Research

This paper investigates how credit shocks affect households’ consumption insurance through the lens of a heterogeneous-agent incomplete-markets model. I simulate two different credit shock specifications as observed in credit panel data: a permanent and a mean-reverting one. I show that consumption insurance for idiosyncratic wage 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 dynamics 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 household 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. This result depends on the availability 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 toGHGalong the income distribution. In other words, I estimate Environmental Engel curves (EECs). I show that making use of the panel dimension of the data, in particular controlling for time-invariant household specific effects, suggests that EECs are flatter and more linear, and reduces the estimated income elasticity for all levels of income. Moreover, I show that these elasticities varies by consumption category. The results imply an attenuated form of the equity-pollution dilemma and suggest differentiated carbon taxes on consumption goods.