Ayse Imrohoroglu

The Role of Unemployment Insurance in an Economy with Liquidity Constraints and Moral Hazard

The potential welfare benefits of unemployment insurance, along with the optimal replacement ratio, are studied using a quantitative dynamic general equilibrium model. To provide a role for unemployment insurance, agents in our economy face exogenous idiosyncratic employment shocks and are unable to borrow or insure themselves through private markets. In the absence of moral hazard, replacement ratios as high as .65 are optimal and the welfare benefits of unemployment insurance are quite large. However, if there is moral hazard and the replacement ratio is not set optimally, but is instead set to an empirically plausible value, the economy can be much worse off than it would be without unemployment insurance.

A life cycle analysis of social security

SummaryWe develop an applied general equilibrium model to examine the optimal social security replacement rate and the welfare benefits associated with it. Our setup consists of overlapping generations of 65-period lived individuals facing mortality risk and individual income risk. Private credit markets, including markets for private annuities, are closed by assumption. Unlike previous analyses, we find that an unfunded social security system may well enhance economic welfare. In our benchmark economy, the optimal social security replacement rate is 30%, and an empirically more plausible replacement rate of 60% raises welfare compared with an economy with no social security system.

Time-Inconsistent Preferences and Social Security

In this paper we examine the role of social security in an economy populated by overlapping generations of individuals with time-inconsistent preferences who face mortality risk, individual income risk, and borrowing constraints. Agents in this economy are heterogeneous with respect to age, employment status, retirement status, hours worked, and asset holdings. We consider two cases of time-inconsistent preferences. First, we model agents as quasi-hyperbolic discounters. They can be sophisticated and play a symmetric Nash game against their future selves; or they can be naive and believe that their future selves will exponentially discount. Second, we consider retrospective time inconsistency. We find that (1) there are substantial welfare costs to quasi-hyperbolic discounters of their time-inconsistent behavior, (2) social security is a poor substitute for a perfect commitment technology in maintaining old-age consumption, (3) there is little scope for social security in a world of quasi-hyperbolic discounters (with a short-term discount rate up to 15%), and, (4) the ex ante annual discount rate must be at least 10% greater than seems warranted ex post in order for a majority of individuals with retrospective time inconsistency to prefer a social security tax rate of 10% to no social security. Our findings question the effectiveness of unfunded social security in correcting for the undersaving resulting from time-inconsistent preferences.

The welfare cost of inflation under imperfect insurance

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On the Political Economy of Income Redistribution and Crime

In this paper we consider a general equilibrium model where heterogeneous agents specialize either in legitimate market activities or in criminal activities and majority rule determines the share of income redistributed and the expenditures devoted to the apprehension of criminals. We calibrate our model to the U.S. economy in 1990, and we conduct simulation exercises to evaluate the effectiveness of expenditures on police protection and income redistribution at reducing crime. We find that while expenditures on police protection reduce crime, it is possible for the crime rate to increase with redistribution. We also show that economies that adopt relatively more generous redistribution policies may have either higher or lower crime rates than economies with relatively less generous redistribution policies, depending on the characteristics of their wage distribution and on the efficiency of their apprehension technology.

Firm-Level Productivity, Risk, and Return

This paper provides new evidence about the link between firm-level total factor productivity TFP and stock returns. We estimate firm-level TFP and show that it is strongly related to several firm characteristics such as size, the book-to-market ratio, investment, and hiring rate. Low productivity firms earn a significant premium over high productivity firms in the following year, and this premium is countercyclical. We show that a production-based asset pricing model calibrated to match the cross section of measured firm-level TFPs can replicate the empirical relationship between TFP, many firm characteristics, and stock returns. Our results offer an explanation as to how these firm characteristics rationally predict returns. This paper was accepted by Wei Jiang, finance.

Understanding the Determinants of Crime

In this paper, we use an overlapping generations model where individuals are allowed to engage in both legitimate market activities and criminal behavior in order to assess the role of certain factors on the property crime rate. In particular, we investigate if differences in the unemployment rate, fraction of low human capital individuals in an economy, apprehension probability, duration of a jail sentence, and income inequality could be capable of generating large differences in crime rates that are observed across countries. We find that small differences in the apprehension probability and income inequality can generate quantitatively significant differences in the crime rates across similar environments.

On the political economy of income redistribution and crime

We study a one-sector growth model which is standard except for the presence of an externality in the production function. The set of competitive equilibria is large. It includes constant equilibria, sunspot equilibria, cyclical and chaotic equilibria, and equilibria with deterministic or stochastic regime switching. The efficient allocation is characterized by constant employment and a constant growth rate. We identify an income tax-subsidy schedule that supports the efficient allocation as the unique equilibrium outcome. That schedule has two properties: (i) it specifies the tax rate to be an increasing function of aggregate employment, and (ii) earnings are subsidized when aggregate employment is at its efficient level. The first feature eliminates inefficient, fluctuating equilibria, while the second induces agents to internalize the externality.

A field study on matching with network externalities

We study the effects of network externalities on a unique matching protocol for faculty in a large U.S. professional school to offices in a new building. We collected institutional, web, and survey data on facultys attributes and choices. We first identify the different layers of the social network: institutional affiliation, coauthorships, and friendships. We demonstrate and quantify the effects of network externalities on choices and outcomes. Furthermore, we disentangle the different layers of the social network and quantify their relative impact. Finally, we assess the matching protocol from a welfare perspective. Our study suggests the importance and feasibility of accounting for network externalities in general assignment problems and evaluates a set of techniques that can be employed to this end.

AGRICULTURAL PRODUCTIVITY AND GROWTH IN TURKEY

This paper investigates the growth experience of one country in detail in order to enhance our understanding of important factors that affect economic growth. Using a two-sector model, we identify low productivity growth in the agricultural sector as the main reason for the divergence of income per capita between Turkey and its peer countries between 1968 and 2005. An extended model that incorporates distortions in the use of intermediate goods in producing agricultural output indicates that policies that have different effects across sectors and across time may be important in explaining the growth experience of countries.