Working Papers

1. Specific Human Capital and Real Wage Cyclicality: An Application to Postgraduate Wage Premium, IFS Working Paper WP19/26 (under review. The previous title of this paper is “Specific Capital, Firm Insurance, and the Dynamics of the Postgraduate Wage Premium”)

Media Coverage: LSE Business Review, Royal Economic Society

This paper examines how specific human capital affects labour turnover and real wage cyclicality in a frictional labour market. I develop an equilibrium search model with long-term contracts and imperfect monitoring of worker effort. Imperfect monitoring creates a moral hazard problem that requires firms to pay efficiency wages. The optimal contract implies that more specific capital reduces job separation, thereby alleviating the moral hazard and increasing wage stability over the business cycle. I apply this model to explain novel stylised facts about the cyclicality of the postgraduate-undergraduate wage premium. Postgraduate degree holders experience lower cyclical variation in real wages than those with undergraduate degrees. This effect is significant for workers with a long tenure, but not for new hires. Moreover, postgraduates have more specific human capital than undergraduates. Estimates reveal that specific capital can explain the educational gaps both in labour turnover and in real wage cyclicality.

2. Durables and Lemons: Private Information and the Market for Cars, NBER Working Paper w26281, with Richard Blundell, Hamish Low, Soren Leth-Petersen, and Costas Meghir (under review)

Media Coverage: The Economist, NEP-DGE blog

We specify an equilibrium model of car ownership with private information where individuals sell and purchase new and second-hand cars over their life-cycle. Private information induces a transaction cost and distorts the market reducing the value of a car as a savings instrument. We estimate the model using data on car ownership in Denmark, linked to register data. The lemons penalty is estimated to be 18% of the price in the first year of ownership, declining with the length of ownership. It leads to large reductions in the turnover of cars and in the probability of downgrading at job loss.

3. Risk Attitude and Portfolio Choice: An Intra-household Perspective, with Cameron Peng and Weilong Zhang

Using the Household, Income and Labour Dynamics in Australia (HILDA) data, we document that the households whose financial decision-makers are husbands are more attached to the financial market than those whose decision-makers are wives. To explain this fact, we develop a simple intra-household bargaining model of household portfolio choice, in which the couple first collectively decides the household risk preference, which, in turn, determines their portfolio allocations. The bargaining power of each spouse depends on a wide range of economic and non-economic characteristics. Our channel decomposition analysis shows the risk related variables (income, education, cognitive ability and financial literacy) are most important factors in explaining the gender asymmetric associations between the bargaining power and household investment decisions. Incorporating “Big-five” personality traits in the bargaining equation reduces the household risk taking preference and therefore leads to the decrease of stock market participation rates, which is opposite to the effect of gender identify norm.

4. The Reverse Added Worker Effect and Gross Worker Flows over the Business Cycle

I develop an equilibrium search model with incomplete markets and endogenous labour force participation, where households are formed by a job-seeker and an employed spouse. Households face aggregate shocks on the income of the employed member, but the spouse adjusts her labour supply to insure against the risk. I use the model to explain the cyclical properties of the transition rate from employment to out-of-labour-force (E2O). As in the US data, the model predicts that E2O is strongly pro-cyclical. This property is in sharp contrast to the prediction of the standard search theory that labour force participation should increase in booms. In the two-member household model and in the data, the secondary earner leaves the labour force when the primary earner’s income increases. This model also shows that the spouse’s behaviour is affected by the counter-cyclical unemployment benefits, which is in line with the data.