Essays on heterogeneous agent macroeconomics with frictional markets

Aaron Hedlund, University of Pennsylvania

Abstract

Addressing many topics in macroeconomics—ranging from questions of optimal policy design to determining the effects of demographic change, globalization, and technological progress—requires a sound understanding of the nature of the risks that households face and the insurance opportunities available to hedge against those risks. This dissertation examines how the interaction of imperfect risk sharing and frictional markets can affect macroeconomic outcomes—from allocations to welfare to market dynamics. ^ In chapter one, I analyze how information externalities in the labor market affect the efficiency of wealth accumulation and estate taxation. I develop a model of costly skill acquisition, labor market signaling, and wealth accumulation and bequests. When making hiring decisions, firms form beliefs about the skill level of each worker by looking at that worker's signal in addition to the proportion of skilled workers in the economy. This aggregate proportion is a public good, and workers exert sub-optimal effort to become skilled because they engage in informational free-riding. Wealthier workers expend even less effort on becoming skilled, and thus, informational free-riding gives rise to inefficient wealth accumulation. Under certain conditions, an increase in the estate tax rate can benefit some members of society, even absent any redistribution. ^ In chapter two, I investigate how illiquidity in the housing and mortgage markets impacts the dynamics of housing, mortgage debt, and foreclosures. I develop a tractable model of the macroeconomy with idiosyncratic and aggregate risk, directed search in the housing market, and equilibrium mortgage default. I show that the dynamics of the model are consistent with U.S. housing market dynamics over the period 1975–2010. In particular, house prices, sales, residential investment, and investment are procyclical and volatile; foreclosures and average time to sell are countercyclical and volatile; and housing booms and busts are protracted and subject to overshooting. The model also matches micro-empirical facts on home buying, selling, and foreclosure behavior. The model highlights an important feedback mechanism in housing markets: trading frictions tighten endogenous credit constraints, and credit constraints magnify trading frictions in the real estate market.^

Subject Area

Economics, General

Recommended Citation

Aaron Hedlund, "Essays on heterogeneous agent macroeconomics with frictional markets" (January 1, 2012). Dissertations available from ProQuest. Paper AAI3509137.
http://repository.upenn.edu/dissertations/AAI3509137

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