Modeling Human Capital in Life-Cycle Portfolio Choice: Riskless or Risky?

The response of aggregate labor supply to various changes in the economic environment is central to many economic issues, especially the optimal design of tax policies. Conventional wisdom based on studies in the 1980s and 1990s has long held that the analysis of micro data leads one to conclude that aggregate labor supply elasticities are quite small. In this paper we argue that this conventional wisdom does not hold up to empirically reasonable and relevant extensions of simple life cycle models that served as the basis for these conclusions. In particular, we show that several pieces of conventional wisdom fail in the presence of human capital accumulation or labor supply decisions that allow for adjustment along both the extensive and intensive margin. We conclude that previous estimates of small labor supply elasticities based on micro data are fully consistent with large aggregate labor supply elasticities. (JEL D91, E24, J22)

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Asset Market Participation and Portfolio Choice over the Life-Cycle

The Journal of Finance ◽

10.1111/jofi.12484 ◽

2017 ◽

Vol 72 (2) ◽

pp. 705-750 ◽

Cited By ~ 76

Author(s):

ANDREAS FAGERENG ◽

CHARLES GOTTLIEB ◽

LUIGI GUISO

Keyword(s):

Life Cycle ◽

Portfolio Choice ◽

Asset Market ◽

Market Participation

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Optimal Mirrleesean Taxation in a Ben-Porath Economy

American Economic Journal Macroeconomics ◽

10.1257/mac.20110110 ◽

2015 ◽

Vol 7 (2) ◽

pp. 219-248 ◽

Cited By ~ 4

Author(s):

Marek Kapička

Keyword(s):

Human Capital ◽

Life Cycle ◽

Income Taxes ◽

Optimal Tax ◽

Cycle Economy ◽

The Us ◽

Optimal Taxes

I characterize optimal taxes in a life-cycle economy where ability and human capital are unobservable. I show that unobservable human capital effectively makes preferences over labor nonseparable across age. I generalize the static optimal tax formulas to account for such nonseparabilities and show how they depend both on own-Frisch labor elasticities and cross-Frisch labor elasticities. I calibrate the economy to US data. I find that the optimal marginal income taxes decrease with age, in contrast to both the US tax code and to a model with observable human capital. I demonstrate that the behavior of cross-Frisch elasticities is essential in explaining the decline. (JEL D91, H21, H24, J24)

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Optimal Life Cycle Unemployment Insurance

The American Economic Review ◽

10.1257/aer.20111559 ◽

2015 ◽

Vol 105 (2) ◽

pp. 816-859 ◽

Cited By ~ 21

Author(s):

Claudio Michelacci ◽

Hernán Ruffo

Keyword(s):

Human Capital ◽

Life Cycle ◽

Moral Hazard ◽

Unemployment Insurance ◽

Older Workers ◽

Life Cycle Model ◽

Cycle Model ◽

Welfare Gains ◽

High Return ◽

Unemployment Risk

We argue that US welfare would rise if unemployment insurance were increased for younger and decreased for older workers. This is because the young tend to lack the means to smooth consumption during unemployment and want jobs to accumulate high-return human capital. So unemployment insurance is most valuable to them, while moral hazard is mild. By calibrating a life cycle model with unemployment risk and endogenous search effort, we find that allowing unemployment replacement rates to decline with age yields sizeable welfare gains to US workers. (JEL D91, E24, J13, J64, J65)

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