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Working Papers and Work in Progress:

Public policy and inequality:

The macroeconomic and distributional effects of progressive wealth taxes
[A quantitative analysis of Thomas Piketty's wealth tax proposals]
with Barış Kaymak (Université de Montréal)
[draft coming soon]

The firm size distribution and entrepreneurship:

The firm size distribution across countries and skill-biased change in entrepreneurial technology
[Updated: Jan 2017 version including more info on data and an exploration of the potential role of size-dependent distortions]
[
abstract]

The labour market, the decision to become an entrepreneur, and the firm size distribution
CIREQ Working Paper 11-2012, Aug 2012. [
abstract]

The decision to become an entrepreneur and the firm size distribution: a unifying framework for policy analysis
IZA Discussion Paper 7757, Nov 2013. [
abstract]

Structural change and growth:

Capital-labour substitution, structural change and the labor income share
with Francisco Alvarez-Cuadrado and Ngo Van Long (both McGill University)
IZA Discussion Paper 8941. Submitted. [
abstract]

Labor markets:

Understanding Severance Pay Determination: Mandates, Bargaining, and Unions [Jan 2015]
with Stéphane Auray and Samuel Danthine (both CREST-Ensai)
IZA Discussion Paper 8422. [
abstract]

Published/Forthcoming:

Capital-labour substitution, structural change and growth
with Francisco Alvarez-Cuadrado and Ngo Van Long (both McGill University)
Theoretical Economics, forthcoming.
Working paper version with more proofs:
CESifo Working Paper 5928.
[
abstract]

The evolution of wealth inequality over half a century: the role of taxes, transfers and technology
with Barış Kaymak (Université de Montréal).
Journal of Monetary Economics 78, April 2016. [
abstract] [link to journal] [related piece at voxeu.org]
Old title: "The Macroeconomic Implications of Cuts in Top Income Tax Rates: 1960-2010".

Transitional dynamics and the optimal progressivity of income redistribution
with Ozan Bakış (Sabanci University) and Barış Kaymak (Université de Montréal)
Review of Economic Dynamics 18(3), July 2015, 679-693. [
abstract] [link to journal]

Experimentation by Firms, Distortions, and Aggregate Productivity
with Alain Gabler (Swiss National Bank)
Review of Economic Dynamics, 16(1), January 2013, 26-38. [
abstract] [link to journal]

Who Becomes an Entrepreneur? Labor Market Prospects and Occupational Choice
Journal of Economic Dynamics and Control, 37(3), March 2013, 693-710. [
abstract] [link to journal]

"Entrepreneurs out of necessity": a snapshot
Applied Economics Letters 20(7), 2013, 658-663. [
abstract] [link to journal] [Apr 1020 IZA DP version]

Trust and the Choice Between Housing and Financial Assets: Evidence from Spanish Households
with Mayssun El-Attar (McGill University)
Review of Finance, 15(4), October 2011, 727-756. [
abstract] [link to journal] [Sep 2010 version]

Structural Change out of Agriculture: Labor Push versus Labor Pull
with Francisco Alvarez-Cuadrado (McGill University)
American Economic Journal: Macroeconomics, 3(3), July 2011, 127-158. [
abstract] [link to journal] [July 2010 version]

The regulation of entry and aggregate productivity
Economic Journal, 120(549), December 2010, 1175-1200. [
abstract] [link to journal] [May 2009 version] [related piece at voxeu.org]

Employment Protection, Firm Selection and Growth
Journal of Monetary Economics, 56(8), November 2009, 1074-1085. [
abstract] [link to journal] [Sep 2009 version]

Abstracts:

The evolution of wealth inequality over half a century: the role of taxes, transfers and technology
Journal of Monetary Economics 78, April 2016. [
back up] [link to journal]
Old title: "The Macroeconomic Implications of Cuts in Top Income Tax Rates: 1960-2010"
Over the last 50 years the US tax system went through a striking transformation that reduced the effective tax rates for top income groups and raised transfers to seniors. This paper investigates the macroeconomic repercussions of this change in policy, particularly for the distributions of income, wealth and consumption. Changes in taxes and transfers account for nearly half of the rise in wealth concentration. Nonetheless, their impact on the distributions of income and consumption has been minor due to changes in equilibrium prices and the offsetting effects of tax cuts and transfers on the dispersion of consumption. Results highlight the role of increasing wage dispersion during this period as the main driver of trends in inequality.

The firm size distribution across countries and skill-biased change in entrepreneurial technology
[
back up]
How and why does the firm size distribution differ across countries? Using two datasets covering more than 30 countries, this paper documents that several features of the firm size distribution are strongly associated with income per capita: the entrepreneurship rate and the fraction of small firms fall with per capita income across countries, while average firm employment, the median and higher percentiles of the firm size distribution, and the dispersion and skewness of employment all rise with per capita income. The paper broadens existing evidence on the first three facts to cover more countries and newly introduces the last three to the literature. It then proposes a simple theory of skill-biased change in entrepreneurial technology motivated by recent microeconomic literature that fits with the evidence. For this, it introduces two additional features into an otherwise standard occupational choice, heterogeneous firm model à la Lucas (1978): technological change does not benefit all potential entrepreneurs equally, and there is a positive relationship between an individual's potential payoffs in working and in entrepreneurship. If some firms consistently benefit more from technological progress than others, they stay closer to the frontier, while others fall behind. Because wages rise for all workers, marginal entrepreneurs exit and become workers. This frictionless model can account for key aspects of changes in the U.S. firm size distribution over time. The model can also account for a third of the systematic cross-country variation. Productivity-dependent distortions can account for a similar amount.

Capital-labour substitution, structural change and the labor income share
with Francisco Alvarez-Cuadrado and Ngo Van Long (both McGill University)
[
back up]
Recent work has documented declines in the labor income share in the United States and beyond. This paper documents that these trends differ between manufacturing and services in the U.S. and in a broad set of other industrialized economies, and shows that a model where the degree of capital-labor substitutability differs across sectors is consistent with these trends. We calibrate the model exploiting additional information on the pace of structural change from manufacturing to services, on which the model also has predictions. We then conduct a decomposition to establish the relative importance of several potential drivers of changes in factor income shares and structural change that have been proposed in the literature. This exercise reveals that differences in productivity growth across sectors, combined with differences in substitution possibilities, have been the main driver of both changes in the labor income share and structural change.

Capital-labour substitution, structural change and growth
with Francisco Alvarez-Cuadrado and Ngo Van Long (both McGill University)
[
back up]
There is a growing interest in multi-sector models that combine aggregate balanced growth, consistent with the well-known Kaldor facts, with systematic changes in the sectoral allocation of resources, consistent with the Kuznets facts. Although variations in the income elasticity of demand across goods played an important role in initial approaches, recent models stress the role of supply-side factors in this process of structural change, in particular sector-specific technical change and sectoral differences in factor proportions. We explore a general framework that features an additional supply-side mechanism and also encompasses, as special cases, these two known mechanisms. Our model shows that sectoral differences in the degree of capital-labor substitutability – a new mechanism – are a driving force for structural change. When the flexibility to combine capital and labor differs across sectors, a factor rebalancing effect is operative. It tends to make production in the more flexible sector more intensive in the input that becomes more abundant. As a result, growth rates of sectoral capital-labor ratios can differ and, if this effect dominates, shares of each factor used in a given sector can move in different directions. We identify conditions under which this occurs and analyze the dynamics of such a case. We also provide some suggestive evidence consistent with this new mechanism. A quantitative analysis suggests that this channel was an important contributor to structural change out of agriculture in the United States.

Understanding Severance Pay Determination: Mandates, Bargaining, and Unions
with Stéphane Auray and Samuel Danthine (both CREST-Ensai)
IZA Discussion Paper 8422. [
back up]
While most of the literature on employment protection has focused on government-mandated severance pay, it has recently been documented that a substantial share of severance payments derives from private contracts or collective agreements. This paper studies the determination of these payments. We analyze the problem of joint bargaining over wages and severance payments and examine the impact of unions on these choices. To do so, we use a search and matching model with risk averse workers, in which we assume that workers may be unionized and that bargaining is over wages and severance pay. Bargaining results in levels of severance pay providing full insurance, which depend on the generosity of unemployment benefits and on the job finding rate. Unions opt for higher levels of severance pay given that their higher wage demands imply reduced job creation. Calibrated to 8 European economies, the model predicts bargained levels of severance pay which are close to those found in reality.

The labour market, the decision to become an entrepreneur, and the firm size distribution
CIREQ Working Paper 11-2012. [
back up]
Why do some people become entrepreneurs, how do institutions affect this choice, and how does this affect the firm size distribution and aggregate productivity? This paper addresses this question using a matching model with occupational choice and heterogeneity in both ability as a worker and ex ante unknown productivity of firm start-ups. This rich setting allows to address effects of heterogeneity and diverse types of institutions, like labor market institutions, entry restrictions, taxes, which can possibly differ by firm size and thereby allow addressing informality. Importantly, the model allows for a comparatively flexible lower tail of the firm size distribution and can explain the existence and persistence of small, low-productivity firms with low profits: their owners have low outside options in the labor market. Key effects from a preliminary analysis are the following: labor market conditions affect incentives to start firms differently for workers and the unemployed, with repercussions on aggregate productivity; and they affect the expected value of firm creation due to the possibility of failure. Labor market frictions can have a new effect here: they shape prospective entrepreneurs’ value of failure. Given that failure of new projects is common, they can strongly affect not only entry rates, but also the type of firms that enter.

The Decision to Become an Entrepreneur and the Firm Size Distribution: a Unifying Framework
IZA Discussion Paper 7757. [
back up]
Developing and emerging economies have high entrepreneurship rates and relatively many small firms. There is enormous heterogeneity among these firms and entrepreneurs. This paper presents a simple occupational choice model that captures motives for entrepreneurship at both edges of the size distribution. The model is then used to analyse the effects of productivity growth, distortions, financial and labor market frictions, and risk. Capturing entrepreneurship across the size distribution allows for different reactions of high- and low-ability entrepreneurs to changes in policies and the environment. These may result in powerful general equilibrium effects. In particular, policies affecting high-ability entrepreneurs potentially running large firms can indirectly have a strong effect on entry by low-ability entrepreneurs and thus on the prevalence of small firms.

On the Optimality of Progressive Income Redistribution
with Ozan Bakış (Sabanci University) and Barış Kaymak (Université de Montréal)
Review of Economic Dynamics, accepted. [
back up] [link to journal]
We compute the optimal non-linear tax policy for a dynastic economy with uninsurable risk, where generations are linked by dynastic wealth accumulation and correlated incomes. Unlike earlier studies, we take full account of the welfare distribution along the transition to the new steady state following a once-and-for-all change in the tax system. Findings show that accounting for transitional dynamics leads to a more progressive optimal tax system than one would obtain by only comparing steady states. Starting at the U.S. status quo, the optimal tax reform is a slight to moderate reduction in the progressivity of the tax system, depending on how much the policy maker cares about future generations.

Experimentation by Firms, Distortions, and Aggregate Productivity
with Alain Gabler (Swiss National Bank)
Review of Economic Dynamics, 16(1), January 2013, 26-38. [
back up] [link to journal]
Recent empirical research has documented that distortions of allocative efficiency among heterogeneous firms can have large aggregate consequences. This paper evaluates the size of these effects when distortions affect not only resource allocation but also the evolution of firm-level productivity itself. To this end, we partially endogenize the evolution of firm-level productivity in a standard heterogeneous firm model by allowing firms to engage in costly, purposeful experimentation: Firms can engage in risky experiments, which take the form of productivity shocks. Results from failed experiments can be discarded. We then show that endogenous productivity implies up to twice as large effects of productivity-dependent distortions on aggregate consumption.

Who Becomes an Entrepreneur? Labor Market Prospects and Occupational Choice
August 2012 version.
Journal of Economic Dynamics and Control, 37(3), March 2013, 693-710. [
back up] [link to journal]
Why do some people become entrepreneurs (and others don’t)? Why are firms so heterogeneous, and many firms so small? To start, the paper briefly documents evidence from the empirical literature that the relationship between entrepreneurship and education is U-shaped; that many entrepreneurs start a firm “out of necessity”; that most firms are small, remain so, yet persist in the market; and that returns to entrepreneurship have a much larger cross-sectional variance than returns to wage work. Popular models of firm heterogeneity cannot easily account for the U-shape or for the persistence of low-productivity firms. The paper shows that these facts can be explained in a dynamic model of occupational choice between wage work and entrepreneurship where agents are heterogeneous in their ability as workers, and starting entrepreneurs face uncertainty about their project’s productivity. Then, under weak conditions, the most and the least able individuals choose to become entrepreneurs. This sorting is due to heterogeneous outside options in the labor market. Because of their low opportunity cost, low-ability agents optimally spend more time searching for a good project. This also makes them more likely to abandon an unsatisfactory project for a new one. Data from the National Longitudinal Survey of Youth (NLSY79) give support to these two predictions. Individuals with relatively high or low ability are more likely to be entrepreneurs or to become entrepreneurs, and spend more time in entrepreneurship. Low-ability entrepreneurs are more likely to abandon a project after only a year.

"Entrepreneurs out of necessity": a snapshot
Applied Economics Letters 20(7), 2013, 658-663. [
back up] [link to journal] [Apr 1020 IZA DP version]
“Entrepreneurs out of necessity” as identified by the Global Entrepreneurship Monitor (GEM) survey are a sizeable group across countries. This paper documents that they tend to have low education, run smaller firms, expect their firms to grow less, but are likely to stay in the market. This evidence matters for policy supporting small businesses. It is a challenge for existing theories of heterogeneous firms and points to the importance of heterogeneous outside options.

Trust and the Choice Between Housing and Financial Assets: Evidence from Spanish Households
with Mayssun El-Attar (McGill University)
Review of Finance 15(4), October 2011, 727-756. [
back up] [link to journal] [Sep 2010 version]
Trusting behavior has been shown to affect households’ portfolio choice between risky and risk-free financial assets. We extend the analysis to include the dominant component of households’ portfolios, real estate. Using data from the European Social Survey, we estimate individual-level trust by applying a hierarchical item response model. Combining these estimates with data on Spanish households’ financial decisions from the Survey of Household Finances (EFF), we show that households with less trust invest more in housing and less in financial assets, in particular risky ones. Trust thus may drive not only (limited) stock market participation, but financial development more generally.

Structural Change out of Agriculture: Labor Push versus Labor Pull
with Francisco Alvarez-Cuadrado (McGill University)
American Economic Journal: Macroeconomics 3(3), July 2011, 127-158. [
back up] [link to journal] [July 2010 vesion]
A declining agricultural employment share is a key feature of economic development. Its main drivers are: improvements in agricultural technology combined with Engel’s law release resources from agriculture (“labor push”), and improvements in industrial technology attract labor out of agriculture (“labor pull”). We present a model with both channels and evaluate the importance using data on 12 industrialized countries since the nineteenth century. Results suggest that the “pull” channel dominated until 1920 and the “push” channel dominated after 1960. The “pull” channel mattered more in countries in early stages of the structural transformation. This contrasts with modeling choices in recent literature.

Employment Protection, Firm Selection and Growth
Journal of Monetary Economics 56(8), November 2009, 1074-1085. [
back up] [link to journal] [Sep 2009 version]
How do firing costs affect aggregate productivity growth? To address this question, a model of endogenous growth through selection and imitation is developed. It is consistent with recent evidence on firm dynamics and on the importance of reallocation for productivity growth. In the model, growth is driven by selection among heterogeneous incumbent firms and is sustained as entrants imitate the best incumbents. In this framework, firing costs not only induce misallocation of labor, but also affect growth by affecting firms’ exit decisions. Importantly, charging firing costs only to continuing firms raises growth by promoting selection. Also charging them to exiting firms is akin to an exit tax, hampers selection, and reduces growth—by 0.1 percentage points in a calibrated version of the model. With job turnover very similar in the two settings, this implies that the treatment of exiting firms matters for growth. In addition, the impact on growth rates is larger in sectors where firms face larger idiosyncratic shocks, as in services. This fits evidence that recent EU–U.S. growth rate differences are largest in these sectors and implies that firing costs can play a role here.

The regulation of entry and aggregate productivity
Economic Journal 120(549), December 2010, 1175-1200. [
back up] [link to journal] [May 2009 version]
Euro Area economies have lower total factor and labour productivity than the United States. I argue that differences in entry cost contribute to this by affecting firms’ technology choice. Introducing technology choice into a standard heterogeneous- firm model, small differences in administrative entry cost can explain around one third of TFP differences. The productivity difference arises because entry costs reduce com- petition and the incentive to adopt more advanced technologies. Firm heterogeneity, technology choice, and the competition channel all contribute to strengthening results compared to previous studies. The effects of entry costs are even larger when the labour market is not competitive.