John Jones' Research Papers

 
  • Why do the Elderly Save? The Role of Medical Expenses (with Cristina De Nardi and Eric French)
  • NBER Working Paper 15149 (Slides)
  • Previously circulated as Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles
  • NBER Working Paper 12554 (earlier draft)

    • Under second review at the Journal of Political Economy
    June, 2009
    Abstract.  This paper constructs a rich model of saving for retired single people. Our framework allows for bequest motives and heterogeneity in medical expenses and life expectancies. We estimate the model using AHEAD data and the method of simulated moments. The data show that out-of-pocket medical expenses rise quickly with both age and permanent income. For many elderly people the risk of living long and requiring expensive medical care is a more important driver of old age saving than the desire to leave bequests. Social insurance programs such as Medicaid rationalize the low asset holdings of the poorest. These government programs, however, also benefit the rich because they insure them against their worst nightmares about their very old age: either not being able to afford the medical care that they need, or being left destitute by huge medical bills.
     
  • 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.
     
  • 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.
     
  • The Effects of Health Insurance and Self-Insurance on Retirement Behavior (with Eric French)
  • Michigan Retirement Research Center Working Paper 2007-170 (slightly earlier draft)
  • Center for Retirement Research Working Paper 2004-12 (earlier draft)

    • Under revision for Econometrica
    June, 2008
  • Slides

    • 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 the first dynamic programming model of retirement that accounts for both saving and uncertain medical expenses. Our results suggest that uncertainty and saving are both important for understanding the labor supply responses to Medicare. Furthermore, we find evidence that individuals with stronger preferences for leisure self-select into jobs that provide post-retirement health insurance coverage. Properly accounting for this self-selection reduces the estimated effect of Medicare on retirement behavior. Nevertheless, we find that health insurance is an important determinant of retirement—the labor supply responses to the Medicare eligibility age are as large as the responses to the Social Security normal retirement age.
     
  • 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.
     
  • 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.
     
  • 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.
     
     

    Last Updated on June 23, 2008 by John Jones