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| LSE Economics |
Position: Associate Professor of Economics (with tenure)
Research Interests: Public Economics, Behavioral Economics, Applied Theory
Other Positions, Affiliations and Awards:
Job Opportunity: Pre-doctoral Full-time Research Assistants
Abstract: To study the value of unemployment insurance (UI), the literature has mostly focused on measuring consumption responses to job loss, while also highlighting the many shortcomings of this approach. This paper proposes two novel approaches that we then implement using rich administrative data in Sweden and compare to the consumption-based results for the same sample of job seekers. We first document relatively small drops (~12 percent) in consumption expenditures upon job loss, which would translate into a relatively low valuation for UI following the standard consumption-based implementation. However, using variation in local public transfers, we show that the marginal propensity to consume for this sample of job losers is estimated to be 30-40 percent higher when unemployed than when employed. This reveals a high relative price of smoothing consumption when unemployed, corroborated by direct evidence of limited liquidity, binding borrowing constraints and negligible added worker effects. This price provides a lower-bound on the value of UI, which is substantially higher than the standard consumption-based estimate. Exploiting the UI choices embedded in the Swedish UI system, we then present an alternative Revealed-Preference approach, which confirms the high value of UI in our setting and reveals substantial dispersion above and beyond the variation in consumption drops.
Abstract: This paper analyses job seekers' perceptions and their relationship to unemployment outcomes to study heterogeneity and duration-dependence in both perceived and actual job finding. Using longitudinal data from two comprehensive surveys, we document (1) that reported beliefs have strong predictive power of actual job finding, (2) that job seekers are over-optimistic in their beliefs, particularly the long-term unemployed, and (3) that job seekers do not revise their beliefs downward when remaining unemployed. We then develop a reduced-form statistical framework, where we exploit the joint observation of beliefs and ex-post realizations, to disentangle heterogeneity and duration-dependence in actual job finding rates while allowing for elicitation errors and systematic biases in beliefs. We find a substantial amount of heterogeneity in actual job finding rates, accounting for more than half of the observed decline in job finding rates over the spell of unemployment. Moreover, job seekers' beliefs are systemically biased and under-respond to differences in job finding rates both across job seekers and over the unemployment spell. Finally, we show theoretically and quantify in a calibrated model of job search how these biases in beliefs contribute to the slow exit out of unemployment. The biases jointly explain about 15 percent of the incidence of long-term unemployment.
Abstract: This paper studies whether adverse selection can rationalize a universal mandate for unemployment insurance (UI). Building on a unique feature of the unemployment policy in Sweden, where workers can opt for supplemental UI coverage above a minimum mandate, we provide the first direct evidence for adverse selection in UI and derive its implications for UI design. We find that the unemployment risk is more than twice as high for workers who buy supplemental coverage, even when controlling for a rich set of observables. Exploiting variation in risk and prices to control for moral hazard, we show how this correlation is driven by substantial risk-based selection. Despite the severe adverse selection, we find that mandating the supplemental coverage is dominated by a design leaving the choice to workers. In this design, a large subsidy for supplemental coverage is optimal and complementary to the use of a minimum mandate. Our findings raise questions about the desirability of the universal mandate of generous UI in other countries, which has not been tested before.
Abstract: Demand for insurance can be driven by high risk aversion or high risk. We show how to separately identify risk preferences and risk types using only choices from menus of insurance plans. Our revealed preference approach does not rely on rational expectations, nor does it require access to claims data. We show what can be learned non-parametrically from variation in insurance plans, offered separately to random cross-sections or offered as part of the same menu to one cross-section. We prove that our approach allows for full identification in the textbook model with binary risks and extend our results to continuous risks. We illustrate our approach using the Massachusetts Health Insurance Exchange, where choices provide informative bounds on the type distributions, especially for risks, but do not allow us to reject homogeneity in preferences.
Abstract: This paper measures consumption expenditures using registry data on income and asset holdings in Sweden and illustrates how a registry-based measure can alleviate some critical limitations of traditional survey measures in capturing changes in consumption inequality and consumption responses to shocks. In the construction of our measure, we build on previous work exploiting the identity coming from the household budget constraint between consumption expenditures and income net of savings. We try to improve this measure using more registry information to account for the contribution of both financial and real assets to consumption flows. We demonstrate the power of the registry-based measure to study the relationship between income and consumption inequality, especially at the top of the income distribution. We also exploit the longitudinal dimension to study consumption responses to important life-time events and the different means used to smooth consumption.
© 2018 London School of Economics. All rights reserved. Picture by Jef Boes.