Essays in public economics and empirical banking

Abstract

This thesis studies questions from the fields of public economics and empirical banking. The first chapter studies the question of how the design of pension system affects household labour supply incentives. The effective marginal tax rate of the pension system is derived directly from the households’ optimality conditions and decomposed into five components driven by inter- and intra-generational redistribution, demographics, borrowing constraints, and insurance. I provide quantitative results for the US, demonstrating that the effective tax rate lies significantly below the statutory rate. Eliminating progressivity from the US pension schedule significantly reduces effective marginal rates as it equalizes average and marginal replacement rates. The second chapter considers the introduction of a Vickrey-style lifetime income tax in a heterogeneous agent model with idiosyncratic risk. In a model with perfect foresight, lifetime income taxation leads to unambiguous welfare gains as it redistributes resources from high- consumption to low-consumption households. A similar argument does not hold for the case with idiosyncratic risk. In a lifecycle model calibrated to the US economy, a transition to a tax on lifetime income leads to small welfare losses as workers increase their savings early in life in order to insure against uncertain future tax liabilities. In the third chapter, we study the question how risk taking by banks responds to an exogenous change in leverage. We employ heterogeneity in the geographic distribution of banks’ offices in order to introduce an exogenous variation in deposit supply based on local economic shocks. This variation is used to instrument banks’ leverage. We measure bank risk taking by directly observing lending decisions on all residential mortgages in the US. In response to an exogenous decrease in their leverage, banks become more responsive to risk characteristics of residential mortgage loans, and the median predicted probability of default for issued loans decreases.