We build a unified quantitative theory of increasing adult life expectancy and income growth in the last two centuries, and the emergence of a modern health sector in the 20th century. We interpret the data as three phases of a dynamic equilibrium in which households are initially poor, the price of health goods is prohibitively high, and life expectancy is stagnant. As technological progress fuels income growth, households commence consuming basic health goods and life expectancy rises in the first half of the 19th century. 100 years later, further directed technological progress leads to the emergence of a modern health sector. Through the lens of the model, the quality-adjusted relative price of modern health goods declined by about 2.5% per year between 1940 and 2020 while the model-implied relative price that lacks quality adjustment increases in line with the BEA health price index. Counterfactual analyses suggest that almost one fourth of adult life expectancy gains between 1940 and 2020 are attributed to the emergence and expansion of modern health and that public spending on health R&D during World War II played an important role in the kickoff of the modern health sector. Institutional subscribers to the NBER working paper series, and residents of developing countries may download this paper without additional charge at www.nber.org.

We evaluate the aggregate, distributional and welfare consequences of alternative government education policies to encourage college completion such as making college free and improving funding for public schooling.To do so, we construct a general equilibrium overlapping generations model with intergenerational linkages, a higher education choice as well as a multistage human capital production process during childhood and adolescence with parental and government schooling investments.The model features rich cross-sectional heterogeneity, distinguishes between single and married parents, and is disciplined by US household survey data on income, wealth, education and time use.Studying the transitions induced by unexpected policy reforms we show that the "free college" and the "better schools" reform generate significant welfare gains, which take time to materialize and are lower in general than in partial equilibrium.It is optimal to combine both reforms: tuition subsidies make college affordable even for children from poorer parental backgrounds and better schools increase human capital thereby reducing dropout risk.

Homeownership rates differ widely across European countries. We document that part of this variation is driven by differences in the fraction of adults co-residing with their parents. Comparing Germany and Italy, we show that in contrast to homeownership rates per household, homeownership rates per individual are very similar during the first part of the life cycle. To understand these patterns, we build an overlapping-generations model where individuals face uninsurable income risk and make consumption-saving and housing tenure decisions. We embed an explicit intergenerational link between children and parents to capture the three-way trade-off between owning, renting, and co-residing. Calibrating the model to Germany we explore the role of income profiles, housing policies, and the taste for independence and show that a combination of these factors goes a long way in explaining the differential life-cycle patterns of living arrangements between the two countries.

We extend the canonical income process with persistent and transitory risk to shock distributions with left-skewness and excess kurtosis, to which we refer as higher-order risk. We estimate our extended income process by GMM for household data from the United States. We find countercyclical variance and procyclical skewness of persistent shocks. All shock distributions are highly leptokurtic. The existing tax and transfer system reduces dispersion and left-skewness of shocks. We then show that in a standard incomplete-markets life-cycle model, first, higher-order risk has sizable welfare implications, which depend crucially on risk attitudes of households; second, higher-order risk matters quantitatively for the welfare costs of cyclical idiosyncratic risk; third, higher-order risk has non-trivial implications for the degree of self-insurance against both transitory and persistent shocks.

This paper studies discrete time finite horizon life-cycle models with arbitrary discount functions and iso-elastic per period power utility with concavity parameter θ. We distinguish between the savings behavior of a sophisticated versus a naive agent. Although both agent types have identical preferences, they solve different utility maximization problems whenever the model is dynamically inconsistent. Pollak (1968) shows that the savings behavior of both agent types is nevertheless identical for logarithmic utility (θ=1). We generalize this result by showing that the sophisticated agent saves in every period a greater fraction of her wealth than the naive agent if and only if θ≥1. While this result goes through for model extensions that preserve linearity of the consumption policy function, it breaks down for non-linear model extensions.

Based on data on school visits from Safegraph and on school closures from Burbio, we document that during the Covid-19 crisis secondary schools were closed for in-person learning for longer periods than elementary schools, private schools experienced shorter closures than public schools, and schools in poorer US counties experienced shorter school closures. To quantify the long-run consequences of these school closures, we extend the structural life cycle model of private and public schooling investments by Fuchs-Schündeln et al. (Econ J 132:1647–1683, 2022) to include private school choice and feed into the model the school closure measures from our empirical analysis. Future earnings and welfare losses are largest for children that started public secondary schools at the onset of the Covid-19 crisis. Comparing children from the top to children from the bottom quartile of the income distribution, welfare losses are 0.5 percentage points larger for the poorer children if school closures were unrelated to income. Accounting for the longer school closures in richer counties reduces this gap by about 1/4. A policy intervention that extends schools by 6 weeks generates significant welfare gains for children and raises future tax revenues sufficient to pay for the cost of this schooling expansion.

We develop a method that identifies the effects of nationwide policy, i

We develop a method that identifies the effects of nationwide policy, i.e., policy implemented across all regions at the same time. The core idea is to track outcome paths in terms of stages rather than time, where a stage of a regional outcome at time t is its location on the support of a reference path. The method proceeds in two steps. First, a normalization maps the time paths of regional outcomes onto the reference path—using only pre-policy data. This uncovers cross-regional heterogeneity of the stage at which policy is implemented. Second, this stage variation identifies policy effects inside a window of stages where a stage-leading region provides the no-policy counterfactual path for non-leading regions that are subject to policy inside that window. We assess our method’s performance with Monte-Carlo experiments, illustrate it with empirical applications, and show that it captures heterogeneous policy effects across stages.

Population aging has forced policy makers in most developed countries to reform pension systems with the aim of maintaining or re-establishing financial sustainability. This usually involves cost-cutting measures like later pension eligibility ages and lower replacement rates. Such reforms face harsh trade-offs with the objective of providing adequate pensions. Social welfare and inequality have emerged as crucial concerns about recent pension reforms, stressing that the lack of “social sustainability” may undermine financial sustainability. This paper analyzes such trade-offs and may explain why support for pension reform has dwindled in Europe. The paper evaluates reform effects on financial sustainability, social welfare, and intra- and inter-generational equality in a rich unified framework with several dimensions of heterogeneity and various behavioral reactions. Our simulations shed light on the complex distributional effects of pension reform on different cohorts and societal groups. They show where policy tends to reform unequally and why reforms may fail to find voters’ approval.

We develop a two sector incomplete markets integrated assessment model to analyze the effectiveness of green quantitative easing (QE) in complementing fiscal policies for climate change mitigation. We model green QE through an outstanding stock of private assets held by a monetary authority and its portfolio allocation between a clean and a dirty sector of production. Green QE leads to a partial crowding out of private capital in the green sector and to a modest reduction of the global temperature by 0.04 degrees of Celsius until 2100. A moderate global carbon tax of 50 USD is 4 times more effective.

We characterize the optimal linear tax on capital in an Overlapping Generations model with two period lived households facing uninsurable idiosyncratic labor income risk. The Ramsey government internalizes the general equilibrium feedback of private precautionary saving. For logarithmic utility our full analytical solution of the Ramsey problem shows that the optimal aggregate saving rate is independent of income risk. The optimal time-invariant tax on capital is increasing in income risk. Its sign depends on the extent of risk and on the Pareto weight of future generations. If the Ramsey tax rate that maximizes steady state utility is positive, then implementing this tax rate permanently generates a Pareto-improving transition even if the initial equilibrium is dynamically efficient. We generalize our results to Epstein-Zin-Weil utility and show that the optimal steady state saving rate is increasing in income risk if and only if the intertemporal elasticity of substitution is smaller than 1.

This paper investigates the roles psychological biases play in empirically estimated deviations between subjective survival beliefs (SSBs) and objective survival probabilities (OSPs). We model deviations between SSBs and OSPs through age-dependent inverse S-shaped probability weighting functions (PWFs), as documented in experimental prospect theory. Our estimates suggest that the implied measures for cognitive weakness, likelihood insensitivity, and those for motivational biases, relative pessimism, increase with age. We document that direct measures of cognitive weakness and motivational attitudes share these trends. Our regression analyses confirm that these factors play strong quantitative roles in the formation of subjective survival beliefs. In particular, cognitive weakness is an increasingly important contributor to the overestimation of survival chances in old age.

Using a structural life-cycle model, we quantify the long-term impact of school closures during the Corona crisis on children affected at different ages and coming from households with different parental characteristics. In the model, public investment through schooling is combined with parental time and resource investments in the production of child human capital at different stages in the children's development process. We quantitatively characterize both the long-term earnings consequences on children from a Covid-19 induced loss of schooling, as well as the associated welfare losses. Due to self-productivity in the human capital production function, skill attainment at a younger stage of the life cycle raises skill attainment at later stages, and thus younger children are hurt more by the school closures than older children. We find that parental reactions reduce the negative impact of the school closures, but do not fully offset it. The negative impact of the crisis on children's welfare is especially severe for those with parents with low educational attainment and low assets. The school closures themselves are primarily responsible for the negative impact of the Covid-19 shock on the long-run welfare of the children, with the pandemic-induced income shock to parents playing a secondary role.

We estimate the effects that the different financial deregulations in the U.S. have had on the country’s income distribution. We find that the different reforms have moved inequality in drastically different directions. On the one hand, during the late 1970s and early 1980s, the removal of intraand inter-state branching restrictions and the elimination of state-varying rates ceilings decreased inequality, as they mostly enhanced the incomes of workers in the lower tail of the income distribution. On the other hand, the repeal of the Glass-Steagall Act in 1999 substantially increased inequality, as it mostly and by large amounts– increased the incomes of workers in the upper tail of the distribution. To explore the mechanisms underlying the different effects, we also examine the responses within and across individuals in different age groups, and compare finance vs non-finance workers. Our findings indicated that models based solely on capital skill complementarities (CSC) are insufficient because they would imply similar responses to all reforms. We construct a model that emphasize the endogenous changes in the heterogeneous access (and choices) of households’ financial products. The model naturally explains how the different deregulations impacted the opposite tails of the income distribution by capturing the changes in the financial markets available to households of different incomes and characteristics. ∗ Preliminary and Incomplete. Contact information: Alexander Ludwig: Ludwig@safe.uni-frankfurt.de. Alexander Monge-Naranjo: Alexander.MongeNaranjo@ stls.frb.org. Ctirad Slav́ık: ctirad.slavik@cerge-ei.cz. Faisal Sohail: faisal.sohail@unimelb.edu.au. All views and opinions expressed here are the authors’ and do not necessarily reflect those of the Federal Reserve Bank of St. Louis or the Federal Reserve System. Alexander Ludwig acknowledges financial support by the Research Center SAFE, funded by the State of Hessen initiative for research LOEWE. Ctirad Slav́ık acknowledges financial support of the Grant Agency of the Czech Republic, grant number 17-27676S, as well as the support of the Charles University, PRIMUS project Primus/HUM/37.

We develop a novel empirical approach to identify the effectiveness of policies against a pandemic. The essence of our approach is the insight that epidemic dynamics are best tracked over stages, rather than over time. We use a normalization procedure that makes the pre-policy paths of the epidemic identical across regions. The procedure uncovers regional variation in the stage of the epidemic at the time of policy implementation. This variation delivers clean identification of the policy effect based on the epidemic path of a leading region that serves as a counterfactual for other regions. We apply our method to evaluate the effectiveness of the nationwide stay-home policy enacted in Spain against the Covid-19 pandemic. We find that the policy saved 15.9% of lives relative to the number of deaths that would have occurred had it not been for the policy intervention. Its effectiveness evolves with the epidemic and is larger when implemented at earlier stages.

In 2015-2016 Germany experienced a wave of predominantly low-skilled refugee immigration. We evaluate its macroeconomic and distributional effects using a quantitative overlapping generations model calibrated using German micro data to replicate education and productivity differentials between foreign born and native workers. Workers are modelled as imperfect substitutes in aggregate production leading to endogenous wage differentials. We simulate the dynamic effects of this refugee wave, with specific focus on the welfare impact on low skilled natives. Our results indicate that the small losses this group suffers can be compensated by welfare gains of other parts of the native population.

1. The coronavirus has led to a human tragedy, but it need not end up in an economic catastrophe. 2. In Southern Europe there are signs of a silver lining: the growth rate of the total number of deaths attributed to the coronavirus has been decreasing for weeks in Italy and Spain. 3. While the effect of the connement measures aim at limiting the spread of the virus is at best uncertain, the economic and social costs of a prolonged lockdown are much less ambiguous and potentially huge. Importantly, these costs can be very unequally distributed. 4. We argue that it is therefore time to start thinking about how to gradually unlock these countries, and we make some suggestions along this line starting with large-scale testing and continuous retesting as the most useful pre-condition.

This paper estimates the effects of financial market deregulation on income inequality in the US. We find that different financial reforms had different implications for income inequality. Reforms in the 1970s through the 1980s, namely the removal of restrictions on intra- and inter-state banking and the elimination of ceilings on interest rates, decreased inequality by increasing incomes at the bottom of the income distribution, mainly of younger workers. In contrast, the 1999 repeal of the Glass-Steagal act increased inequality by increasing incomes at the top of the income distribution. We also document strong indirect effects of all three reforms on sectors other than Finance and Insurance (FI). Direct effects on workers in FI are mainly strong for the repeal of the Glass-Steagal act. Our findings suggest that for a better understanding of trends in inequality one should carefully distinguish between different types of financial market reforms, both empirically and theoretically.

We ask whether a pay-as-you-go financed social security system is welfare improving in an economy with idiosyncratic productivity and aggregate business cycle risk. We show analytically that the whole welfare benefit from joint insurance against both risks is greater than the sum of benefits from insurance against the isolated risk components. One reason is the convexity of the welfare gain in total risk. The other reason is a direct risk interaction which amplifies the utility losses from consumption risk. We proceed with a quantitative evaluation of social security’s welfare effects. We find that introducing an unconditional minimum pension leads to substantial welfare gains in expectation, even net of the welfare losses from crowding out. About 60% of the welfare gains would be missing when simply summing up the isolated benefits.

We characterize the optimal joint design of public unemployment and pension insurance systems. We start with a simple three period model to illustrate analytically interactions between both systems. We then develop a quantitative multi-period life-cycle model with incomplete markets, endogenous labor supply and retirement decisions in general equilibrium that features a restricted set of policy instruments to represent public unemployment and pension insurance schemes. Our main objective is to quantitatively characterize the optimal mix of both systems by calibrating the model to the German economy, which features generous public insurance systems. This paper is incomplete. We are currently at the stage of diagnosing the quantitative model, which provides important insights into desirable refinements of the model’s specification. Very preliminary results based on an earlier model variant suggested that unemployment pay should be more generous and pension insurance more redistributive than for the German status quo. JEL Classification: E61, H55, J65.