Category: Working Papers

The Changing Value of Employment


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Abstract. Do workers derive different returns from similar jobs? Are earnings informative about changes in overall returns from work? We estimate the value of worker-occupation matches in an equilibrium model that distinguishes between wages and latent returns. We define a measure of employment rents that has three properties: (i) it reflects both wages and unobserved match values; (ii) it delivers a monetary metric for compensating differentials; (iii) it illustrates how the marginal workers within a match affect the rents of others. We show that earnings data reliably approximate the evolution of average rents between 1980 and 2018 despite differences in unobserved match values. The results highlight a dichotomy: while the existence of rents is due to latent values, their evolution is driven by productivity and technology.

Citation

@techreport{alonzo2023changing,
  title={The changing value of employment and its implications},
  author={Alonzo, Davide and Gallipoli, Giovanni},
  year={2023},
  institution={CEPR DP17943}
}

The Production of Financial Literacy


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Abstract. We study the accumulation of financial competencies in a model of dynamic skill formation. We find evidence of complementarities between financial literacy, wealth and risk attitudes. Risk tolerance and wealth facilitate experimentation and learning-by-doing. Latent risk attitudes and financial literacy are unevenly distributed across households and do not align with general human capital. Linking estimates with data on household portfolios, we show that early-life differences in financial literacy and its accumulation in the life-cycle may account for about one-fifth of the standard deviation of wealth by age 60. Dynamic complementarities in skill formation imply that early interventions may reduce later-life inequality while boosting average wealth growth.

Citation

@article{gallipoli-gomez-2023,
  title={The Production of Financial Literacy},
  author={Gallipoli, Giovanni and Gomez, sebastian},
  journal={mimeo, UBC},
  year={2023}
}

End-of-Life Liquidity


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Abstract. Uncertainty about one’s lifespan induces a preference for end-of-life liquidity (Yaari, 1965). Such preference, which can be characterized as a warm-glow motive but need not be interpreted that way, interacts with institutional constraints to shape life-cycle behaviors. We illustrate its quantitative importance using a model of consumption, labor supply, and retirement decisions and document a little-known set of distortions that annuity plans, including the U.S. social security, impose on life-cycle decisions through the illiquid and uncertain nature of its entitlements. A minor policy change that reduces the value of retirement annuities in exchange for a guaranteed amount upon death induces large effects on life-cycle allocations and raises welfare, especially among unmarried individuals with low education. These findings are relevant for the design of annuity programs, whether public or private.

Citation

@article{bairoliya2023end,
  title={End-of-Life Liquidity},
  author={Bairoliya, Neha and Gallipoli, Giovanni and McKiernan, Kathleen},
  journal={Available at SSRN 4585698},
  year={2023}
}

Consumption and Income Inequality across Generations


How much of the cross-sectional dispersion of income and consumption can be accounted for by parental heterogeneity and family background? How strong are intergenerational linkages? We examine data on expenditures and income of parent-child pairs and document the presence of significant family persistence in earnings, consumption, saving behaviours, and marital sorting patterns. However, we also show that idiosyncratic (family independent) heterogeneity has a quantitatively bigger role than parental effects for the evolution of cross-sectional inequality.
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Abstract. We characterize the joint evolution of cross-sectional inequality in earnings, other sources of income, and consumption across generations in the U.S. To account for cross-sectional dispersion, we estimate a model of intergenerational persistence and separately identify the influences of parental factors and of idiosyncratic life-cycle components. We find evidence of family persistence in earnings, consumption and saving behaviours, and marital sorting patterns. However, the quantitative contribution of idiosyncratic heterogeneity to cross-sectional inequality is significantly larger than parental effects. Our estimates imply that intergenerational persistence is not high enough to induce further large increases in inequality over time and across generations.

Citation

@techreport{GLM,
  title={Consumption and Income Inequality across Generations},
  author={Gallipoli, Giovanni and Low, Hamish and Mitra, Aruni},
  year={2020},
  institution={Discussion Paper}
}

Piercing the “Payoff Function” Veil: Tracing Beliefs and Motives


We develop a non-intrusive approach to experimentally gauge the way agents make their choices. We document the presence of significant heterogeneity in the decision-making process of agents within an interactive setting. The setting is designed to elicit beliefs and motives of agents.

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Abstract. This paper develops an experimental methodology that allows the identification of decision-making processes in interactive settings using tracking of non-choice data. This non-intrusive and indirect approach provides essential information for the characterization of beliefs. The analysis reveals significant heterogeneity, which is reduced to two broad types, differentiated by the importance of pecuniary rewards in agents’ payoff function. Most subjects maximize monetary rewards by best responding to beliefs shaped by recent history. Others are able to identify profit-maximizing actions but choose to systematically deviate from them. The interaction among different types is key to understanding aggregate outcomes.

Citation

@techreport{FGH1_2019,
  title={Piercing the ``Payoff Function'' Veil: Tracing Beliefs and Motives},
  author={Fenig, Guidon and Gallipoli, Giovanni and Halevy, Yoram},
  year={2018},
  note={Working Paper},
  institution={University of Toronto}
  }

Revisiting the Relationship Between Unemployment and Wages


We investigate the empirical relationship between wages and labor market conditions.

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Abstract. We investigate the empirical relationship between wages and labor market conditions. Following work histories in the NLSY79 we document that the relationship between wages and unemployment rate differs across occupations. The results hold after controlling for unobserved match quality. This suggests that evidence about history-dependence of wages obtained from pooled samples conceals significant differences and provides an imprecise description of earning dynamics. We examine these discrepancies and offer new evidence suggesting that the sensitivity of wages to current unemployment is linked to the prevalence of performance pay.

Citation


	


	





	

		
		
Social Security, Endogenous Retirement and Intra-household Cooperation
	


				

				


We model the retirement incentives induced by the U.S. Social Security system in a framework that allows for different degrees of cooperation and strategic interaction between spouses.



			

			
	
	

		
LINK TO DRAFT (PDF) 


Abstract. This paper studies the retirement incentives induced by the U.S. Social Security system in a framework which allows for different degrees of cooperation and strategic interaction between spouses. We develop a model in which spouses maximize joint household utility, subject to the additional constraint that neither partner  finds it optimal to deviate from the best constrained household allocation. We show that accounting for \non- cooperative” behavior through this additional constraint can rationalize various choices of older couples observed in the 1932-42 cohort of the Health and Retirement Study. Non-cooperative behavior helps with two puzzles in the retirement literature:  (i) the clustering of benefit claiming at age 62 despite significant gains associated to delayed claiming by husbands; and (ii) the joint benefit claiming of couples. We contrast our  findings to those from a unitary model of the household, extended to include a process for declining health, and show that the latter can rationalize neither early nor joint claiming behavior if individuals can independently make benefit and labor force participation decisions.


Citation


@techreport{turner2008social,
  title={Social Security, endogenous retirement and intrahousehold cooperation},
  author={Turner, Laura and Gallipoli, Giovanni and others},
  year={2013},
  institution={UBC Working paper}
}

	


	





	

		
		
Non-Convexities in Dynamic Programming Problems
	


				

				


We study the properties of models where agents choose over non-convex budget sets due to extensive margin decisions and  fixed costs.



			

			
	
	

		
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Abstract. Models where agents choose over non-convex budget sets are commonly used in the analysis of economic problems with extensive margin decisions and  fixed costs. Their solutions have interesting and distinctive features that are especially relevant in quantitative applications.  We describe how problems with non-convex choice sets differ from standard problems and investigate under which circumstances the inclusion of random shocks makes their solution identical to the solution of standard problems. A simple framework is provided for the analysis of these problems and a numerical example is illustrated.


Citation


@article{gallipoli2008non,
  title={Non-convexities in dynamic programming problems},
  author={Gallipoli, Giovanni and Nesheim, Lars},
  year={2013}
}

	


	





	

		
		
How Robust is the Skill-Dispersion-Complementarity Hypothesis?
	


				

				


We examine the empirical robustness of the hypothesis that countries with higher skill dispersion specialize in sectors characterized by a submodular production function.



			

			
	
	

		
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Abstract. We explore the robustness of the hypothesis, First put forward by Grossman and Maggi (2000) (GM), that countries with higher skill dispersion specialize in the sector characterized by a submodular production function, i.e. the industry that cross-matches workers of different skills (henceforth referred to as SDC hypothesis). We relax the assumption of constant returns to skill, breaking the link between submodularity and the concavity of isoquants, a key feature in GM. We show that when a submodular sector displays convex isoquants, it no longer benefits from higher skill dispersion and higher skill dispersion countries may specialize in the supermodular sector. We investigate this theoretical possibility by performing a variety of simulations, based on empirical skill distributions, and find that in the vast majority of cases the SDC hypothesis is not violated.


Citation


@misc{bombardini2015robust,
  title={How Robust is the Skill-Dispersion-Complementarity Hypothesis?},
  author={Bombardini, Matilde and Gallipoli, Giovanni and Pupato, Germ{\'a}n},
  year={2015}
}

	


	





	

		
		
Household Responses to Individual Shocks: Disability and Labour Supply
	


				

				
We study how changes in health status affect the labor supply and consumption choices of individuals and couples. We find evidence of non-cooperative behavior in couples and quantify its implications for marital insurance.

			

			
	
	

		
LINK TO DRAFT (PDF)


Abstract. How do people respond to idiosyncratic shocks? Using longitudinal data from the Canadian Survey of Labour and Income Dynamics we use variation in health status to develop and estimate a life cycle framework which rationalizes observed responses of individuals and couples to disability shocks. Two puzzling findings associated with disability onset motivate our work: (1) the almost complete absence of added worker e effects within households and, (2) the fact that single workers’ labor supply responses to disability shocks are larger and more persistent than those of married workers. We argue that these facts are consistent with optimal life cycle behavior when we account for the interaction of two mechanisms: first, a dynamic human capital accumulation motive linking wages to labor supply; second, the ability of spouses to transfer time through home production. We provide evidence supporting the empirical relevance of both these mechanisms and show that dynamic labor supply decisions depend crucially on the interaction of the two. Our findings suggest that the persistence of measured wage shocks may be in part a by-product of optimal individual responses.


Citation


@article{gallipoli2009household,
  title={Household Responses to Individual Shocks: Disability and Labour Supply},
  author={Gallipoli, Giovanni and Turner, Laura},
  year={2009}
}