Projects

Working Papers


“Bonus Question: How Does Incentive Pay Affect Wage Rigidity? [October 2022]
with Meghana Gaur, John Grigsby, and Jonathon Hazell.

Abstract: Wage rigidity occupies a central role in business cycle models. However, the relevant notion of wage rigidity is unclear because, in the data, base wages are rigid, but non-base wages, such as bonuses, are flexible. This paper studies how incentive pay affects unemployment and inflation dynamics by embedding a general dynamic principal-agent problem into macro business cycle models. We show that a Diamond-Mortensen-Pissarides labor search model with flexible incentive pay exhibits first-order unemployment dynamics that are identical to those in a simple model with exogenously fixed wages Hall (2005) calibrated to the same steady-state moments. Similarly, in a New Keynesian model, incentive pay generates the same Phillips Curve relation between price inflation and unemployment as does a fixed wage model. Thus incentive pay is not relevant "wage flexibility'' for unemployment or inflation dynamics.


“Redistribution with Performance Pay” [Revise & Resubmit, Journal of Political Economy Macroeconomics, November 2022]
with Pawel Doligalski and Nicolas Werquin.

Abstract: Half of the jobs in the U.S. feature pay-for-performance. We derive novel incidence and optimal nonlinear tax formulas for the overall rate of progressivity and for the top tax rates on total earnings and bonuses when such labor contracts arise from moral hazard frictions within firms. Optimal taxes account for the fiscal externalities and welfare consequences of two distinct forces: a direct crowding-out of private insurance and a countervailing crowding-in due to endogenous labor effort responses. These imply that the amount of pre-tax earnings risk to which the worker is exposed is roughly invariant to tax progressivity, whereas the (adverse) welfare consequences of the crowd-out outweigh those of the crowd-in. Quantitatively, the optimal tax policy with performance-pay contracts is close to that prescribed by standard models that treat earnings risk as exogenous. Finally, we uncover an efficiency-based argument for taxing bonuses at strictly lower rates than base earnings.


Appendix | VMACS WP Presentation

“Flexible Retirement and Optimal Taxation” [Reject & Resubmit, Quarterly Journal of Economics, August 2020]

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


Work in Progress


"Optimal Unemployment Insurance in Developing Countries: Theory and Evidence from Senegal" (draft available upon request)
with Abdoulaye Cisse, Kyle Herkenhoff, and Ahmadou A. Mbaye