John Jones' Research Papers

  • An Estimated Structural Model of Entrepreneurial Behavior (with Sangeeta Pratap)

  • December, 2015
    Abstract.  Using a rich panel of owner-operated New York dairy farms, we provide new evidence on entrepreneurial behavior. We formulate a dynamic model of farms facing uninsured risks, financial constraints and liquidation costs. Farmers derive nonpecuniary benefits from operating their businesses. We estimate the model via simulated minimum distance, matching both production and financial data. We find that financial factors play an important role at the extensive and intensive margin. Collateral constraints and liquidity restrictions inhibit borrowing and the accumulation of capital. Debt renegotiation allows productive farms to continue operating despite temporary setbacks. Farms with high productivity are more constrained than low productivity farms. The nonpecuniary benefits to farming are large and keep small, low productivity farms in business. Although farmers are risk averse, eliminating uninsured risk has only modest effects on capital and output.
  • Medicaid Insurance in Old Age (with Cristina De Nardi and Eric French)
  • NBER Working Paper 19151 (updated)

  • October, 2015
    Abstract.  The old age provisions of the Medicaid program were designed to insure poor retirees against medical expenses. However, it is the rich who are most likely to live long and face expensive medical conditions when very old. We estimate a rich structural model of savings and endogenous medical spending with heterogeneous agents, and use it to compute the distribution of lifetime Medicaid transfers and Medicaid valuations across currently single retirees. We find that retirees with high lifetime incomes can end up on Medicaid, and often value Medicaid?s insurance features the most, as they face a larger risk of catastrophic medical needs at old ages, and face the greatest consumption risk. In addition, our compensating differential calculations indicate that retirees value Medicaid insurance at more than its actuarial cost, but that most would value expansions of the current Medicaid program at less than cost, thus suggesting that the Medicaid program may currently be of the approximately right size.
  • Savings after Retirement: A Survey (with Cristina De Nardi and Eric French)
  • NBER Working Paper 21268

  • June, 2015
    commissioned by the Annual Review of Economics
    Abstract.  The saving patterns of retired U.S. households pose a challenge to the basic life-cycle model of saving. The observed patterns of out-of-pocket medical expenses, which rise quickly with age and income during retirement, and heterogeneous lifespan risk, can explain a significant portion U.S. savings during retirement. However, more work is needed to disentangle these precautionary saving motives from other motives, such as the desire to leave bequests. An important complementary question is why households do not buy more insurance against these risks. Going beyond total savings and looking at its components, including housing, and looking at other portfolio choices can help shed light on these questions.
  • Medical Spending of the U.S. Elderly (with Cristina De Nardi, Eric French and Jeremy McCauley)
  • NBER Working Paper 21270

  • June, 2015
    written for the special edition on “Medical Expenditures Around the World” of Fiscal Studies
    Abstract.  We use data from the Medicare Current Beneficiary Survey (MCBS) to document the medical spending of Americans aged 65 and older. We find that medical expenses more than double between ages 70 and 90 and that they are very concentrated: the top 10% of all spenders are responsible for 52% of medical spending in a given year. In addition, those currently experiencing either very low or very high medical expenses are likely to find themselves in the same position in the future. We also find that the poor consume more medical goods and services than the rich and have a much larger share of their expenses covered by the government. Overall, the government pays for 65% of the elderly's medical expenses. Despite this, the expenses that remain after government transfers are even more concentrated among a small group of people. Thus, government health insurance, while potentially very valuable, is far from complete. Finally, while medical expenses before death can be large, on average they constitute only a small fraction of total spending, both in the aggregate and over the life cycle. Hence, medical expenses before death do not appear to be an important driver of the high and increasing medical spending found in the U.S.
  • Skill-Biased Technical Change and the Cost of Higher Education (with Annie Yang)

  • January, 2015
    forthcoming Journal of Labor Economics
    Abstract.  We document the growth in higher education costs and tuition over the past 50 years. To explain these trends, we develop a general equilibrium model with skill- and sector-biased technical change. Finding the model's parameters through a combination of estimation and calibration, we show that it can explain the rise in college costs between 1961 and 2009, along with the increase in college attainment and the change in the relative earnings of college graduates. The model predicts that if college costs had ceased to grow after 1961, enrollment in 2010 would be 3 to 6 percent higher.
  • Public Pensions and Labor Supply Over the Life Cycle (with Eric French)
  • Federal Reserve Bank of Chicago Working Paper WP 2010-09

  • International Tax and Public Finance 19(2) (April 2012)
    Abstract.  In this paper we discuss how labor supply elasticities vary over the life cycle. We conclude that the labor supply of older workers is responsive to changes in retirement incentives. The evidence suggests that recent public pension reforms are leading older individuals in many developed countries to increase their labor supply.
  • The Effects of Health Insurance and Self-Insurance on Retirement Behavior (with Eric French)
  • Supplemental Appendices
  • Replication Materials: First Stage, Second Stage
  • Michigan Retirement Research Center Working Paper 2007-170 (earlier draft)
  • Center for Retirement Research Working Paper 2004-12 (even earlier draft)
  • Slides

  • Econometrica 79(3) (May, 2011)
    Abstract.  This paper provides an empirical analysis of the effects of employer-provided health insurance, Medicare, and Social Security on retirement behavior. Using data from the Health and Retirement Study, we estimate a dynamic programming model of retirement that accounts for both saving and uncertain medical expenses. Our results suggest that Medicare is important for understanding retirement behavior, and that uncertainty and saving are both important for understanding the labor supply responses to Medicare. Half the value placed by a typical worker on his employer-provided health insurance is the value of reduced medical expense risk. Raising the Medicare eligibility age from 65 to 67 leads individuals to work an additional 0.074 years over ages 60-69. In comparison, eliminating two years worth of Social Security benefits increases years of work by 0.076 years.
  • Why do the Elderly Save? The Role of Medical Expenses (with Cristina De Nardi and Eric French)
  • NBER Working Paper 15149 (earlier draft)
  • Previously circulated as Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles (NBER Working Paper 12554)

  • Journal of Political Economy 118(1) (February, 2010)
    Abstract.  This paper constructs a model of saving for retired single people that includes heterogeneity in medical expenses and life expectancies, and bequest motives. We estimate the model using AHEAD data and the method of simulated moments. Out-of-pocket medical expenses rise quickly with age and permanent income. The risk of living long and requiring expensive medical care is a key driver of saving for many higher income elderly. Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest, but also benefit the rich, by insuring them against high medical expenses at the ends of their lives.
  • Transition Accounting for India in a Multi-sector Dynamic General Equilibrium Model (with Sohini Sahu)
  • SUNY-Albany Discussion Paper 08-03

  • July, 2009
    Abstract.  Using a quantitative methodology designed specifically for emerging economies, we measure the components of India's economic growth over the period 1960-2005. Our approach accounts for time-varying parameters, transitional dynamics and non-linear trends. We find that increased productivity in the service sector, facilitated by a structural shift toward services, is the principal driver of India's economic growth. Our measures also suggest that the allocation of inputs across sectors has not improved over this period, and in the case of labor appears to have significantly worsened. We further find that fluctuations in output around its trend are due primarily to fluctuations in sector-specific total factor productivity, with fluctuations in labor market distortions and labor taxes also playing important roles. In the period 1960-1980, productivity fluctuations in the agricultural sector are the dominant source of cycles. Since then, productivity fluctuations in the manufacturing and service sectors have been more important.
  • Life Expectancy and Old Age Savings (with Cristina De Nardi and Eric French)
  • NBER Working Paper 14653 (earlier draft)

  • American Economic Review, Papers & Proceedings, 99(2) (May, 2009)
    Abstract.  Rich people, women, and healthy people live longer. We document that this heterogeneity in life expectancy is large, and we use an estimated structural model to assess its effect on the elderly's saving. We find that the differences in life expectancy related to observable factors such as income, gender, and health have large effects on savings, and that these factors contribute by similar amounts. We also show that the risk of outliving one's expected lifespan has a large effect on the elderly's saving behavior.
  • Financial Liberalization and Banking Crises in Emerging Economies (with Betty C. Daniel)
  • Extended Background Version

  • Journal of International Economics 72(1) (May, 2007)
    Abstract.  Financial liberalization often leads to financial crises. This link has usually been attributed to poorly designed banking systems, an explanation that is largely static. In this paper we develop a dynamic explanation, by modelling how a newly-liberalized bank's opportunities and incentives to take on risk develop over time. The model reveals that even if a banking system is well-designed, in the sense of having good long-run properties, many countries will enjoy an initial period of rapid, low-risk growth and then enter a period with an elevated risk of banking crisis. This transition emerges because of the way in which the degree of foreign competition, the marginal product of capital, and the bank's own net worth simultaneously evolve.
  • Optimal Investment with Lumpy Costs (with Duc T. Le)
  • SUNY-Albany Discussion Paper 02-02

  • Journal of Economic Dynamics and Control 29(7) (July, 2005)
    Abstract.  In this paper we analyze a continuous-time model of investment with uncertainty, irreversibility and a broad class of lumpy adjustment costs. We show that the two components of the optimal investment strategy, the investment trigger and the investment increment, can be found sequentially, and that the optimal investment increment maximizes a closed form function. Solving the model numerically, we find that adding a relatively small amount of variable adjustment costs often leads firms to invest in much smaller increments. We derive a measure of user cost that incorporates lumpy investment, and use it to show that as firms invest in bigger increments, the investment trigger increases as well.
  • On the Distribution and Dynamics of Health Care Costs (with Eric French)
  • Detailed Background Version

  • Journal of Applied Econometrics 19(4) (Special Issue on the Econometrics of Social Insurance, 2004)
    Abstract. Using data from the Health and Retirement Survey and the Assets and Health Dynamics of the Oldest Old survey, we estimate the stochastic process that determines both the distribution and dynamics of health care costs. We find that the data generating process for log health costs is well represented as the sum of a white noise process and a highly persistent AR(1) process. We also find that the innovations to this process can be modelled with a normal distribution that has been adjusted to capture the risk of catastrophic health care costs. Simulating this model, we find that in any given year 0.1% of households receive a health cost shock with a present value of at least $125,000.
  • The Dynamic Effects of Firm-level Borrowing Constraints
  • Background

  • Journal of Money, Credit and Banking 35(5) (October, 2003)
    Abstract.  In this paper I develop a detailed dynamic model of firm behavior in order to see whether financial constraints and endogenous exit are important propagation mechanisms.  To do this, I construct an economy where firms face financial constraints, fixed costs and persistent idiosyncratic shocks. Using numerical methods, I analyze how a large collection of these firms responds to aggregate productivity shocks.  A common result is that financial constraints tend to dampen the economy's initial response to aggregate productivity shocks, but that equity accumulation and exit dynamics amplify the longer-term response. The relative sizes of these two effects, however, are sensitive to firms' environments.
  • Finite Mixture Distributions, Sequential Likelihood and the EM Algorithm (with Peter Arcidiacono)

  • Econometrica 71(3) (May, 2003)
    Abstract.  A popular way to account for unobserved heterogeneity is to assume that the data are drawn from a finite mixture distribution. A barrier to using finite mixture models is that parameters that could previously be estimated in stages must now be estimated jointly: using mixture distributions destroys any additive separability of the log-likelihood function. We show, however, that an extension of the EM algorithm reintroduces additive separability, thus allowing one to estimate parameters sequentially during each maximization step. In establishing this result, we develop a broad class of estimators for mixture models. Returning to the likelihood problem, we show that, relative to full information maximum likelihood, our sequential estimator can generate large computational savings with little loss of efficiency.
  • Has Fiscal Policy Helped Stabilize the Postwar U.S. Economy?

  • Journal of Monetary Economics 49(4) (May, 2002)
    Abstract.  In this paper, I consider whether postwar fiscal policy has helped stabilize the U.S. economy. I do this by adding to the stochastic growth model fiscal policy feedback rules estimated from postwar data. These rules allow fiscal policies to respond to current and lagged output and labor hours. I use the estimated policy rules to see if postwar fiscal policy reduces output volatility and/or lengthens expansions and shortens recessions. I find that fiscal policy in general provides little stability on either count. I also find that the endogenous feedback rules, by themselves, are at best moderately stabilizing and are in some cases destabilizing.
  • Multiple Equilibria and Endogenous Persistence in a Dynamic Model of Employment
  • SUNY-Albany Discussion Paper 04-02

  • July, 1998
    Abstract.  In this paper, I consider whether:  (1) a dynamic forward-looking model with multiple equilibria can generate persistent fluctuations without persistent sunspots; and (2) indeterminacy is important for these persistent fluctuations.  The answer to the first question is a tentative no. The answer to the second question is yes.  Extending the approach of Howitt and McAfee (1988, 1992), I work with a dynamic model of long-term employment.  In this framework, search externalities allow both hiring and not hiring to comprise symmetric Nash equilibria for some values of the i.i.d. hiring cost.  Following Cooper (1994), firms implement the hiring strategy of the previous period unless the realized hiring cost makes a change in strategy the dominant strategy.  Calibrating the model, I find that with plausible functional forms, the selection rule can lead to persistent economic episodes only if one uses counterfactual parameters.  Turning to the second question, I estimate that the economy has multiple equilibria, in the sense that the current hiring decision depends on the previous hiring decision, around 41 percent of the time.  Moreover, I find that without some indeterminacy, the model can not generate expansions and recessions that are both persistent.
  • Slides


    Last Updated on September 14, 2012 by John Jones