Growth and welfare effects of business cycles in economies with idiosyncratic human capital risk

Krebs, Tom

doi:10.1016/s1094-2025(03)00030-9

Cited by 109 publications

(95 citation statements)

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“…In other words, even though the baseline model assumes permanent income shocks for tractability reasons, the quantitative results are robust to the more general assumption of persistent income shocks. Second, following the bulk of the literature, this paper takes the job displacement process as exogenously given and uses an abstract "integration principle" (Lucas, 2003, Krebs, 2003a, Krusell and Smith, 1999) in order to model the effect of macroeconomic stabilization policy on job displacement risk. Clearly, a more detailed analysis of the economic forces behind the cyclical variations in job displacement risk in conjunction with an explicit model of macroeconomic stabilization policy would yield additional insights into the cost of business cycles.…”

Section: Introductionmentioning

confidence: 99%

Job Displacement Risk and the Cost of Business Cycles

Krebs

2007

American Economic Review

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This paper analyzes the welfare costs of business cycles when workers face uninsurable job displacement risk. The paper uses a simple macroeconomic model with incomplete markets to show that cyclical variations in the long-term earnings losses of displaced workers can generate arbitrarily large cost of business cycles even if the variance of individual income changes is constant over the cycle. In addition to the theoretical analysis, this paper also conducts a quantitative study of the cost of business cycles using empirical evidence on the long-term earnings losses of U.S. workers. The quantitative analysis shows that realistic variations in job displacement risk generate sizable costs of business cycles even though a second-moment analysis implies negligible costs.JEL Classification: D52, E21, E32, J24

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Section: Introductionmentioning

confidence: 99%

Job Displacement Risk and the Cost of Business Cycles

Krebs

2007

American Economic Review

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129

120

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“…Because of space limitations, this paper did not discuss any applications of the framework to macroeconomic policy analysis. However, the model has already been used to study the growth and welfare effects of social insurance (Krebs 2001) and the welfare cost of business cycles (Krebs, 2002a).…”

Section: Discussionmentioning

confidence: 99%

“…For example, whereas social insurance of idiosyncratic risk has no effect on growth and welfare in the complete-markets economy, it has a substantial effect in the incomplete-markets economy (Krebs, 2001). Moreover, the welfare cost of business cycles are likely to be much larger when markets for idiosyncratic risk are incomplete (Krebs, 2002a).…”

Section: Introductionmentioning

confidence: 99%

“…Finally, there is the work by Scheinkman and Weiss (1986) and Woodford (1986) who consider models with two infinitely-lived agents that are isomorphic to two-period OLG-models because individual endowments fluctuate deterministically. In contrast to this work, the current model allows for a wide range of distributions of idiosyncratic shocks, a feature that is essential when calibrating the model based on household-level consumption and income data (Krebs 2001(Krebs , 2002a we interpret s it as a household-specific (idiosyncratic) shock and S t as an economy-wide (aggregate) shock. We assume that s it is an element of a time-and household-independent set s, and that S t is an element of a time-invariant set S. To avoid mathematical technicalities, the formal proofs also assume that the two sets s and S are finite.…”

Section: Introductionmentioning

confidence: 99%

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Recursive equilibrium in endogenous growth models with incomplete markets

Krebs

2005

Economic Theory

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis paper analyzes the existence of recursive equilibria in a class of convex growth models with incomplete markets. Households have identical CRRA-preferences, production displays constant returns to scale with respect to physical and human capital, and all markets are competitive. There are aggregate productivity shocks that affect the aggregate returns to physical and human capital investment (stock returns and wages), and there are idiosyncratic shocks to human capital (idiosyncratic depreciation shocks) that only affect individual human capital returns. For a given history of aggregate shocks, these idiosyncratic human capital shocks are independently distributed over time and identically distributed across agents. Finally, households have the opportunity to trade assets in zero net supply with payoffs that depend on the aggregate shock, but markets are incomplete in the sense that there are no assets with payoffs depending on idiosyncratic shocks. It is shown that there exist recursive equilibria that are simple in the sense that equilibrium prices (returns) only depend on exogenous shocks. Moreover, the allocations associated with simple recursive equilibria are identical to the equilibrium allocations of an economy in which households live in autarky and face both aggregate and idiosyncratic risk.JEL Classification: D50, D52, G50

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“…What seams pivotal for larger estimates is whether shocks on individual income are modeled as persistent. In reviewing this literature, Lucas (2003) concludes that the only routes to larger estimates rely on (a) assumptions that convert small, transient aggregate shocks into larger, persistent (effectively uninsurable) individual shocks; Krebs (2003Krebs ( , 2007 and Storesletten, Telmer and Yaron (2001), 18 or on (b) there being long term risk in the representative agent's consumption, Alvarez and Jermann (2000), or on (c) the poorest being borrowing constrained and remaining poor along the path to a steady state; Krusell and Smith (1999), or on (d) an extremely high degree of relative risk aversion. Indeed, throughout this list there is always a risk that is highly persistent or permanent (including the risk of drawing a high risk aversion coefficient at birth).…”

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confidence: 99%

Quantifying the Cost of Risk in Consumption

Tirelli

Turner²

2010

The B.E. Journal of Theoretical Economics

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Fixing a risky intertemporal, interagent consumption profile, its total cost is the total willingness to pay for smoothing everyone's consumption. It decomposes into a micro cost capturing the inefficiency in the cross-sectional distribution of total consumption, risky as it is, and a macro cost capturing the additional benefit of eliminating the risk in total consumption, once efficiently redistributed.We consider the risk that an individual experiences income mobility and the consequent consumption mobility. US panel data estimates a consumption profile, for which we compute the costs. Total cost is 9-18% of total initial consumption for CRRA parameters 1.25-3.5. Of this, 80-90% is the micro cost and only 10-20% the macro cost. The magnitude of these results, and in particular the relative importance of the micro-cost, is in line with previous empirical evidence.Motivated by this evidence we develop the theory of micro cost. Moreover, because the micro cost does not admit a closed form, for general preferences, we layout an approximation method.

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Growth and welfare effects of business cycles in economies with idiosyncratic human capital risk

Cited by 109 publications

References 43 publications

Job Displacement Risk and the Cost of Business Cycles

Job Displacement Risk and the Cost of Business Cycles

Recursive equilibrium in endogenous growth models with incomplete markets

Quantifying the Cost of Risk in Consumption

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