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For Faculty

The Heller-Hurwicz Economics Institute is interested in supporting rigorous, groundbreaking, nonpartisan research that can influence real-world economic policy challenges. The Institute is now accepting proposals for research at the University of Minnesota focused on economic policy questions. Applications will be considered on all topics, but priority will be given to research that advances one of the Institute’s priority areas that include social insurance, climate change and financial regulation. Please submit an initial letter of inquiry to HHEI@umn.edu.

Past Grant Recipients

2017-18

The Theory and Empirics of Subjective Beliefs in Macroeconomic Dynamics
Anmol Bhandari
This project lays down a general framework for incorporating subjective beliefs into models of macroeconomic dynamics. The connection of theoretical restrictions with informative data sources yields new insights into the joint determination of beliefs and equilibrium dynamics in the macroeconomy. The second contribution is to extend the existing toolkits that macroeconomists use to solve and estimate dynamic equilibrium models to allow for endogenous subjective beliefs. Finally, forward-looking policies affect these endogenous beliefs which opens the scope for explicit expectations management by the policymakers. We formalize how to pose optimal policy problems with endogenous subjective beliefs and explain the new lessons that emerge when policymakers acknowledge the feedback between policies and equilibrium belief formation.

Credit Access and Inequality
Kyle Herkenhoff
What is the impact of credit access on inequality and income mobility? Does access to credit exacerbate or mitigate inequality? We test how credit access impacts earnings through two main channels: (1) revolving credit, student debt, and human capital formation and (2) business credit and entrepreneurship. Understanding the answer to these questions is an important step toward optimal government policy for student loans, entrepreneur loans, and other government subsidized forms of credit.

Housing and Taxation over the Life Cycle
Larry Jones
This project will theoretically and quantitatively study the optimal joint taxation for consumption, housing, and labor earnings over the life cycle with unrestricted tax instruments. To connect our theory to the empirical environment, we propose to use unique administrative data for the Netherlands. This project has two contributions. First, we propose a two-step method to connect dynamic Mirrlees models to the data. In the first step, we infer preference and shock process parameters by estimating a decentralized life-cycle economy. In the second step, we use the estimated parameters to quantify the optimal allocation subject to information constraints. Second, we provide a normative prescription on how to optimally tax consumption, earnings and housing.

Deep Reinforcement Learning Analysis of Stochastic Games and Computational Problems in Economics
Aldo Rustichini
This research project will extend the techniques of Deep Reinforcement Learning (DRL) to the analysis of stochastic games, and thus to provide a foundation of the theory of rules as guidance for behavior. As follow up, we plan to extend DRL to the analysis of a large class of computational problems in Economics. The immediate motivation for the extension is to provide a psychologically plausible model of behavior in repeated and stochastic games, based on the replacement of strategies with rules. A set of rules provides a potentially incomplete guidance of behavior. The starting point will be the application of DRL techniques to any stochastic game with finite state space with action and state-dependent transition.

2016-17

The Affordable Care Act and the Labor Market
Naoki Aizawa
The 2010 Affordable Care Act (ACA) dramatically changes the policy environment for both labor and health insurance markets. Claims have been made that ACA may reduce overall efficiency in the labor market by distorting firms’ optimal decisions regarding size or composition of full-time and part-time employees.  It has also been argued that under the pre-ACA health insurance system, entrepreneur decisions were distorted by poor individual insurance markets. This project will use empirical models to investigate these claims and their policy implications.

The Theory and Empirics of Sweat Equity
Anmol Bhandari
There are about 6 million firms in the U.S. with 99.6% employing fewer than 500 employees, accounting for more than half of the aggregate labor force. In the past 30 years, there has been a striking change in how small businesses organize their activity. Now, the majority of business income is earned by pass through entities, including Schedule S corporations, partnerships and sole proprietorships, with most growth coming from LLC partnerships and S corporations. The pass through entities are for the most part small businesses with one or two owners or shareholders and, according to BEA studies, are more nimble in shifting income to avoid regulations and minimize taxes. This research will examine accounting for intangible investments that pass-through business owners make that do not show up in business income reporting and ultimately GDP. These findings have implications for the debate on wealth vs. earnings inequality that is central to policy questions of taxation and redistribution. 

How Much Can Job Losers Borrow, and How Much Do They Actually Borrow? Implications for Optimal Unemployment Insurance
Kyle Herkenhoff
This project will be the first research to merge individual credit reports with census employment histories. This unique quarterly panel includes 5 million individuals across the US and allows for the observation of borrowing behavior of displaced workers and measurement of credit limits of displaced workers. This research is the first to measure credit constraints directly using measures of borrowing capacity (including credit scores and credit limits) as well as direct measures of ability-to-obtain-loans (such as loan application and denial rates).

The Monetary and Fiscal History of Latin America
Tim Kehoe
Since the mid 1970s, countries in Latin America have been plagued by economic crises. This project will systematically collect and analyze data for a comparable set of countries, analyze recurrent historical episodes, and evaluate existing models and develop new models to guide the analysis of these data. The theoretical analysis and the collected volume that will be produced as a result of this research will serve as a guide for policymakers as to how to avoid the same mistakes. Events over the past five years suggest that this guide will also be useful for researchers and policy makers outside Latin America, such as countries in the Eurozone and even the United States.

2014-15

Inequality in Lifetime Earnings
Fatih Guvenen
Using a unique, confidential, and very large dataset on earnings histories from the US Social Security Administration, this project will estimate the distribution of lifetime earnings for individuals in the US. This data will then be used to address questions such as: (1) How much inequality is there in lifetime earnings among US individuals? (2) How much dispersion is there across men and women and workers with different racial backgrounds in lifetime earnings? (3) How should lifetime earnings inform tax policy? (4) Current Social Security benefits are calculated based on the maximum 35 years of earnings during the working life. Using our measurement of lifetime earnings for different US cohorts, what are some alternatives?

Medicare Advantage Private-Plan Reimbursement Rates and the Associated Savings and Costs to Taxpayers
Amil Petrin
Does adding the Medicare Advantage market reduce or increase overall health care costs and consumer welfare? The goal of this project is to develop the most advanced model of demand and supply of the Medicare Advantage market to date to estimate how its existence impacts costs and welfare. Ultimately, it will answer the question of what – if any – the optimal reimbursement rates and rules in the market should be to achieve lower health care costs.

Information Management Systems and Societal Cooperation
David Rahman
Understanding which informational institutions can help individuals cooperate better is a fundamental question of both mechanism design and public policy. Famously, Abreu, Milgrom and Pearce (1991, Econometrica) showed how simple information management institutions can dramatically impact the scope for cooperation in society. Their two main theories were (i) delaying the arrival of information to individuals in society can increase welfare, and (ii) increasing the frequency with which individuals interact can decrease welfare. In the context of the Prisoners' Dilemma with imperfect monitoring, this project will test these theories.