IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/17714.html
   My bibliography  Save this paper

Human Capital Risk, Contract Enforcement, and the Macroeconomy

Author

Listed:
  • Tom Krebs
  • Moritz Kuhn
  • Mark L. J. Wright

Abstract

We develop a macroeconomic model with physical and human capital, human capital risk, and limited contract enforcement. We show analytically that young (high-return) households are the most exposed to human capital risk and are also the least insured. We document this risk-insurance pattern in data on life-insurance drawn from the Survey of Consumer Finance. A calibrated version of the model can quantitatively account for the life-cycle variation of insurance observed in the US data and implies welfare costs of under-insurance for young households that are equivalent to a 4 percent reduction in lifetime consumption. A policy reform that makes consumer bankruptcy more costly leads to a substantial increase in the volume of credit and insurance.

Suggested Citation

  • Tom Krebs & Moritz Kuhn & Mark L. J. Wright, 2011. "Human Capital Risk, Contract Enforcement, and the Macroeconomy," NBER Working Papers 17714, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:17714
    Note: EFG
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w17714.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Ethan Ligon & Jonathan P. Thomas & Tim Worrall, 2002. "Informal Insurance Arrangements with Limited Commitment: Theory and Evidence from Village Economies," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 69(1), pages 209-244.
    2. David M. Cutler & Amy Finkelstein & Kathleen McGarry, 2008. "Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance," American Economic Review, American Economic Association, vol. 98(2), pages 157-162, May.
    3. Krueger, Dirk & Uhlig, Harald, 2006. "Competitive risk sharing contracts with one-sided commitment," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1661-1691, October.
    4. Michael Baker & Gary Solon, 2003. "Earnings Dynamics and Inequality among Canadian Men, 1976-1992: Evidence from Longitudinal Income Tax Records," Journal of Labor Economics, University of Chicago Press, vol. 21(2), pages 267-288, April.
    5. Igal Hendel & Alessandro Lizzeri, 2003. "The Role of Commitment in Dynamic Contracts: Evidence from Life Insurance," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(1), pages 299-328.
    6. Pedro Carneiro & James J. Heckman, 2002. "The Evidence on Credit Constraints in Post--secondary Schooling," Economic Journal, Royal Economic Society, vol. 112(482), pages 705-734, October.
    7. Fatih Guvenen & Burhanettin Kuruscu & Serdar Ozkan, 2014. "Taxation of Human Capital and Wage Inequality: A Cross-Country Analysis," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 81(2), pages 818-850.
    8. Cox, Donald & Rank, Mark R, 1992. "Inter-vivos Transfers and Intergenerational Exchange," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 305-314, May.
    9. Townsend, Robert M, 1994. "Risk and Insurance in Village India," Econometrica, Econometric Society, vol. 62(3), pages 539-591, May.
    10. Rebelo, Sergio, 1991. "Long-Run Policy Analysis and Long-Run Growth," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 500-521, June.
    11. Luc Arrondel & Andre Masson, 2001. "Family Transfers Involving Three Generations," Scandinavian Journal of Economics, Wiley Blackwell, vol. 103(3), pages 415-443, September.
    12. Arthur B. Kennickell & Martha Starr-McCluer & Annika E. Sunden, 1997. "Family Finance in the U.S.: Recent Evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, Board of Governors of the Federal Reserve System (U.S.), vol. 83(1), pages .1-24, January.
    13. repec:bla:scandj:v:103:y:2001:i:3:p:415-43 is not listed on IDEAS
    14. Timothy J. Kehoe & David K. Levine, 1993. "Debt-Constrained Asset Markets," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 60(4), pages 865-888.
    15. Deaton, Angus & Paxson, Christina, 1994. "Intertemporal Choice and Inequality," Journal of Political Economy, University of Chicago Press, vol. 102(3), pages 437-467, June.
    16. Flavio Cunha & James Heckman & Salvador Navarro, 2005. "Separating uncertainty from heterogeneity in life cycle earnings," Oxford Economic Papers, Oxford University Press, vol. 57(2), pages 191-261, April.
    17. Fatih Guvenen, 2007. "Learning Your Earning: Are Labor Income Shocks Really Very Persistent?," American Economic Review, American Economic Association, vol. 97(3), pages 687-712, June.
    18. Geweke, John & Keane, Michael, 2000. "An empirical analysis of earnings dynamics among men in the PSID: 1968-1989," Journal of Econometrics, Elsevier, vol. 96(2), pages 293-356, June.
    19. David Andolfatto & Martin Gervais, 2006. "Human Capital Investment and Debt Constraints," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 9(1), pages 52-67, January.
    20. Richard Blundell & Luigi Pistaferri & Ian Preston, 2008. "Consumption Inequality and Partial Insurance," American Economic Review, American Economic Association, vol. 98(5), pages 1887-1921, December.
    21. Mark Huggett & Gustavo Ventura & Amir Yaron, 2011. "Sources of Lifetime Inequality," American Economic Review, American Economic Association, vol. 101(7), pages 2923-2954, December.
    22. Jonathan Thomas & Tim Worrall, 1988. "Self-Enforcing Wage Contracts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 55(4), pages 541-554.
    23. Jonathan Heathcote & Fabrizio Perri & Giovanni L. Violante, 2010. "Unequal We Stand: An Empirical Analysis of Economic Inequality in the United States: 1967-2006," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 13(1), pages 15-51, January.
    24. Costas Meghir & Luigi Pistaferri, 2004. "Income Variance Dynamics and Heterogeneity," Econometrica, Econometric Society, vol. 72(1), pages 1-32, January.
    25. repec:bla:econom:v:47:y:1980:i:185:p:51-72 is not listed on IDEAS
    26. Dirk Krueger & Fabrizio Perri, 2006. "Does Income Inequality Lead to Consumption Inequality? Evidence and Theory -super-1," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 73(1), pages 163-193.
    27. Fernando Alvarez & Urban J. Jermann, 2000. "Efficiency, Equilibrium, and Asset Pricing with Risk of Default," Econometrica, Econometric Society, vol. 68(4), pages 775-798, July.
    28. Gong, Xiaodong, 2010. "The Added Worker Effect and the Discouraged Worker Effect for Married Women in Australia," IZA Discussion Papers 4816, Institute of Labor Economics (IZA).
    29. B. Douglas Bernheim & Lorenzo Forni & Jagadeesh Gokhale & Laurence J. Kotlikoff, 2003. "The Mismatch Between Life Insurance Holdings and Financial Vulnerabilities: Evidence from the Health and Retirement Study," American Economic Review, American Economic Association, vol. 93(1), pages 354-365, March.
    30. Tom Krebs, 2003. "Human Capital Risk and Economic Growth," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 118(2), pages 709-744.
    31. Primiceri, Giorgio E. & van Rens, Thijs, 2009. "Heterogeneous life-cycle profiles, income risk and consumption inequality," Journal of Monetary Economics, Elsevier, vol. 56(1), pages 20-39, January.
    32. Cordoba, Juan-Carlos, 2008. "U.S. inequality: Debt constraints or incomplete asset markets?," Journal of Monetary Economics, Elsevier, vol. 55(2), pages 350-364, March.
    33. Altonji, Joseph G & Hayashi, Fumio & Kotlikoff, Laurence J, 1997. "Parental Altruism and Inter Vivos Transfers: Theory and Evidence," Journal of Political Economy, University of Chicago Press, vol. 105(6), pages 1121-1166, December.
    34. Tomas Philipson & John Cawley, 1999. "An Empirical Examination of Information Barriers to Trade in Insurance," American Economic Review, American Economic Association, vol. 89(4), pages 827-846, September.
    35. Cox, Donald, 1987. "Motives for Private Income Transfers," Journal of Political Economy, University of Chicago Press, vol. 95(3), pages 508-546, June.
    36. Patrick J. Kehoe & Fabrizio Perri, 2002. "International Business Cycles with Endogenous Incomplete Markets," Econometrica, Econometric Society, vol. 70(3), pages 907-928, May.
    37. Larry E. Jones & Rodolfo Manuelli, 1990. "A Convex Model of Equilibrium Growth," NBER Working Papers 3241, National Bureau of Economic Research, Inc.
    38. James J. Heckman & Thomas MaCurdy, 1982. "Corrigendum on A Life Cycle Model of Female Labour Supply," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 49(4), pages 659-660.
    39. Jones, Larry E & Manuelli, Rodolfo E, 1990. "A Convex Model of Equilibrium Growth: Theory and Policy Implications," Journal of Political Economy, University of Chicago Press, vol. 98(5), pages 1008-1038, October.
    40. Fatih Guvenen, 2004. "Learning your Earning: Are Labor Income Shocks Really That Persistent?," 2004 Meeting Papers 177, Society for Economic Dynamics.
    41. Tullio Jappelli, 1990. "Who is Credit Constrained in the U. S. Economy?," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 219-234.
    42. Jay H. Hong & José-Víctor Ríos-Rull, 2012. "Life Insurance and Household Consumption," American Economic Review, American Economic Association, vol. 102(7), pages 3701-3730, December.
    43. Cullen, Julie Berry & Gruber, Jonathan, 2000. "Does Unemployment Insurance Crowd Out Spousal Labor Supply?," Journal of Labor Economics, University of Chicago Press, vol. 18(3), pages 546-572, July.
    44. James J. Heckman & Thomas E. Macurdy, 1980. "A Life Cycle Model of Female Labour Supply," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 47(1), pages 47-74.
    45. Lucas, Robert Jr., 1988. "On the mechanics of economic development," Journal of Monetary Economics, Elsevier, vol. 22(1), pages 3-42, July.
    46. Elin Halvorsen & Thor O. Thoresen, 2011. "Parents' Desire to Make Equal Inter Vivos Transfers," CESifo Economic Studies, CESifo Group, vol. 57(1), pages 121-155, March.
    47. Attanasio, Orazio & Davis, Steven J, 1996. "Relative Wage Movements and the Distribution of Consumption," Journal of Political Economy, University of Chicago Press, vol. 104(6), pages 1227-1262, December.
    48. Lillard, Lee A & Weiss, Yoram, 1979. "Components of Variation in Panel Earnings Data: American Scientists, 1960-70," Econometrica, Econometric Society, vol. 47(2), pages 437-454, March.
    49. MaCurdy, Thomas E., 1982. "The use of time series processes to model the error structure of earnings in a longitudinal data analysis," Journal of Econometrics, Elsevier, vol. 18(1), pages 83-114, January.
    50. Satyajit Chatterjee & Dean Corbae & Makoto Nakajima & José-Víctor Ríos-Rull, 2007. "A Quantitative Theory of Unsecured Consumer Credit with Risk of Default," Econometrica, Econometric Society, vol. 75(6), pages 1525-1589, November.
    51. Brugiavini, Agar, 1993. "Uncertainty resolution and the timing of annuity purchases," Journal of Public Economics, Elsevier, vol. 50(1), pages 31-62, January.
    52. Giovanni Gallipoli & Laura Turner, 2009. "Household Responses to Individual Shocks: Disability and Labor Supply," Working Papers 2009.97, Fondazione Eni Enrico Mattei.
    53. Robert E. Lucas Jr., 2003. "Macroeconomic Priorities," American Economic Review, American Economic Association, vol. 93(1), pages 1-14, March.
    54. Greg Kaplan & Giovanni L. Violante, 2010. "How Much Consumption Insurance beyond Self-Insurance?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 53-87, October.
    55. Rustichini, Aldo, 1998. "Dynamic Programming Solution of Incentive Constrained Problems," Journal of Economic Theory, Elsevier, vol. 78(2), pages 329-354, February.
    56. Tim Maloney, 1987. "Employment Constraints and the Labor Supply of Married Women: A Reexamination of the Added Worker Effect," Journal of Human Resources, University of Wisconsin Press, vol. 22(1), pages 51-61.
    57. Lundberg, Shelly, 1985. "The Added Worker Effect," Journal of Labor Economics, University of Chicago Press, vol. 3(1), pages 11-37, January.
    58. Benjamin M. Friedman & Mark J. Warshawsky, 1990. "The Cost of Annuities: Implications for Saving Behavior and Bequests," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 105(1), pages 135-154.
    59. Alan L. Gustman & Olivia S. Mitchell & Andrew A. Samwick & Thomas L. Steinmeier, "undated". "Pension and Social Security Wealth in the Health and Retirement Study," Pension Research Council Working Papers 97-3, Wharton School Pension Research Council, University of Pennsylvania.
    60. Narayana R. Kocherlakota, 1996. "Implications of Efficient Risk Sharing without Commitment," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 63(4), pages 595-609.
    61. Winter, Ralph A, 1981. "On the Rate Structure of the American Life Insurance Market," Journal of Finance, American Finance Association, vol. 36(1), pages 81-96, March.
    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Human Capital Risk, Contract Enforcement, and the Macroeconomy
      by Christian Zimmermann in NEP-DGE blog on 2015-08-26 18:13:08

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Sebastian Koehne & Moritz Kuhn, 2015. "Should unemployment insurance be asset-tested?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 18(3), pages 575-592, July.
    2. Shang, Longfei & Saffar, Walid, 2023. "Employment Protection and Household Mortgage Debt," Journal of Banking & Finance, Elsevier, vol. 149(C).
    3. Moritz Kuhn, 2017. "The Research Agenda: Moritz Kuhn on Understanding income and wealth inequality," EconomicDynamics Newsletter, Review of Economic Dynamics, vol. 18(1), April.
    4. Mark Huggett & Greg Kaplan, 2016. "How Large is the Stock Component of Human Capital?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 21-51, October.
    5. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
    6. Krebs, Tom & Kuhn, Moritz & Wright, Mark L. J., 2016. "Insurance in Human Capital Models with Limited Enforcement," IZA Discussion Papers 9948, Institute of Labor Economics (IZA).
    7. Yang, Guanyi & Casner, Ben, 2021. "How much does schooling disutility matter?," Research in Economics, Elsevier, vol. 75(1), pages 87-95.
    8. Krebs, Tom & Scheffel, Martin, 2016. "Quantifizierung der gesamtwirtschaftlichen Effekte ausgewählter Reformvorschläge der Studie "Reforms, Investment and Growth: An Agenda for France, Germany and Europe"," Working Papers 16-04, University of Mannheim, Department of Economics.
    9. Benjamin S. Griffy, 2021. "Search And The Sources Of Life‐Cycle Inequality," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 62(4), pages 1321-1362, November.
    10. Moritz Kuhn & Gašper Ploj, 2020. "Job Stability, Earnings Dynamics, and Life-Cycle Savings," CESifo Working Paper Series 8710, CESifo.
    11. Mohamed Mansour & Eric Kamwa, 2021. "Judges and the price of human life in the French Court System," Working Papers hal-03129639, HAL.
    12. Fang, H., 2016. "Insurance Markets for the Elderly," Handbook of the Economics of Population Aging, in: Piggott, John & Woodland, Alan (ed.), Handbook of the Economics of Population Aging, edition 1, volume 1, chapter 0, pages 237-309, Elsevier.
    13. Rampini, Adriano A. & Viswanathan, S., 2018. "Financing Insurance," CEPR Discussion Papers 12855, C.E.P.R. Discussion Papers.
    14. Tom Krebs & Moritz Kuhn & Mark Wright, 2017. "Under-Insurance in Human Capital Models with Limited Enforcement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 121-150, April.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Tom Krebs & Moritz Kuhn & Mark Wright, 2017. "Under-Insurance in Human Capital Models with Limited Enforcement," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 25, pages 121-150, April.
    2. Tom Krebs & Moritz Kuhn & Mark Wright, 2016. "Insurance in human capital models with limited enforcement," CAMA Working Papers 2016-48, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2014. "Consumption and Labor Supply with Partial Insurance: An Analytical Framework," American Economic Review, American Economic Association, vol. 104(7), pages 2075-2126, July.
    4. Theloudis, Alexandros, 2021. "Consumption inequality across heterogeneous families," European Economic Review, Elsevier, vol. 136(C).
    5. Meghir, Costas & Pistaferri, Luigi, 2011. "Earnings, Consumption and Life Cycle Choices," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 4, chapter 9, pages 773-854, Elsevier.
    6. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2009. "Quantitative Macroeconomics with Heterogeneous Households," Annual Review of Economics, Annual Reviews, vol. 1(1), pages 319-354, May.
    7. Tobias Broer, 2009. "Stationary equilibrium distributions in economies with limited commitment," Economics Working Papers ECO2009/39, European University Institute.
    8. Fatih Guvenen, 2011. "Macroeconomics with hetereogeneity : a practical guide," Economic Quarterly, Federal Reserve Bank of Richmond, vol. 97(3Q), pages 255-326.
    9. Manuel Sanchez & Felix Wellschmied, 2020. "Modeling Life-Cycle Earnings Risk with Positive and Negative Shocks," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 37, pages 103-126, July.
    10. Greg Kaplan & Giovanni L. Violante, 2010. "How Much Consumption Insurance beyond Self-Insurance?," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(4), pages 53-87, October.
    11. Orazio P. Attanasio & Guglielmo Weber, 2010. "Consumption and Saving: Models of Intertemporal Allocation and Their Implications for Public Policy," Journal of Economic Literature, American Economic Association, vol. 48(3), pages 693-751, September.
    12. repec:fip:fedreq:y:2011:i:3q:p:255-326:n:vol.97no.3 is not listed on IDEAS
    13. Miao, Jianjun & Zhang, Yuzhe, 2015. "A duality approach to continuous-time contracting problems with limited commitment," Journal of Economic Theory, Elsevier, vol. 159(PB), pages 929-988.
    14. Krueger, Dirk & Perri, Fabrizio, 2011. "Public versus private risk sharing," Journal of Economic Theory, Elsevier, vol. 146(3), pages 920-956, May.
    15. Richard Blundell & Luigi Pistaferri & Itay Saporta-Eksten, 2016. "Consumption Inequality and Family Labor Supply," American Economic Review, American Economic Association, vol. 106(2), pages 387-435, February.
    16. Ivan Vidangos, 2009. "Household welfare, precautionary saving, and social insurance under multiple sources of risk," Finance and Economics Discussion Series 2009-14, Board of Governors of the Federal Reserve System (U.S.).
    17. Melanie Morten, 2016. "Temporary Migration and Endogenous Risk Sharing in Village India," NBER Working Papers 22159, National Bureau of Economic Research, Inc.
    18. Fatih Karahan & Serdar Ozkan, 2013. "On the Persistence of Income Shocks over the Life Cycle: Evidence, Theory, and Implications," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 452-476, July.
    19. Lance J. Lochner & Alexander Monge-Naranjo, 2011. "The Nature of Credit Constraints and Human Capital," American Economic Review, American Economic Association, vol. 101(6), pages 2487-2529, October.
    20. Joseph G. Altonji & Anthony A. Smith Jr. & Ivan Vidangos, 2013. "Modeling Earnings Dynamics," Econometrica, Econometric Society, vol. 81(4), pages 1395-1454, July.
    21. Estelle Dauchy & Francisco Navarro-Sanchez & Nathan Seegert, 2021. "Taxation and Inequality: Active and Passive Channels," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 42, pages 156-177, October.

    More about this item

    JEL classification:

    • D52 - Microeconomics - - General Equilibrium and Disequilibrium - - - Incomplete Markets
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E24 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Employment; Unemployment; Wages; Intergenerational Income Distribution; Aggregate Human Capital; Aggregate Labor Productivity
    • J24 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Human Capital; Skills; Occupational Choice; Labor Productivity

    NEP fields

    This paper has been announced in the following NEP Reports:

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:17714. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: the person in charge (email available below). General contact details of provider: https://edirc.repec.org/data/nberrus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.