Bank Capital Buffers in a Dynamic Model (joint with Alex Michaelides and Spyros Pagratis)
Financial Management (forthcoming)

We estimate a dynamic structural banking model to examine the interaction between risk-weighted capital adequacy and unweighted leverage requirements, their differential impact on bank lending, and equity buffer accumulation in excess of regulatory minima. Tighter risk-weighted capital requirements reduce loan supply and lead to an endogenous fall in bank profitability, reducing bank incentives to accumulate equity buffers and, therefore, increasing the incidence of bank failure. Tighter leverage requirements, on the other hand, increase lending, preserve bank charter value and incentives to accumulate equity buffers, therefore leading to lower bank failure rates.

JEL Classification: E44, G21, G38
Key words: Banking, Uninsurable Risk, Capital Requirements, Bank Failures
Household Search and the Aggregate Labor Market (joint with Rigas Oikonomou)
Review of Economic Studies (2017), Vol 84(4)

We develop a theoretical model with labor market frictions, incomplete financial markets and with households which have two members. Households face unemployment risks but their members adjust their labor supplies to insure against unemployment. We use the model to explain the cyclical properties of aggregate employment and participation. As in the US data, the model predicts that the participation rate (the fraction of individuals that want jobs) is not strongly correlated with aggregate economic activity. This property is in sharp contrast to the strongly procyclical participation predicted by both neoclassical models and models with search frictions, when we assume bachelor households or households with infinitely many members (complete markets). In the two member household model and in the data, primary earners are always in the labor force, secondary earners have a mildly countercyclical participation rate and a mildly procyclical employment rate. Their behavior insures the household against unemployment risks.

JEL classification: E24, E25, E32, J10, J64
Key Words: Family Self Insurance, Labor Market Search, Primary and Secondary Earners, Labor Force Participation.
Published version (RES) Working Paper Unemployment insurance appendix Data and Numerical Appendix
The Rise of the Added Worker Effect (joint with Rigas Oikonomou)
Economics Letters (2016), Vol 143

We document that the added worker effect (AWE) has increased over the last three decades. We develop a search model with two earner households and we illustrate that the increase in the AWE from the 1980s to the 2000s can be explained through i) the narrowing of the gender pay gap, ii) changes in the frictions in the labor market and iii) changes in the labor force participation costs of married women.

JEL classification: E24, J12, J64
Key Words: Heterogeneous Agents, Family Self Insurance, Dual Earner, Unemployment, Labor Market Search.
Published version (EL)
Entrepreneurship, Bankruptcy and Debt Portfolios (joint with Giacomo Rodano)
Journal of Monetary Economics (2015), Vol 76

Every year 400,000 entrepreneurs fail and 60,000 file for bankruptcy. Thus the personal bankruptcy law has important implications for entrepreneurship. The option to declare bankruptcy encourages entrepreneurship through providing insurance since entrepreneurs may default on unsecured credit in bad times. However, perfectly competitive financial intermediaries take the possibility of default into account and they charge higher interest rates which reflect these default probabilities. Thus personal bankruptcy provides insurance at the cost of worsening credit conditions. Since the benefits depend on agents degree of risk-aversion but the costs depend on intertemporal preferences, we use Epstein-Zin preferences to investigate the robustness of our results. We develop a quantitative general equilibrium model of occupational choice that examines the effects of the US personal bankruptcy law on entrepreneurship. The model explicitly incorporates the US legislative framework and replicates empirical features of the US economy regarding entrepreneurship, wealth distribution and bankruptcy filings by entrepreneurs. Entrepreneurs in the model can obtain secured and unsecured credit. Secured credit must be repayed and therefore provides no insurance but is cheap. Our quantitative evaluations show: First, the current US bankruptcy law is too harsh. It does not provide enough insurance. According to our simulations, increasing the wealth exemption level to the optimal one would increase entrepreneurship, the median firm size, welfare and social mobility without increasing inequality. Second, and this is an important methodological contribution, the modeling of the credit market matters. Any analysis of unsecured credit and bankruptcy has to include secured credit as well. If agents had only access to unsecured credit (as is the case in most of the previous literature), the optimal bankruptcy law would be harsher.

JEL Classification: M13, K10, O41, E20
Key Words: Personal Banruptcy Law, Entrepreneurship, Occupational Choice
Published version (JME) Bundesbank Discussion paper
The (Un-) importance of Chapter 7 wealth exemption levels
Journal of Economic Dynamics and Control 38 (2014)

This paper examines the effects of the Chapter 7 wealth exemption level on welfare, bankruptcy filings, debt, and on asset holdings. I build a heterogeneous agent life cycle model which features uninsurable income and expense shocks. Moreover, households can borrow and save simultaneously. When a borrower defaults on her debt by filing for Chapter 7 bankruptcy, she can keep her assets up to the wealth exemption level. Wealth exemption levels are important for two reasons. First, they explain the extensive and intensive margin of the credit card debt puzzle. Around thirty percent of borrowers, both in the model and in the data, who borrow at high interest rates simultaneously save at low interest rates. However, these borrowers borrow and save only relatively small amounts, a few thousand U.S. Dollars. Second, ignoring the exemption level biases results because it overstates the costs of defaulting. The welfare gains from Chapter 7 compared to the European system, where debt is not discharged, are twice as high when exemption levels are positive compared to when they are ignored. At the same time, wealth exemption levels are unimportant in the sense that they have an impact only at low exemption levels. The effects of increases in the exemption level fade out very quickly. There is no strong positive relationship between exemption levels, which vary across U.S. states, and default rates in the model. This is in contrast to the previous literature, but consistent with the data. The reason is that those borrowers who might default do not own much wealth. Therefore, only very few households are affected by increases in the exemption level.

JEL Classification: E21, E49, D31, K35
Key words: Personal Banruptcy Law, Wealth Exemption Level, Debt Portfolios, Credit Card Debt Puzzle
Consumer Bankruptcy JEDC article
Changes in education, wage inequality and working hours over time (joint with Thomas Davoine)

The US skill premium and college enrollment have increased substantially over the past few decades. In addition, while low-wage earners worked more than high-wage earners in 1970, the opposite was true in 2000. We show that a parsimonious neoclassical model featuring skill-biased technical change, endogenous education and labor supply decisions can explain the change in the US college education rate between 1967 and 2000 as well as the trend in the wage-hours correlation. Moreover, we show analytically and quantitatively that endogenous labor supply is important. Assuming constant hours signi cantly biases the estimates of the effects of skill-biased technological progress on college enrollment and the skill premium. Further, we find that limiting the maximum number of hours someone can work lowers welfare for almost all generations. Since it increases the skill premium, the welfare loss is most severe for the low-skilled, reaching almost one percent of life-time consumption.

JEL Classification: I24, J2, J31
Key words: Higher Education, Wage Inequality, Skill-biased Technical Change, Labor Supply, Working Time Regulation
Bankruptcy Reform and Endogeneous Risk-taking by Entrepreneurs

I show that making the bankruptcy law more lenient does not necessarily increase the willingness of entrepreneurs to take on more risks. This explains the finding by Berkovitz and White (2004) that the interest rate charged by banks is not monotonically increasing in the leniency of the bankruptcy law. If agents can decide each period whether they want to become entrepreneurs or workers, the two associated value func- tions intersect at a certain level of wealth. The value function around this intersection is not concave and agents are locally risk-loving. Whether en- trepreneurs increase their risk taking when the bankruptcy law is changed depends crucially on the slopes of the value functions and the direction in which they change in response to the change in the law.

JEL Classification: M13, K10, O41, E20
Work in progress
A macroeconomic model of banking (joint with Alex Michaelides and Spyros Pagratis)
Family taxation in life-cycle models (joint with Rigas Oikonomou and Christian Siegel)
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