Giulio Fella

DOES DIVORCE LAW MATTER

In this paper we derive an explicit model of negotiations between spouses when utility is (partially) transferable only in case of separation. We show that inefficient separation may occur in equilibrium even under consensual divorce law. This provides theoretical support for the view that changes in social norms rather than in legislation may be responsible for increasing divorce rates.

Efficiency wage and efficient redundancy pay

Abstract A dynamic version of Shapiro and Stiglitzs shirking model features a form of inefficiency which is not captured by the original static model. Since, incentive compatibility requires workers to enjoy state-independent rents, any offer by redundant workers to take a wage cut is not credible, as it is not ex post incentive compatible. This implies that, if firms cannot commit on future firing ex ante, the number of redundancies is inefficiently high, as the externality, in the form of foregone rents, that firms impose on workers on severance cannot be traded. Redundancy payments make firms internalize the externality and fireless. Aggregate employment unambiguously increases and a Pareto improvement can be obtained provided all or part of the cost accrues to workers.

When Do Firing Costs Matter

This paper uses a strategic bargaining framework to reassess the effect of dismissal costs in models of voluntary separation. It shows that firing, as opposed to inducing a quit, is always an off-equilibrium strategy for firms in this class of models. Thus, dismissal costs can affect payoffs only if some exogenous event may force the firm to fire the worker despite it being suboptimal, or if the firms assets are only partly specific to the relationship. In this latter case, dismissal costs increase the specificity of the firms capital and depress ex post expected profits. In any case, firing restrictions do not affect separation decisions, as firms always find it profitable to induce workers to quit whenever separation is efficient. Involuntary separation is an essential feature of a world in which firing costs result in a lower probability of separation. In such a world, they may be welfare improving, as the separation rate is inefficiently high in the absence of firing restrictions.

A generalized endogenous grid method for non-concave problems

This paper extends Carrolls (2006) endogenous grid method and its combination with value function iteration by Barillas and Fernandez-Villaverde (2007) to non-concave problems. The method is illustrated using a consumer problem in which consumers choose both durable and non-durable consumption. The durable choice is discrete and subject to non-convex adjustment costs. The algorithm yields substantial gains in accuracy and computational time relative to value function iteration, the standard solution choice for non-concave problems.

Privately-Optimal Severance Pay

Abstract This paper constructs an equilibrium matching model with risk-averse workers and incomplete contracts to study both the optimal private provision of severance pay and the consequences of government mandates in excess of the private optimum. The privately-optimal severance payment is bounded below by the fall in lifetime wealth resulting from job loss. Despite market incompleteness, mandated minimum payments significantly exceeding the private optimum are effectively undone by adjustment of the contractual wage, and have only small allocational and welfare effects.

Reserve uncertainty and speculative attacks on target zones

Contrary to a peg, the sustainability of a currency band is enhanced by uncertainty about the availability of a secondary reserve. Furthermore, the critical size of reserves necessary to support a target zone is a decreasing function of the band upper boundary.

Fiscal Stimulus with Learning-By-Doing

Using a Bayesian SVAR analysis, we document that an increase in government purchases raises private consumption, the real wage and total factor productivity (TFP) while reducing inflation. Each of these facts is hard to reconcile with both neoclassical and New-Keynesian models. We extend a standard New-Keynesian model to allow for skill accumulation through past work experience, following Chang, Gomes and Schorfheide (2002). An increase in government spending increases hours and induces skill accumulation and higher measured TFP and real wages in subsequent periods. Future marginal costs fall lowering future expected inflation and, through the monetary policy rule, the real interest rate. Consumption increases as a result.

Nonlinear household earnings dynamics, self-insurance, and welfare

Earnings dynamics are much richer than typically assumed in macro models with heterogeneous agents. This holds for individual-pre-tax and household-post-tax earnings and across administrative (Social Security Administration) and survey (Panel Study of Income Dynamics) data. We study the implications of two processes for household, post-tax earnings in a standard life-cycle model: a canonical earnings process (that includes a persistent and a transitory shock) and a rich earnings dynamics process (that allows for age-dependence of moments, non-normality, and nonlinearity in previous earnings and age). Allowing for richer earnings dynamics implies a substantially better fit of the evolution of cross-sectional consumption inequality over the life cycle and of the individual-level degree of consumption insurance against persistent earnings shocks. Richer earnings dynamics also imply lower welfare costs of earnings risk, but, as the canonical earnings process, do not generate enough concentration at the upper tail of the wealth distribution.