In this paper we use the enhanced consumption data in the Panel Survey of Income Dynamics (PSID) from 2005-2017 to explore the transmission of income shocks to consumption. We build on the nonlinear quantile framework introduced in Arellano, Blundell and Bonhomme (2017). Our focus is on the estimation of consumption responses to persistent nonlinear income shocks in the presence of unobserved heterogeneity. To reliably estimate heterogeneous responses in our unbalanced panel, we develop Sequential Monte Carlo computational methods. We find substantial heterogeneity in consumption responses, and uncover latent types of households with different life-cycle consumption behavior. Ordering types according to their average log-consumption, we find that low-consumption types respond more strongly to income shocks at the beginning of the life cycle and when their assets are low, as standard life-cycle theory would predict. In contrast, high-consumption types respond less on average, and in a way that changes little with age or assets. We examine various mechanisms that might explain this heterogeneity.

We develop tests for neglected serial correlation when the information matrix is repeatedly singular under the null. Specifically, we consider white noise against a multiplicative seasonal AR model, and a local-level model against a nesting UCARIMA one. Our proposals, which involve higher-order derivatives, are asymptotically equivalent to the likelihood ratio test but only require estimation under the null. Remarkably, we show that our proposed tests effectively check that certain autocorrelations of the observations are 0, so their asymptotic distribution is standard. We conduct Monte Carlo exercises that study their finite sample size and power properties, comparing them to alternative approaches.

We compare decisions by female and male judges in child support trials where a judge decides on the child support amount to be paid by the father. Leveraging the random assignment of cases to judges, we show that female judges set lower child support awards. We find no evidence that this gap is explained by pervasive views on traditional gender norms, nor by female and male judges pursuing alternative judicial goals. Instead, we offer a new perspective on gender differences in judicial decision-making by focusing on cases where the defendant’s income is non-observable due to labor market informality. In these cases, judges must form beliefs about the income before deciding on a child support award. Eliciting such beliefs, we find that female judges rely less on the plaintiff’s claim to form beliefs about the defendant’s income, which explains the gender gap in child support awards.

The U.S. spends signifficant amounts on non-medical transfers for its working-age population in a wide range of programs that support low and middle-income households. How valuable are these programs for U.S. households? Are there simpler, welfare improving ways to transfer resources that are supported by a majority? What are the macroeconomic effects of such alternatives? We answer these questions in an equilibrium, life-cycle model with single and married households who face idiosyncratic productivity risk, in the presence of costly children and potential skill losses of females associated with non-participation. Our findings show that a potential revenue-neutral elimination of the welfare state generates large welfare losses in the aggregate, although most households support the move as losses are concentrated among a small group. We find that a Universal Basic Income program does not improve upon the current system. If instead per-person transfers are implemented alongside a proportional tax, a Negative Income Tax experiment, it becomes feasible to improve upon the current system. Providing per-person transfers to all households is costly, and reducing tax distortions helps to provide for resources to expand redistribution.

How should the U.S. confront the growing revenue needs driven by higher spending requirements? We investigate the mix of potential tax increases that generate a given revenue need at the minimum welfare cost and evaluate its macroeconomic impact. We do so in the context of a life-cycle growth model that captures key aspects of the earnings and wealth distributions and the non-linear shape of taxes and transfers in place. Our findings show that a proportional consumption tax combined with a lump-sum transfer to all households and a reduction in income tax progressivity consistently emerges as the best alternative to minimize welfare costs associated with a given increase in revenue. A 30% long-run increase in Federal tax revenue requires a consumption tax rate of 27.8%, a transfer of about 12% of mean household income to all households, and a reduction of top marginal income tax rates of more than 5 percentage points—output declines by 7.9% in the long run. While transfers are substantial, smaller transfers can accomplish most of the reduction in welfare costs. We find no role for wealth taxes in increasing revenues or minimizing welfare costs.

Imperfect competition in labor markets can lead to efficiency losses and lower aggregate output. In this paper, we study whether differences in competitiveness of labor markets can help explain differences in GDP per capita across countries. We structurally estimate a model of oligopsony with free entry for countries at different stages of development and show that the labor supply elasticity, which determines the extent of firms’ labor market power, is increasing with GDP per capita. Wage mark-downs range from 55 percent among low-income countries to around 23 percent among the richest. Output per capita in poorer countries would increase by up to 69 percent if their labor markets were as competitive as in countries at the top of the development ladder.