Research Papers

"Unemployed but Optimistic: Optimal Insurance Design with Biased Beliefs" (Job Market Paper) [pdf]
Abstract: Biased perceptions of risks change the perceived value of insurance and the perceived returns to avoiding these risks. I show empirically that unemployed workers overestimate how quickly they will find work, but underestimate the return to their search efforts. I analyze the consequences for the optimal design of unemployment insurance. With biased beliefs, contracts equalizing the marginal smoothing benefit and the moral hazard cost of insurance are suboptimal. Social and private insurance diverge; a paternalistic social planner corrects the moral hazard cost for the distortion in the insuree's effort choice, while private insurers focus on the perceived rather than the true smoothing benefits. When unemployed workers are optimistic, privatizing unemployment insurance may result in inefficiently low or rapidly decreasing unemployment benefits.

"Capital Income Taxes with Heterogeneous Discount Rates" with Peter Diamond [pdf]
Abstract: Empirical evidence shows that on average people with higher skills save at higher rates. Saez (2002) suggests that with such positive correlation taxing savings can increase welfare, even when earnings are optimally taxed. This paper analyzes this issue in a model with less than perfect correlation between ability and preference for the future. To have multiple types at the same earnings level, the number of types of jobs in the economy is restricted. Key to the analysis is that types who value future consumption less are more tempted to switch to the low earning job. We show that introducing both a small savings tax on the high earners and a small savings subsidy on the low earners increase welfare, regardless of the correlation between ability and preferences for the future. However, a uniform savings tax, as in the Nordic dual income tax, increases welfare only if that correlation is sufficiently high.

"Training and Search during Unemployment" [pdf]
Abstract: This paper analyzes unemployment insurance contracts that combine monetary benefits and training. The optimal contract trades off the provision of search incentives and insurance against both the temporary loss of income and future losses in earnings due to the decrease in human capital. Human capital falls upon displacement and continuously depreciates during unemployment. Training counters the decrease in human capital, but also changes the willingness of the unemployed to search. Numerical simulations show that if the cost of training is sufficiently low, the human capital of long-term unemployed converges to a unique, positive level. The optimal contract never stops inducing search efforts. In practice, training programs are mainly targeted towards the long-term unemployed. In the simulations, this is optimal only if the fall in human capital upon displacement is small relative to the depreciation rate during unemployment.

"Insurance and Perceptions: How to Screen Optimists and Pessimists" [pdf]
Abstract: Individuals have differing beliefs about risks they face and their ability to mitigate these risks. Profit-maximizing firms exploit these differences, even if beliefs are unobservable. I show that firms screen identical agents with different beliefs by providing less insurance to optimists than to pessimists. Optimists perceive the risk to be less likely than pessimists given the respective levels of precautionary efforts. I contrast the contracts offered by a monopolist and competing firms and analyze how the distortions in insurance coverage depend on the differences in beliefs about the likelihood and the marginal return to effort. While the standard adverse selection model predicts a positive correlation between risk occurrence and insurance coverage, these differences in beliefs can explain the negative correlation found in empirical studies. Heterogeneity in beliefs may strengthen the case for government intervention in the economy.

"Revising Claims and Resisting Ultimatums in Bargaining Games" with Frans Spinnewyn [pdf]
Abstract: We propose a mechanism which implements a unique solution to the bargaining problem with two players in subgame-perfect equilibrium. Players start by making claims and accept a compromise only if they cannot gain by pursuing their claim in an ultimatum. The player offering the lowest resistance to his opponent's claim can propose a compromise. The unique solution depends on the extent to which claims can be revised. If no revisions are allowed, compatible claims implement the Nash solution. If all revisions are allowed, maximal claims implement the Kalai-Smorodinsky solution.