In this dissertation, we study optimal macroeconomic policy in dynamic environments.
In Chapter 1, we focus on optimal tax policies in environments with idiosyncratic capital income risk. We develop a model in which entrepreneurs are subject to idiosyncratic shocks to their capital income. Shocks to capital income have two components: 1) a component that is known to the entrepreneur at the time of investment, 2) a residual component that is realized after investment. This creates two types of incentive problems: a hidden type problem and a hidden action problem. We show that, absent private markets for insurance of idiosyncratic risk, entrepreneurial and non-entrepreneurial capital income should be taxed differently. Moreover, the government should subsidize non-entrepreneurial capital income when the known
and lowest value. Furthermore, for a wide variety of distributions, the optimal tax schedule is progressive with respect to entrepreneurial capital income. Finally, the results regarding taxation of entrepreneurial income depend on the extent to which incentives and insurance are provided by private contracts. In particular, private contracts can approximately implement the efficient allocation if convertible securities are available. The prevalence of these securities in venture capital contracts suggest that the forces identified here are important in practice.
In Chapter 2, we study optimal intergenerational transmission of consumption and wealth with endogenous fertility. We use an extended Barro-Becker model of endogenous fertility, in which parents are heterogeneous in their labor productivity, to study the efficient degree of consumption inequality in the long run when parents productivity is private information. We show that a feature of the informationally constrained optimal insurance contract is that there is a stationary distribution over per capita continuation utilities, i.e. there is an efficient amount of long run inequality. This contrasts with much of the earlier literature on dynamic contracting where ``immiseration'' occurs. Further, the model has interesting and novel implications for the policies that can be used to implement the efficient allocation. Two examples of this are: 1) estate taxes are positive and 2) there are positive taxes on family size.
In Chapter 3, we focus on optimal design of pension systems in providing incentives for efficient retirement. We study lifecycle environments with active intensive and extensive labor margins. First, we analytically characterize Pareto efficient policies when the main tension is between redistribution and provision of incentives: while it may be more efficient to have highly productive individuals work more and retire older, earlier retirement may be needed to give them incentives to fully realize their productivity when they work. We show that, under plausible conditions, efficient retirement ages increase in lifetime earnings. We also show that this pattern is implemented by pension benefits that not only depend on the age of retirement but are designed to be actuarially unfair. Second, using individual earnings and retirement data for the U.S. as well as intensive and extensive labor elasticities, we calibrate policy models to simulate robust implications: it is efficient for individuals with higher lifetime earning to retire (i) older than they do in the data and (ii) older than their less productive peers, in sharp contrast to the pattern observed in the data.
In Chapter 4, we focus on optimal policies in remedying problems in secondary loan markets. Loan originators often securitize some loans in secondary loan markets and hold on to others. New issuances in such secondary markets collapse abruptly on occasion, typically when collateral values used to secure the underlying loans fall and these collapses are viewed by policymakers as inefficient. We develop a dynamic adverse selection model in which small reductions in that a variety of policies intended to remedy market inefficiencies do not do so.