We develop quantitative macroeconomic theory of input-saving technical change to analyze how mark... more We develop quantitative macroeconomic theory of input-saving technical change to analyze how markets economize on scarce natural resources, with an application to fossil fuel. We find that aggregate U.S. data calls for a very low short-run substitution elasticity between energy and the capital/labor inputs. Our estimates imply that energy-saving technical change took off when the oil shocks hit in the 1970s. This response implies significant substitutability with the other inputs in the long run: even under every-rising energy prices, long-run consumption growth is still possible, along with a modest factor share of energy.
ecent literature on the Anthropocene suggests multiple threats to the resilience of the Earth sys... more ecent literature on the Anthropocene suggests multiple threats to the resilience of the Earth system. Exceeding the 'planetary boundaries' could lead to rapidly increasing risks of catastrophic and/or irreversible environmental change 2-6. Acknowledging underlying scientific disagreements and considerable uncertainties, we note that there are many articles describing human dominance of the planet 7 , and here we take the planetary boundaries as given and focus on the design of policy and governance structures in response to the risks of overstepping them. There are no simple solutions. Design issues are complex and challenging precisely because the threats are global, long-run, interconnected, uncertain and potentially irreversible 8. Nevertheless, we have identified seven guiding principles as follows.
Journal of the European Economic Association, 2021
There is a scientific consensus that human activities, in the form of emissions of carbon dioxide... more There is a scientific consensus that human activities, in the form of emissions of carbon dioxide into the atmosphere, cause global warming. These emissions mostly occur in the marketplace, that is, they are undertaken by private individuals and firms. Governments seeking to curb emissions thus need to design policies that influence market behavior in the direction of their goals. Economists refer to Pigou taxation as “the” solution here, since the case of global warming can be seen as a pure (negative) externality. We agree. However, given the reluctance of policymakers to agree with us, there is an urgent need to consider, and compare, suboptimal policies. In this paper, we look at one such instance: setting a global tax on carbon at the wrong level. How costly are different errors? Since there is much uncertainty about how much climate change there will be, and how damaging it is when it occurs, ex-post errors will most likely be made. We compare different kinds of errors qualita...
Acknowledging that wage inequality and intergenerational mobility are strongly interrelated, this... more Acknowledging that wage inequality and intergenerational mobility are strongly interrelated, this paper presents a model in which both are jointly determined. The model enables us to study how inequality and mobility are a¤ected by exogenous changes and what determines their correlation. A main implication of the model is that di¤erences in the amount of public subsidies to education and educational quality produce cross-country patterns with a negative correlation between inequality and mobility. Di¤erences in the labor market, like di¤erences in skill-biased technology or wage compression instead produce a positive correlation. The predictions of the model are found to be consistent with various empirical observations on mobility and inequality. We thank Omer Moav and Fabrizio Zilibotti for very useful comments on previous drafts. We also thank the referees and the editor of this journal for important suggestions and criticisms. yJohn Hassler: IIES and CEPR; e-mail: John.Hassler@i...
Evidence suggests that unemployed individuals can sometimes a¤ect their job prospects by undertak... more Evidence suggests that unemployed individuals can sometimes a¤ect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity only arises for some individuals and the identity of those may be unobservable ex-ante. The problem of characterizing constrained optimal unemployment insurance in this case has been neglected in previous literature. We construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled. The model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobservable job-search. In particular, we derive closed-form solutions showing that when the moving/retraining incentive constraint binds, unemployment bene ts should increase over the unemployment spell, with an initial period with low bene ts and an increase after this period has expired. JEL Classi cation: J65, J...
Previous literature has shown that price dividend ratios are volatile if dividend growth rates ar... more Previous literature has shown that price dividend ratios are volatile if dividend growth rates are positively correlated also when discount rates are constant. However, it has been argued that to produce empirically observed volatilities, an autocorrelation unreasonably close to one is required. In this note, we show that to account for the observed volatility, a much lower autocorrelation, within the range of reasonableness, is needed. Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden and CEPR. Email: [email protected] y Department of Economics, Hebrew University of Jerusalem, Mt. Scopus, Jerusalem, 91905, Israel and CEPR. Email:[email protected]
Evidence suggests that unemployed individuals sometimes can a¤ect their job prospects by undertak... more Evidence suggests that unemployed individuals sometimes can a¤ect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity arises only for some individuals and the identity of those is unobservable. Unemployment insurance should then be designed to induce individuals to exploit existing opportunities to move or retrain without excessively diminishing the insurance value for the remaining unemployed. This problem has been neglected in previous literature on unemployment insurance design and we show that it may have important consequences. In particular, we derive closed-form solutions, showing that unemployment bene...ts should increase over the unemployment spell, having an initial period with low bene...ts and a substantial increase after this period has expired. JEL Classi...cation: J65, J64, E24
At least since the work of Kydland and Prescott (1977), it is acknowledged that the ability for p... more At least since the work of Kydland and Prescott (1977), it is acknowledged that the ability for policy makers to commit to future policies often is of key importance for outomces and welfare. An example is capital income taxation, where the commitment solution typically involve zero capital income taxes after some initial periods, while no commitment may imply empirically much too high taxes. A more realistic intermediate outcome can be supported by trigger strategies where a deviation from a "good" equilibrium is punished by a possibly in…nite revertion to a "bad" Nash-equilibrium. In a political economy setting, < :
Preliminary: not ready for circulation We construct an integrated assessment model with multiple ... more Preliminary: not ready for circulation We construct an integrated assessment model with multiple energy sources– including fossil fuels and “green energy”– and multiple world regions. The energy sources are imperfect substitutes and their production involve structures that are endogenous. In particular, firms can decide to lower the marginal cost of producing one form of energy at the expense of the marginal costs of other energy sources: there is directed technical change. In the lowering of these marginal costs, there are also spillovers, which are international. We analyze how (potentially region-specific) taxes affect output and the climate with and without the endogeneity of technology. We emphasize the second-best nature of taxation when optimal world-wide technology subsidies are not implemented.
We develop a model where the allocation of human resources, intergenerational social mobility, an... more We develop a model where the allocation of human resources, intergenerational social mobility, and technological growth are jointly determined. High growth endogenously increases the equilibrium return to innate cognitive ability and makes the allocation of individuals depend more on innate ability and less on social background. Individuals with a higher level of innate cognitive ability can deal better with less known, but more productive, technologies and thus choose a higher rate of technological growth. A social allocation based on innate ability and high growth will thus reinforce each other, implying the possibility of multiple endogenous growth equilibria. (JEL J62, O1)
thank Francesco Caselli for comments and Mistra-SWECIA (all authors) and the European Research Co... more thank Francesco Caselli for comments and Mistra-SWECIA (all authors) and the European Research Council (Krusell) for financial support.
Acknowledging that wage inequality and intergenerational mobility are strongly interrelated, this... more Acknowledging that wage inequality and intergenerational mobility are strongly interrelated, this paper presents a model in which both are jointly determined. The model enables us to study how inequality and mobility are affected by exogenous changes and what determines their correlation. A main implication of the model is that differences in the amount of public subsidies to education and educational quality produce crosscountry patterns with a negative correlation between inequality and mobility. Differences in the labor market, like differences in skill-biased technology or wage compression instead produce a positive correlation. The predictions of the model are found to be consistent with various empirical observations on mobility and inequality.
ABSTRACT Earlier studies have shown that lumpy investment models well characterize individual exp... more ABSTRACT Earlier studies have shown that lumpy investment models well characterize individual expenditures on durables, in particular automobiles. In this class of models, a higher level of uncertainty generally implies that the household should tolerate a larger imbalance between the actual stock of the durable and the target stock before adjusting it by buying and/or selling. Then, if the level of uncertainty increases, aggregate expenditures would temporarily fall. This hypothesis is tested by estimating an aggregate lumpy investment model on automobile expenditure data, using stock market volatility to proxy uncertainty. The result is that expenditures fall significantly as stock market volatility increases. Copyright 2001 by The editors of the Scandinavian Journal of Economics.
The financial turmoil that originated in 2007 and developed into an unprecedented crisis batterin... more The financial turmoil that originated in 2007 and developed into an unprecedented crisis battering financial and real markets is the latest manifestation, on a grand scale and with new attributes, of a welldefined pathology in the process of market liberalization and integration in the post-Bretton Woods era. At the root of the crisis lies a fundamental inconsistency between financial globalisation – the process of liberalization and deregulation driving the impressive growth of world financial markets – and existing public rules and policies at both domestic and international levels. This pathology underlies virtually all the episodes of instability that have affected the developing and the emerging economies since the constraints on capital mobility started to be removed during the 1970s: from the debt crisis in the early 1980s to the financial and currency crisis in South-East Asia in 1997–98. Globalisation of financial markets has systematically and vastly outpaced the developme...
The financial crisis triggered by the bursting of the US real-estate bubble has spread over the e... more The financial crisis triggered by the bursting of the US real-estate bubble has spread over the entire world to different degrees and markedly slowed down world economic growth in 2008. This year, all major regions in the world will be in recession.
Two features distinguish the European and the U.S. labor markets. First, European countries have ... more Two features distinguish the European and the U.S. labor markets. First, European countries have considerably more generous unemployment insurances. Second, the duration of unemployment and employment spells are substantially longer in Europe { turnover is low. We will build a model of political determination of the unemployment insurance to explain these dierences. We show that saving and borrowing is a good substitute for unemployment insurance when turnover is high, as in the U.S. A small deviation from actuarial fairness in the unemployment insurance system will then cause the employed median voter to prefer low unemployment insurance. With a l o w turnover, a high unemployment insurance becomes considerably more valuable to the median voter. Low turnover also causes a strong divergence between the longand short-run interest of the employed. If the median voter cannot bind future voters to a certain level of insurance, the voting cycle must be long to support a high level of insurance. We thank Antonio Cabrales, Assar Lindbeck, Torsten Persson, Kjetil Storesletten and Fabrizio Zilibotti for helpful comments and discussions. Christina L onnblad provided valuable editorial assistance. All remaining errors are our own responsibility.
We develop quantitative macroeconomic theory of input-saving technical change to analyze how mark... more We develop quantitative macroeconomic theory of input-saving technical change to analyze how markets economize on scarce natural resources, with an application to fossil fuel. We find that aggregate U.S. data calls for a very low short-run substitution elasticity between energy and the capital/labor inputs. Our estimates imply that energy-saving technical change took off when the oil shocks hit in the 1970s. This response implies significant substitutability with the other inputs in the long run: even under every-rising energy prices, long-run consumption growth is still possible, along with a modest factor share of energy.
ecent literature on the Anthropocene suggests multiple threats to the resilience of the Earth sys... more ecent literature on the Anthropocene suggests multiple threats to the resilience of the Earth system. Exceeding the 'planetary boundaries' could lead to rapidly increasing risks of catastrophic and/or irreversible environmental change 2-6. Acknowledging underlying scientific disagreements and considerable uncertainties, we note that there are many articles describing human dominance of the planet 7 , and here we take the planetary boundaries as given and focus on the design of policy and governance structures in response to the risks of overstepping them. There are no simple solutions. Design issues are complex and challenging precisely because the threats are global, long-run, interconnected, uncertain and potentially irreversible 8. Nevertheless, we have identified seven guiding principles as follows.
Journal of the European Economic Association, 2021
There is a scientific consensus that human activities, in the form of emissions of carbon dioxide... more There is a scientific consensus that human activities, in the form of emissions of carbon dioxide into the atmosphere, cause global warming. These emissions mostly occur in the marketplace, that is, they are undertaken by private individuals and firms. Governments seeking to curb emissions thus need to design policies that influence market behavior in the direction of their goals. Economists refer to Pigou taxation as “the” solution here, since the case of global warming can be seen as a pure (negative) externality. We agree. However, given the reluctance of policymakers to agree with us, there is an urgent need to consider, and compare, suboptimal policies. In this paper, we look at one such instance: setting a global tax on carbon at the wrong level. How costly are different errors? Since there is much uncertainty about how much climate change there will be, and how damaging it is when it occurs, ex-post errors will most likely be made. We compare different kinds of errors qualita...
Acknowledging that wage inequality and intergenerational mobility are strongly interrelated, this... more Acknowledging that wage inequality and intergenerational mobility are strongly interrelated, this paper presents a model in which both are jointly determined. The model enables us to study how inequality and mobility are a¤ected by exogenous changes and what determines their correlation. A main implication of the model is that di¤erences in the amount of public subsidies to education and educational quality produce cross-country patterns with a negative correlation between inequality and mobility. Di¤erences in the labor market, like di¤erences in skill-biased technology or wage compression instead produce a positive correlation. The predictions of the model are found to be consistent with various empirical observations on mobility and inequality. We thank Omer Moav and Fabrizio Zilibotti for very useful comments on previous drafts. We also thank the referees and the editor of this journal for important suggestions and criticisms. yJohn Hassler: IIES and CEPR; e-mail: John.Hassler@i...
Evidence suggests that unemployed individuals can sometimes a¤ect their job prospects by undertak... more Evidence suggests that unemployed individuals can sometimes a¤ect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity only arises for some individuals and the identity of those may be unobservable ex-ante. The problem of characterizing constrained optimal unemployment insurance in this case has been neglected in previous literature. We construct a model of optimal unemployment insurance where multiple incentive constraints are easily handled. The model is used to analyze the case when an incentive constraint involving moving costs must be respected in addition to the standard constraint involving costly unobservable job-search. In particular, we derive closed-form solutions showing that when the moving/retraining incentive constraint binds, unemployment bene ts should increase over the unemployment spell, with an initial period with low bene ts and an increase after this period has expired. JEL Classi cation: J65, J...
Previous literature has shown that price dividend ratios are volatile if dividend growth rates ar... more Previous literature has shown that price dividend ratios are volatile if dividend growth rates are positively correlated also when discount rates are constant. However, it has been argued that to produce empirically observed volatilities, an autocorrelation unreasonably close to one is required. In this note, we show that to account for the observed volatility, a much lower autocorrelation, within the range of reasonableness, is needed. Institute for International Economic Studies, Stockholm University, S-106 91 Stockholm, Sweden and CEPR. Email: [email protected] y Department of Economics, Hebrew University of Jerusalem, Mt. Scopus, Jerusalem, 91905, Israel and CEPR. Email:[email protected]
Evidence suggests that unemployed individuals sometimes can a¤ect their job prospects by undertak... more Evidence suggests that unemployed individuals sometimes can a¤ect their job prospects by undertaking a costly action like deciding to move or retrain. Realistically, such an opportunity arises only for some individuals and the identity of those is unobservable. Unemployment insurance should then be designed to induce individuals to exploit existing opportunities to move or retrain without excessively diminishing the insurance value for the remaining unemployed. This problem has been neglected in previous literature on unemployment insurance design and we show that it may have important consequences. In particular, we derive closed-form solutions, showing that unemployment bene...ts should increase over the unemployment spell, having an initial period with low bene...ts and a substantial increase after this period has expired. JEL Classi...cation: J65, J64, E24
At least since the work of Kydland and Prescott (1977), it is acknowledged that the ability for p... more At least since the work of Kydland and Prescott (1977), it is acknowledged that the ability for policy makers to commit to future policies often is of key importance for outomces and welfare. An example is capital income taxation, where the commitment solution typically involve zero capital income taxes after some initial periods, while no commitment may imply empirically much too high taxes. A more realistic intermediate outcome can be supported by trigger strategies where a deviation from a "good" equilibrium is punished by a possibly in…nite revertion to a "bad" Nash-equilibrium. In a political economy setting, < :
Preliminary: not ready for circulation We construct an integrated assessment model with multiple ... more Preliminary: not ready for circulation We construct an integrated assessment model with multiple energy sources– including fossil fuels and “green energy”– and multiple world regions. The energy sources are imperfect substitutes and their production involve structures that are endogenous. In particular, firms can decide to lower the marginal cost of producing one form of energy at the expense of the marginal costs of other energy sources: there is directed technical change. In the lowering of these marginal costs, there are also spillovers, which are international. We analyze how (potentially region-specific) taxes affect output and the climate with and without the endogeneity of technology. We emphasize the second-best nature of taxation when optimal world-wide technology subsidies are not implemented.
We develop a model where the allocation of human resources, intergenerational social mobility, an... more We develop a model where the allocation of human resources, intergenerational social mobility, and technological growth are jointly determined. High growth endogenously increases the equilibrium return to innate cognitive ability and makes the allocation of individuals depend more on innate ability and less on social background. Individuals with a higher level of innate cognitive ability can deal better with less known, but more productive, technologies and thus choose a higher rate of technological growth. A social allocation based on innate ability and high growth will thus reinforce each other, implying the possibility of multiple endogenous growth equilibria. (JEL J62, O1)
thank Francesco Caselli for comments and Mistra-SWECIA (all authors) and the European Research Co... more thank Francesco Caselli for comments and Mistra-SWECIA (all authors) and the European Research Council (Krusell) for financial support.
Acknowledging that wage inequality and intergenerational mobility are strongly interrelated, this... more Acknowledging that wage inequality and intergenerational mobility are strongly interrelated, this paper presents a model in which both are jointly determined. The model enables us to study how inequality and mobility are affected by exogenous changes and what determines their correlation. A main implication of the model is that differences in the amount of public subsidies to education and educational quality produce crosscountry patterns with a negative correlation between inequality and mobility. Differences in the labor market, like differences in skill-biased technology or wage compression instead produce a positive correlation. The predictions of the model are found to be consistent with various empirical observations on mobility and inequality.
ABSTRACT Earlier studies have shown that lumpy investment models well characterize individual exp... more ABSTRACT Earlier studies have shown that lumpy investment models well characterize individual expenditures on durables, in particular automobiles. In this class of models, a higher level of uncertainty generally implies that the household should tolerate a larger imbalance between the actual stock of the durable and the target stock before adjusting it by buying and/or selling. Then, if the level of uncertainty increases, aggregate expenditures would temporarily fall. This hypothesis is tested by estimating an aggregate lumpy investment model on automobile expenditure data, using stock market volatility to proxy uncertainty. The result is that expenditures fall significantly as stock market volatility increases. Copyright 2001 by The editors of the Scandinavian Journal of Economics.
The financial turmoil that originated in 2007 and developed into an unprecedented crisis batterin... more The financial turmoil that originated in 2007 and developed into an unprecedented crisis battering financial and real markets is the latest manifestation, on a grand scale and with new attributes, of a welldefined pathology in the process of market liberalization and integration in the post-Bretton Woods era. At the root of the crisis lies a fundamental inconsistency between financial globalisation – the process of liberalization and deregulation driving the impressive growth of world financial markets – and existing public rules and policies at both domestic and international levels. This pathology underlies virtually all the episodes of instability that have affected the developing and the emerging economies since the constraints on capital mobility started to be removed during the 1970s: from the debt crisis in the early 1980s to the financial and currency crisis in South-East Asia in 1997–98. Globalisation of financial markets has systematically and vastly outpaced the developme...
The financial crisis triggered by the bursting of the US real-estate bubble has spread over the e... more The financial crisis triggered by the bursting of the US real-estate bubble has spread over the entire world to different degrees and markedly slowed down world economic growth in 2008. This year, all major regions in the world will be in recession.
Two features distinguish the European and the U.S. labor markets. First, European countries have ... more Two features distinguish the European and the U.S. labor markets. First, European countries have considerably more generous unemployment insurances. Second, the duration of unemployment and employment spells are substantially longer in Europe { turnover is low. We will build a model of political determination of the unemployment insurance to explain these dierences. We show that saving and borrowing is a good substitute for unemployment insurance when turnover is high, as in the U.S. A small deviation from actuarial fairness in the unemployment insurance system will then cause the employed median voter to prefer low unemployment insurance. With a l o w turnover, a high unemployment insurance becomes considerably more valuable to the median voter. Low turnover also causes a strong divergence between the longand short-run interest of the employed. If the median voter cannot bind future voters to a certain level of insurance, the voting cycle must be long to support a high level of insurance. We thank Antonio Cabrales, Assar Lindbeck, Torsten Persson, Kjetil Storesletten and Fabrizio Zilibotti for helpful comments and discussions. Christina L onnblad provided valuable editorial assistance. All remaining errors are our own responsibility.
Uploads
Papers by John Hassler