Research

This paper studies how credit shocks affect the pass-through of idiosyncratic productivity shocks to consumption. Using a heterogeneous-agent incomplete-markets model I simulate two different credit shock dynamics as observed in credit panel data, a permanent and a mean-reverting one, and measure consumption insurance along the entire transition path. I show that consumption insurance against idiosyncratic productivity shocks drops on impact for both kind of credit shocks, while they imply qualitative different consumption insurance paths in the medium run. Importantly, I find that these paths differ by current wealth holdings. Asset-poor households experience the largest decrease in consumption insurance, whereas asset-rich households actually have access to more consumption insurance subsequent to a credit shock. Finally, endogenous labor supply attenuates these dynamics.

How does uninsurable idiosyncratic risk affect the optimal carbon tax? To answer this question, I augment a heterogenous-agent incomplete-markets model with a climate externality on total factor productivity and dirty energy demand of households and firms. A government sets a carbon tax on energy and redistributes its revenue lump-sum. I find that the optimal carbon tax is increasing in the level of uninsurable idiosyncratic risk, because the tax and transfer combination provides redistribution and insurance through higher transfers and by increasing wages and interest rates due to lower climate damages. However, this result depends on the set of adjustable tax instruments.

I combine multiple data sources to construct a novel panel dataset in which I observe inter alia US households' income, wealth, and expenditure and greenhouse gas (GHG) consumption. With this dataset, I estimate households' income elasticity with respect to GHG along the income distribution. In other words, I estimate Environmental Engel curves (EECs). Making use of the panel dimension of the data, in particular controlling for time-invariant household specific effects, points to EECs that are flatter and more linear, and reduces the estimated income elasticity for all levels of income compared to cross-sectional estimates. Moreover, I show that these elasticities vary by consumption category. The results imply an attenuated form of the equity-pollution dilemma and suggest differentiated carbon taxes on consumption goods.