Self-Employment Rates and Business Sizes: The Role of Occupational Choice and Credit Market Frictions
(with Kartik Athreya)
Annals of Finance , 5, 295-519, 2009.
Abstract: Self-employment rates and project size vary greatly across countries. The main message of this paper is that these broad regularities are consistent with an environment in which a common self-employment technology is available worldwide, but where (a) financial intermediation costs and (b) alternatives in “paid” work differ greatly. Our model indicates that alternatives in paid work are crucial for explaining self-employment rates, whereas high financial intermediation costs primarily affect the scale of projects. We also show that credit use is not informative for predicting either rates of self-employment or the scale of self-employment projects.
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Risky Higher Education and Subsidies
(with Kartik Athreya)
Journal of Economic Dynamics and Control , 29, 979-1023, 2005.
Abstract: Tertiary education in the U.S. requires large investments that are risky, lumpy, and well-timed. Tertiary education is also heavily subsidized. By making the risk of human capital investment more acceptable, especially to low wealth households, subsidies may increase investment in human capital, lower long-run inequality, and reduce aggregate precautionary savings. However, subsidies also encourage more poorly prepared students to attend and are usually financed via distortionary taxes. In this paper, we find that observed collegiate subsidies improve welfare substantially relative to the fully decentralized (zero subsidy) outcome. We show that subsidies help smooth consumption, lower skill premia, increase interest rates as precautionary savings fall, lower the inequality of both consumption and wealth, increase intergenerational income mobility and raise welfare, even when financed by distortionary taxes.
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Optimal Monetary Policy in an Economy with Incomplete Markets and Idiosyncratic Risk
Journal of Monetary Economics , 51, 1245-1269, 2004.
Abstract: This study investigates an incomplete markets economy in which the saving behavior of a continuum of infinitely lived agents is influenced by precautionary saving motives and borrowing constraints. Agents can use two types of assets (interest bearing IOUS and money) to smooth consumption. Money is valued because of a timing friction in the bond market. In particular, the bond market closes before agents observe their idiosyncratic productivity shock. I find that the Friedman rule is not optimal for this economy. The results indicate that the optimal allocation has a rate of inflation of 10%, and a positive amount of private credit held by the government. A positive inflation rate transfers resources from agents with big endowments to those holding bonds which improves risk sharing, and therefore, welfare. However, for higher rates of inflation, agents economize on money holdings, offsetting the insurance effects, and causing a reduction in welfare. Furthermore, higher rates of inflation discourage agents from borrowing, and the endogenous lower bound on bond holdings is higher than the exogenous borrowing limit. High rates of inflation, therefore, exacerbate frictions in the bond market.
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