Equilibrium Evictions, joint with Dean Corbae and Andrew Glover
Abstract: We develop a simple equilibrium model of rental markets for housing in which eviction occurs endogenously. Both landlords and renters lack commitment; a landlord evicts a delinquent tenant if they do not expect total future rent payments to cover costs, while tenants cannot commit to paying more rent than they would be able or willing to pay given their outside option of searching for a new rental. Renters who are persistently delinquent are more likely to be evicted and pay more per quality-adjusted unit of housing than renters who are less likely to be delinquent. Evictions due to a tenant’s inability to pay are never socially efficient, and lead to lower quality investment in housing and too few vacancies relative to the socially optimal allocation. Government policies that restrict landlords’ ability to evict can improve welfare relative to laissez-faire, but a full moratorium on evictions only raises welfare when it is temporarily adopted in response to a large adverse shock. Finally, rent support can effectively eliminate evictions even without covering all missed rent and delivers significantly larger gains than eviction restrictions.
Presentation: 2022 Midwest Macro Spring Meeting
Rising Risk Among the Rich: Implications for Wealth Inequality and Interest Rates, joint with Carter Braxton, Kyle Herkenhoff, Chengdai Huang, Jonathan Rothbaum, and Lawrence Schmidt
Abstract: We estimate the evolution of permanent and transitory income risk across the income distribution and over time using newly-digitized and longitudinally-linked Census-IRS tax returns. Since the 1970s, the variance of permanent income shocks (i.e., permanent income risk) has increased by over 65% for those in the top 5% of the income distribution. Using capitalized interest and dividend income, we also document that high income households save significantly more in response to increases in permanent income risk compared to lower income households. To examine the implications of rising permanent income risk among high income households we integrate our income process into a Bewley-Huggett-Aiyagari model and calibrate the model to be consistent with our savings elasticities. We find that increasing permanent income risk among high income households has put downward pressure on interest rates and increased wealth inequality.
Presentations: 2025 Midwest Finance Association Summer Meeting; 2024 Midwest Macro Spring Meeting
The Composition Effect of the Socially Optimal Green Transition, joint with Alexander von Hafften
Abstract: We show that the heterogeneity of carbon emission intensity across U.S. public firms is substantial and persistent. We develop a dynamic GE model with firms that differ by the dependence of production on brown capital and discipline it with our empirical estimates. Relative to the ineffecient laissez-faire allocation, the socially optimal allocation features a composition effect where production becomes less pollutive at the extensive margin of which production technologies operate, in addition to the intensive margin through firm-level choices. This extensive-margin channel is absent in representative firm frameworks commonly used in the literature. We decentralize the socially optimal allocation through a uniform Pigouvian tax and demonstrate robustness of decentralization. We show in our calibrated model that ignoring firm-level heterogeneity in carbon dependence results in estimates of the optimal carbon tax path that are substantially higher than when the heterogeneity is not ignored. Implementing the too-large tax path in the economy with heterogeneity still results in over 90% of the welfare gain achieved by the first-best allocation over inaction.
Presentation: 2024 Society of Economic Dynamics Summer Meeting
A draft of Tail Risk and Bankruptcy in the United States, joint with Carter Braxton, Kyle Herkenhoff, Chengdai Huang, and Lawrence Schmidt will be available soon!
Abstract: We develop a method to tractably estimate large declines in persistent earnings, i.e., tail risk, in U.S. labor markets. Using a newly linked sample of employment and credit histories, we show that tail risk is pervasive in the U.S. even among very high income households. We document that in response to tail shocks, the likelihood of bankruptcy and other forms of default (e.g., foreclosure, chargeoffs, etc.) increases substantially, including at the top of the income distribution. We embed our income process into a Bewley-Huggett-Aiyagari model with default and show that tail risk can generate bankruptcy among high income households in line with our empirical estimates. Standard Gaussian income processes without tail risk fail to generate bankruptcy in the top half of the income distribution. We show that U.S. bankruptcy institutions should be re-designed once the prevalence and severity of tail risk is modeled accurately.