the life cycle. Both elements are supported and disciplined by novel subjective belief survey data on business owners. We find that switching to a revenue-neutral flat business income tax scheme reduces the aggregate entrepreneur share in the working-age population from 9% to 6%. Not only the share of the young entrepreneurs declines, but that at older ages declines even further. Moreover, agents with high innate productivity lose more from the flat tax reform. The logic is that if the young do not enter to learn about their innate entrepreneurial ability, they will not choose to be an entrepreneur when they are old either since the value of learning is decreasing in age, and progressive taxation favors the young by imposing lower tax burden and providing higher insurance value, thus resolving uncertainty and improving occupation allocation earlier. The main takeaway is that without encouraging agents to enter to discover their entrepreneurial aptitudes, those with high innate productivity may never become an entrepreneur, and thus entrepreneurship-boosting policies should prioritize the young as it will eventually benefit the old successful entrepreneurs who grow up from the young talents.

Intangible Capital and Shadow Financing

Hyunju Lee
,
Ryerson University
Radoslaw Paluszynski
,
University of Houston

Abstract

This paper establishes a link between two recent trends in firm dynamics: i) rising share of intangible assets in production among large corporations, and ii) increasing reliance on financing from non-bank (shadow) intermediaries. Using new microdata from South Korea, we document that intangible-intensive firms disproportionately use shadow credit. Moreover, this heterogeneity in shadow financing widens in years 2013-2018, a period of bank credit tightening. These trends have real implications: we show that shadow financing is strongly associated with reduced investment rates. To explain these findings, we build a model of heterogeneous firms and two sources of financing: shadow and traditional bank, with collateral constraints for the latter. Higher collateral requirement drives intangible-intensive firms away from bank borrowing and results in the rise of shadow credit. A counterfactual experiment using the model shows that suppressing the rise of shadow financing comes at significant efficiency costs.

Over-Optimism about Graduation and College Financial Aid

Emily Moschini
,
College of William and Mary
Gajendran Raveendranathan
,
McMaster University
Ming Xu
,
Queen's University

Abstract

Student loans are now the largest form of consumer credit in the United States after mortgages and have the highest delinquency rates among the major forms of consumer credit. Furthermore, consumers that never completed the educational program the loan was taken out to pay for (“dropouts”) account for more than half of delinquencies on educational loans. Are students borrowing too much? We examine the optimal federal student loan limit in a life cycle model with over-optimism about college graduation likelihood. Using panel microdata from the US Department of Education, we document that students are overconfident about educational attainment and that this overconfidence is highest for students with low high school GPA (“skill”). With this data, we discipline the model’s positive relationship between student skill and college graduation likelihood. In the calibrated model, incorporating over-optimism allows us to match shares of borrowing and delinquencies by dropouts. We find that, for the average student, expanding the student loan limit to fully pay for college is optimal. However, during the transition to this expanded limit, low-skill students experience welfare losses because they over-enroll in college.
JEL Classifications
  • E20 - General
  • E60 - General