Published & Forthcoming Papers

“Redistribution with Performance Pay”  [Forthcoming, Journal of Political Economy Macroeconomics, January 2023]
with Pawel Doligalski and Nicolas Werquin.

Abstract: Half of the jobs in the U.S. feature pay-for-performance. We derive novel incidence and optimum formulas for the overall rate of tax progressivity and the top income tax rate, when such labor contracts arise from moral hazard frictions within firms. Our first main result is that the sensitivity of the worker’s compensation to performance is roughly invariant to tax progressivity. This is because the direct crowding-out of private insurance is offset by a countervailing crowding-in due to endogenous labor effort responses. Our second main result is that the optimal tax schedule is strictly less progressive than in standard models that treat pre-tax earnings risk as exogenous. This is because the negative welfare consequences of the crowd-out channel outweigh those of the crowd-in. Quantitatively, we find that the crowd-in offsets 92% of the crowdout, and that the welfare cost of not accounting for these effects when choosing tax progressivity is 0.3 percent of consumption.

Working Papers

“Bonus Question: How Does Incentive Pay Affect Wage Rigidity?  [March 2023]
with Meghana Gaur, John Grigsby, and Jonathon Hazell.

Abstract: This paper asks how flexible incentive pay affects unemployment dynamics. Introducing general dynamic incentive contracts into a benchmark labor search model yields three results. First, the response of unemployment to labor demand shocks is first-order equivalent in an economy with flexible incentive pay and without bargaining, and in an economy with rigid real wages as in Hall (2005)--if both economies are calibrated to the same steady state labor share. Second, with both bargaining and incentives, wage cyclicality arising from bargaining dampens unemployment fluctuations, but wage cyclicality due to incentive provision does not. Third, calibrating the model suggests at least 40% of new hire wage cyclicality in the data arises from incentives. Therefore a standard labor search model, calibrated to weakly pro-cyclical wages; matches unemployment dynamics in our incentive pay model, calibrated to substantially more pro-cyclical wages.

“Flexible Retirement and Optimal Taxation”  [Under Revision, Reject & Resubmit, Quarterly Journal of Economics]

Abstract: This paper studies optimal insurance against idiosyncratic wage shocks in a life cycle model with intensive labor supply and endogenous retirement. When the fixed cost of work is increasing in wage, the optimal retirement wedge provides stronger incentives for delayed retirement with age. Retirement benefits that resemble the US Social Security system can implement the optimum. Calibrated numerical simulations suggest that a mix of retirement benefits that increase with claiming age, and age-dependent linear taxes, is close to optimal.

Online Analytic Appendix | Online Computational Appendix
Chicago Fed WP, No 2018-18, 2018 version 

"Unemployment Insurance with Limited Enforcement: Evidence from Senegal"
with Abdoulaye Cisse, Kyle Herkenhoff, and Ahmadou A. Mbaye

Abstract: This paper studies the welfare effects of unemployment insurance  (UI) in developing countries characterized by high levels of informality, weak enforcement, and job search frictions. We assess the impact of UI on workers’ welfare in the presence of moral hazard and liquidity constraints. Our analysis highlights the significance of the UI scheme design on workers' welfare and identifies potential funding constraints in implementing UI in imperfect labor markets. Using a custom labor force survey conducted in Senegal, we estimate the key parameters of our model and evaluate the welfare implications of three different UI schemes with varying degrees of enforcement and funding sources. Our results demonstrate that workers are responsive to UI benefits, and the welfare gains depend on the design of the UI system. We find that broad-based taxation can compensate for weak enforcement, leading to substantial and quantifiable welfare gains. This study emphasizes the need to increase the prevalence of UI in developing countries and provides insights into the design of achievable UI schemes that deliver significant welfare improvements.