James M. and Cathleen D. Stone Centre for the Study of Wealth Inequality

Anh Nguyen
PhD Candiate in Economics, Columbia University
January 17, 2018

Abstract: This paper explores the use of bundling to reduce adverse selection in insurance markets and its application to social health insurance programs. When the choice to buy health insurance is made at the household level, bundling the insurance policies of household members eliminates the effect of adverse selection within a household since the household can no longer select only sick members to enroll. However, this can exacerbate adverse selection across households, as healthier households might choose to drop out of the insurance market. The net effect of this trade-off depends on the characteristics of the household demand for medical care and risk preferences. I explore this issue using individual survey data on insurance enrollment and medical spending in Vietnam that contain detailed information about the structure of the household. The reduced-form evidence suggests that income, own-price and cross-member substitution effects play important roles in the demand for medical care, which affects a household’s selection of members into insurance. I then develop and estimate a model of household insurance bundle choice and medical utilization that accounts for these features. The results suggest that much of the adverse selection is concentrated within the household. Counterfactual analysis reveals that under optimal pricing, household bundling yields significantly higher consumer surplus and insurance enrollment than individual purchase. Furthermore, the insurance market is less susceptible to complete unraveling under household bundling.

Professor Esther Duflo
The Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics, The Massachusetts Institute of Technology
December 6, 2017

Overview: Esther Duflo research seeks to understand the economic lives of the poor with the aim to help design and evaluate social policies. In her paper Esther Duflo argues that economists should think of themselves more as plumbers who lay the pipes and fix the leaks, ready to get their hands dirty and to adjust to details when it comes to the policy implementation process. Join us for this public lecture in which Esther Dufo will speak about her vision  on how economists should seriously engage with "plumbing", in the interest of both our business and our society.

Professor Esther Duflo
The Abdul Latif Jameel Professor of Poverty Alleviation and Development Economics, The Massachusetts Institute of Technology
December 6, 2017

Abstract: In 2008, 682 secondary school scholarships were awarded by lottery among 2,064 Ghanaian students (aged 17 on average) who were admitted to a specific school and track but could not immediately enroll, in most cases due to lack of funds. We use follow-up data collected until 2016 to document downstream impacts by age 25. For the whole sample, scholarship winners were 26 percentage points (55%) more likely to complete secondary school, obtained 1.26 more years of secondary education, scored an average of 0.15 standard deviations greater on a reading and math test, and adopted more preventative health behavior. Women who received a scholarship had 0.217 fewer children by age 25. Scholarship winners were also 3 percentage points (30%) more likely to have ever enrolled in tertiary education. Despite the fact that they were 2.5 percentage points more likely to be enrolled in school at the time of the last survey, they were 5.5 percentage points (10%) more likely to have positive earnings and had significantly higher (hyperbolic sine) earnings. For students admitted to vocational tracks (comprising 60% of the sample) scholarships did not increase tertiary education, which simplifies the interpretation of labor market outcomes. In this subsample, scholarships increased the likelihood of earning money by 8.8 percentage points (16%) and increased total earnings by 19%. The estimated financial rate of return to education in this subsample is 13%. For students admitted to academic majors, scholarships increased the chance of having enrolled in tertiary education by 5.3 percentage points on a base of 11 percent. This effect is driven overwhelmingly by women, who nearly double their rate of tertiary enrollment and fully catch up with men. We cannot reject the hypothesis that among those admitted to academic tracks, scholarships did not affect average labor market participation and earnings by age 25, but since more scholarship winners than non-winners were still in school as of 2016, it is too early to definitively assess labor market impacts in this population.

Clément Bellet
Post Doctoral Fellow, INSEAD
November 22, 2017

Abstract: Despite a major upscaling of single-family houses since 1980, house satisfaction has remained steady in American suburbs. At any point in time, however, house satisfaction increases with size. I show this paradox can be explained by upward-looking comparisons in the size of houses. Combining data from the American Housing Survey from 1984 to 2009 with an original dataset of three millions suburban houses built between 1920 and 2009, I find that an increase in size at the top of the distribution after a household moved in offsets the house satisfaction gains from an equivalent rise in own housing size. The relative size externality is stronger for bigger houses and decreases with the geographical distance to newly built superstar houses. Furthermore, homeowners who experienced a relative downscaling of their house are more likely to upscale and subscribe to new loans. I estimate the relative size effect can explain up to 10% of the rise in mortgage debt to income ratio since 1980. Overall, this paper sheds new light on the consequences of inequality and positional externalities on housing market dynamics.

Arash Nekoei
Assistant Professor of Economics, Stockholm University, Institute for International Studies
November 10, 2017

Abstract: We estimate the effect of inheritance on wealth inequality in Swedish administrative data exploiting randomness of inheritance timing. Although the wealth dispersion among heirs increases upon receiving inheritances, the share of the top 1% declines. A decomposition shows that this is due to a relatively high degree of inter-generational wealth mobility. This short-run equalizing effect of inheritance is reversed over time since the bottom 99% spend their inherited wealth within a decade mainly through higher commodity consumption. Yet inheritance also considerably reduces heirs' labor supply supporting the Carnegie conjecture. After a decade remaining inherited wealth thus increases wealth inequality.

Adam Cobb
Assistant Professor of Management, The Wharton School of the University of Pennsylvania
September 25, 2017 

Abstract: Wage inequality in the United States has risen dramatically over the past few decades, prompting scholars to develop a number of theoretical accounts for the upward trend. This study argues that large firms have been a prominent labor-market institution that mitigates inequality. By compensating their lowand middle-wage employees with a greater premium than their higher-wage counterparts, large U.S. firms reduced overall wage dispersion. Yet, broader changes to employment relations associated with the demise of internal labor markets and the emergence of alternative employment arrangements have undermined large firms’ role as an equalizing institution. Using data from the Current Population Survey and the Survey of Income and Program Participation, we find that in 1989, although all private-sector workers benefited from a firm-size wage premium, the premium was significantly higher for individuals at the lower end and middle of the wage distribution compared to those at the higher end. Between 1989 and 2014, the average firm-size wage premium declined markedly. The decline, however, was exclusive to those at the lower end and middle of the wage distribution, while there was no change for those at the higher end. As such, the uneven declines in the premium across the wage spectrum could account for about 20 percent of rising wage inequality during this period, suggesting that firms are of great importance to the study of rising inequality.

David Seim
Assistant Professor of Economics, Stockholm University, CEPR
September 20, 2017

Abstract: This paper uses administrative data to analyze a large and long-lasting employer payroll tax rate cut from 32% down to 15% for young workers (aged 26 or less) in Sweden. We obtain two main results on market level tax incidence and employment effects. First, in contrast to the standard view in tax incidence, the payroll tax cut has zero effect on net-of-tax wages of young treated workers relative to slightly older untreated workers even in the medium-run, implying that employers do not adjust wages based on age in response to the tax reform, perhaps because of wage rigidities. Hence, the labor cost to firms of employing younger workers falls relative to other workers. Second and related, simple graphical analysis shows compelling positive employment effects of about 2-3 percentage points for young workers arising primarily from fewer separations (rather than more hiring). These employment effects are larger in places with higher youth unemployment rates. Next, we analyze the effects of the tax cut on firms by tracing out graphically the time series of outcomes for firms with large vs. moderate share of young workers just before the reform as firms with large share young receive a larger tax cut windfall. We obtain two main results on firm level effects. First, firms with large share young grow faster after the reform: employment, sales, value added, profits, and capital assets all grow faster. These effects appear stronger in firms more likely to be credit constrained, consistent with liquidity effects. Second, firms with large share young increase the wages of all workers (young and old) after the reform. Wages of low paid workers increase more in percentage terms. This suggests that the payroll tax cut benefits workers collectively and indirectly through rent sharing. Our paper highlights the key role of firms in understanding the effects of payroll taxes.