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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

2019-20

Maturity and Multiplicity in Sovereign Debt Models
Manuel Amador
In this project, we propose and analytically solve a tractable version of the canonical Eaton and Gersovitz (1981) sovereign debt model with long duration bonds. Long-term bonds play a key role in bringing the quantitative sovereign debt models closer to the data, in large part due to the inherent incentive to dilute bondholders. We establish that the same force generates multiplicity. We are able to make progress by simplifying the underlying structure of the model. The main ingredients are the introduction of outside option shocks to the government (rather than the usual income shocks), linear utility from expenditures for the government (up to an upper bound), and continuous time. With this, we show if the government is more impatient than foreign creditors, the maturity of the bonds is intermediate, and there are deadweight losses from default; then multiple equilibria emerge. All of these are usual assumptions made in the quantitative literature.

Resource Allocation with Market Incompleteness and Financial Frictions
Anmol Bhandari
This project will study how an economy allocates resources for production and consumption in presence of market incompleteness and financial frictions. Our hypothesis is that factor misallocation is closely tied to the risk-sharing avenues available to firm owners. In contrast to the commonly studied bond-only economy with collateral constraints (for example Moll (2014)), the degree of misallocation can be increasing in the persistence of the idiosyncratic risk when firms have access to state-contingent contracts. The possibility to transfer wealth from high productivity states to low productivity states allows firm owners to trade off the efficient allocation of consumption against the efficient allocation of capital.

Financial Frictions, Startups and the Business Cycle
V.V. Chari
This project aims to better understand whether access to external finance deteriorates in recessions, and quantify its impact on the creation of fast-growing firms. We develop a quantitative general equilibrium model with heterogeneous firms, which features aggregate shocks, financial frictions and firms’ entry and exit. The model is disciplined using a microdata panel covering the universe of U.K. firms. The estimated model is used to evaluate the importance of financial constraints for the short- and medium-run behavior of the economy, and offer several policy proposals aimed at stimulating the entry of firms with high growth potential during recessions.

The Macroeconomics of Intensive Agriculture
Hannes Malmberg
In poor countries, the agricultural sector is large, uses few inputs per worker, and is unproductive, even relative to the local economy. In this project, we jointly study these phenomena using a neoclassical two-sector model. To inform our choice of an agricultural production function, we draw on micro and macro sources to construct a cross-country database of agricultural input use and prices. Using our framework, we separately analyze the consequences of closing the sectoral TFP gap in agriculture and non-agriculture between a poor country and the US. Our preliminary results suggest that closing the agricultural TFP gap is much less powerful than closing non-agricultural TFP gaps in closing aggregate income differences. This finding is very different to those found in earlier simple decomposition exercises, which have suggested that closing agricultural labor productivity gaps could dramatically reduce income differences. Our project focuses on how general equilibrium forces makes full counterfactuals very different from simple decomposition exercises.

Family Law Effects on Divorce, Fertility, and Child Investment
Joseph Mullins
We propose estimating a dynamic model of marriage, fertility and parenting, with the main goal being the investigation of how policies toward divorce influence individual welfare and child skill outcomes. We will discipline our estimates of preferences and the technology of child development with panel data on parental time inputs, child test scores, earnings, and divorce decisions. Using the estimated model, we can perform ex-ante evaluation of the impact of policies governing divorced parenting, such as child support orders, child custody and placement regulations, and marital dissolution standards. The model allows us to look beyond the effect of these policies on rates of divorce, and consider optimal policy combinations for adult welfare and for child skill outcomes.

2018-19

Managing Public Debt
Anmol Bhandari
One of the central questions in macroeconomics is how the government should set its fiscal policy and manage its debts portfolio over the business cycle. The large quantities of public debts accumulated in the aftermath of the 2007 financial crises renewed debates among economists and policymakers about whether the current levels of public debt are suboptimally high, how quickly they should be re-paid and what is the desirable long run target for debt level. Our methods will incorporate fiscal hedging, liquidity, and collateral benefits of issuing debt taking into account distortionary costs of raising taxes and potential lack of commitment issues that governments face. Our main results will derive sufficient statistics that are informed with asset prices and provide practical guidance to policymakers in deciding the level and composition debt over the business cycle.

The Macrodynamics of the Wage Distribution
Jeremy Lise
The project aims to better understand how the distribution of wages in the economy evolve in response to the business cycle. A model of the labor market is developed in which workers are heterogeneous in terms of their initial skills, firms differ in productivity and which types of skills they demand, and the business cycle may have very different effects on low and high skilled workers and on firms operating in different sectors. This theory is combine with comprehensive matched worker-firm data which will allow for the measurement of differential impact on the lifetime earnings of workers across the skill distribution, as well as profits across the firm types. The estimated model is well suited to evaluate policies aimed to improve the living standards of low wages workers, for example minimum wages or earned income tax credits.

Monetary Policy, Fiscal Policy, and Crisis: Application to Latin America
Tim Kehoe
The objective of this project is to develop a conceptual framework that can be used to evaluate the role of aggregate fiscal policy on macroeconomic outcomes. This conceptual framework will be the cornerstone of a larger parallel project, whose purpose is to write the fiscal and monetary history of Latin-America. The proposed research will proceed in parallel along three complementary tracks: The systematic collection and analysis of data for a comparable set of countries, the analysis of recurrent historical episodes and, finally, the evaluation of existing models and development of new models to guide the analysis of these data.

The Impact of Consumer Credit Access on Earnings Mobility, Entrepreneurship and Income Inequality
Kyle Herkenhoff
Households have gained significant amounts of access to consumer credit, such as credit cards, student debt, and mortgages over the last 40 years. Little is known about how the rise of consumer credit access, at the family or individual level, has impacted income inequality or the way families respond to financial distress. This study aims to uncover the relationship between credit access among family members (the head-of-household, spouse, and children) and labor supply, earnings mobility (inclusive of labor and business income), and family-level responses to adverse shocks.

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.