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Publications

"Risk Aversion and the Value of Life." Review of Economic Studies. Accepted. Working paper circulated under the title Beyond Expected Utility in the Economics of Health and Longevity (with Marla Ripoll).                                                                                   

We document various limitations of the expected utility model for the study of health and longevity. The model assumes individuals are indifferent between early and late resolution of uncertainty. This assumption gives rise to predictions regarding the economic value of life that are inconsistent with relevant evidence. For example, poor individuals would price life below the present value of foregone income or even negatively. We show that a non-expected utility model disentangling intertemporal substitution from risk aversion can overcome these limitations. We illustrate the quantitative implications of our model for the economic value of life across countries and time. File

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"Intergenerational Transfers and the Fertility-Income Relationship," Economic Journal, Volume 126, Issue 593, Pages 949-977, June 2016 (with Marla Ripoll)                                                       

Extensive evidence from cross-sectional data reveals a robust negative relationship between family income and fertility. This paper argues that constraints to intergenerational transfers are crucial for understanding this relationship. If parents could legally impose debt obligations on their children as a way to recover the costs incurred in raising them, then fertility would be independent of parental income. In this case, if the present value of a child's future income exceeds the cost of raising the child, as the evidence suggests is the case, parents would have incentives to raise as many children as possible in order to maximize rents. A relationship between fertility and income arises when parents are unable to leave debts behind either because of legal, enforcement, or moral constraints. We also derive the conditions under which the fertility-income relationship is negative. Notably, an intergenerational elasticity of substitution larger than one is required. In this case, parental consumption is a good substitute for children's consumption making it optimal for income rich parents to have fewer children.

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"Stochastic Dominance and Demographic Policy Evaluation: A Critique." Journal of Demographic Economics, Volume 82:01 March 2016, pp 111-138 (with Xiying Liu)                                                       

Stochastic dominance (SD) is commonly used to rank income distribution and assesssocial policies. The literature argues that SD is a robust criterion for policy evaluationbecause it requires minimal knowledge of the social welfare function. We argue that,on the contrary, SD is not a robust criterion. We do this by carefully introducing mi-crofoundations into a model by Chu and Koo (1990) who use SD to provide support tofamily-planning programs aiming at reducing the fertility of the poor. We show thatfertility restrictions are generally detrimental for both individual and social welfare inspite of the fact that SD holds. Our findings are an application of the LucasCritique. File

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"Fertility, Social Mobility and Long Run Inequality," Journal of Monetary Economics, Vol 63:1 January 2016 (with Xiying Liu and Marla Ripoll)                                                       

Dynastic altruistic models with endogenous fertility have been shown to be unable to generate enough intergenerational persistence. Using a Bewley model with endogenous fertility we show that it is possible to recover persistence. Key ingredients for our result include exponential child discounting, discrete number of children, diminishing costs of child rearing, and an elasticity of intergenerational substitution larger than one. Our model provides a uni…ed framework of analysis for long-run inequality that incorporates fertility choices.

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"Children, Dynastic Altruism and the Wealth of Nations," Review of Economic Dynamics, Volume 18:4 October 2015                                                    

The effective life span, or quantity of life, of an altruistic parent extends beyond her own longevity. The quantity of life is also determined by the number and longevity of her descendants. Using a calibrated version of the Barro–Becker model, I derive and estimate measures of effective quantity of life and of relative well-being for representative individuals of 116 countries between 1970 and 2005. I find that the gains in effective quantity of life arising from longevity improvements were on average more than offset by the losses due to fertility reductions. Effective quantity of life in the world fell by more than 7 percent during the period 1970–2005. Contrary to previous estimates, I find that the effective growth rate of well-being in the world, taking into account quantity and quality of life, was significantly below the growth rate of per-capita consumption.

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"What Explains Schooling Differences Across Countries?," Journal of Monetary Economics, March 2013, 60, 184-202 (with Marla Ripoll)                                                       

This paper provides a theory that explains the cross-country distribution of average years of schooling, as well as the so called human capital premium puzzle. In our theory, credit frictions as well as differences in access to public education, fertility and mortality turn out to be the key reasons why schooling differs across countries. Differences in growth rates and in wages are second order.

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"Supply Side Structural Change," Eurasian Economic Review, Spring 2013                                                        

The interest rate and the rate of economic growth are often regaded as roughly constant as economies growth. Moreover, the agricultural sector and rural population typically shrink. We show that an otherwise standard growth model that includes a backward and an advanced sector can account for these regularities. The mechanism works as follows. As the economy accumulates capital, labor flows from the backward sector to the advanced one. This migration prevents the usual disminishing marginal returns of capital. As a result, the interest rate and the growth rate of the economy remain constant during the transition to the steady state.

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"Agriculture and Aggregation," Economic Letters, October 2009, 105 (1), 110-112 (with Marla Ripoll)                                                       

We study the shape of the aggregate production function in the presence of land-intensive agriculture. The traditional Cobb–Douglas formulation is corrected to include a “diversification component.” The implied TFP differences across countries are larger than what Solow residuals suggest.

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"Endogenous TFP and Cross-Country Income Differences," Journal of Monetary Economics, September 2008 (with Marla Ripoll).                                                       

This paper explores the quantitative implications of a class of endogenous growth models for cross-country income differences. These models exhibit international spillovers, no scale effects and conditional convergence, and thus they overcome some difficulties faced by the early generation of endogenous growth models. Cross-country income differences arise in the model as the result of different distortions in the accumulation of rival factors of production, the objects, and in the accumulation of nonrival factor of production, the ideas. We show that object gaps play a much larger role to explain income gaps in models with endogenous TFP than in models with exogenous TFP. We also show, using a carefully calibrated version of the model, that most of the cross-country differences in output per worker are explained by barriers to the accumulation of rival factors (physical and human capital) rather than by barriers to the accumulation of knowledge.

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"U.S. Inequality: Debt-Constraints or Incomplete Asset Markets?" Journal of Monetary Economics, March 2008                                                       

To examine the role of debt constraints and incomplete asset markets (lack of insurance markets) in explaining U.S. inequality, we run horse races between competing models. For a widely used model, we decompose inequality into its fundamental driving forces. The underlying source of inequality in all models is uninsurable idiosyncratic risk. Both debt constraints and incomplete asset markets are needed to account for inequality, but asset market incompleteness is the key friction. It better accounts for the concentration and dispersion of wealth, and is the most costly friction in terms of welfare. Tight debt constraints are important for explaining the lower tail of the wealth distribution.

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"A Generalized Gibrat's Law," International Economic Review, November 2008                                                       

Many economic and non-economic variables such as income, wealth, firm size, or city size often distribute Pareto in the upper tail. It is well established that Gibrat's law can explain this phenomenon, but Gibrat's law often does not hold. This note characterizes a class of processes, one that includes Gibrat's law as a special case, that can explain Pareto distributions. Of particular importance is a parsimonous generalization of Gibrat's law that allows size to affect the variance of the growth process but not its mean. This note also shows that under plausible conditions Zipf's law is equivalent to Gibrat's law.

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"Inequality and Growth: Some Welfare Calculations," Journal of Economic Dynamics and Control, June 2008 (with Genevieve Verdier).                                                       

The main lotteries individuals face during their lifetime are first, their place of birth, and the second, their parents. How much consumption level and growth would a new born child be willing to give up in order to avoid these birth lotteries? This paper shows that a child may well be willing to give up all growth to avoid birthplace risk, and a large fraction of growth, if not all, to avoid family risk. The critical elements for the results are time discounting and risk aversion. Both factors downplay the role of growth for welfare while risk aversion enhances the benefits of more equal outcomes. A third key factor is the size of risk involved at birth, which is staggering. Our calculations suggest a research agenda with the following ranking of priorities: inequality, growth, and business cycles.

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IMF Working paper version with additional exercises.

Click here for a review of the paper in the israelian newspaper Yedioth Ahronoth.

Click here for a link to a discussion group in the Economist's View.

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"On the Distribution of City Sizes," Journal of Urban Economics, Volume 63, Issue 1, January 2008, Pages 177-197.                                                       

The city size distribution of many countries is remarkably well approximated by a Pareto distribution. We study what constraints this regularity imposes on standard urban models. We find that under general conditions urban models must have (i) a balanced growth path and (ii) a Pareto distribution for the underlying source of randomness. In particular, one of the following combinations can induce a Pareto distribution of city sizes: (i) preferences for different goods follow reflected random walks, and the elasticity of substitution between goods in 1; or (ii) total factor productivities in the production of different goods follow reflected random walks, and increasing returns are equal across goods. Citations (Google Scholar)

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"Credit Cycles Redux," International Economic Review, November 2004 (with Marla Ripoll).                                                        

Theoretical studies have shown that under unorthodox assumptions on preferences and production technologies, collateral constraints can act as a powerful amplification and propagation mechanism of exogenous shocks. We investigate whether or not this result holds under more standard assumptions. We find that collateral constraints typically generate small output amplification. Large amplification is obtained as a "kniefe-edge" type of result.

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"Collateral Constraints in a Monetary Economy," Journal of the European Economic Association, December 2004, 2 (6), 1172-1205 (with Marla Ripoll). Reprinted in: Handbook of Liquidity and Crisis, 2011, edited by Franklin Allen, Elena Carletti, Jan Pieter Krahnen and Marcel Tyrell.                                                                              

This paper studies the role of collateral constraints in transforming small monetary shocks into large persistent output fluctuations. We do this by introducing money in the heterogeneous-agent real economy of Kiyotaki and Moore (1997). Money enters in a cash-in-advance constraint and money supply is managed via open-market operations. We find that a monetary shock generates persistent movements in aggregate output, the amplitude of which depends upon whether or not debt contracts are indexed. If only nominal contracts are traded, money shocks can trigger large output fluctuations. In this case a money expansion triggers a boom, while money contractions generate recessions. In contrast, if contracts are indexed amplification is not only smaller, but it can generate the reverse results. When the possibility of default and renegotiation is considered, the model can generate asymmetric business cycles with recessions milder than booms. Finally, monetary shocks generate a highly persistent dampening cycle rather than a smoothly declining deviation.

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Reprinted in Liquidity and Crises," edited by Franklin Allen, Elena Carletti, Jan Pieter Krahnen, and Marcel Tyrell, Oxford University Press, December 2010.

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"Measuring Core Inflation in Colombia," Banca y Finanzas Asobancaria, No. 37, September 1995. Reproduced in Boletin del CEMLA 41(6), Nov/Dec, 1995.                                                                                        

(In Spanish).

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