Search

We analyse the deadweight losses of tax-induced labor misallocation in an equilibrium model of the labour market where workers search to climb a job ladder and firms post vacancies. Workers differ in abilities. Jobs differ in productivities and amenities. A planner uses affine tax functions to finance lump-sum transfers to all workers and unemployment benefits. The competitive search equilibrium maximizes after-tax utility subject to resource constraints and the tax policy. A higher tax rate distorts search effort, job ranking and vacancy creation. Distortions vary on the job ladder, but always result in deadweight losses. We calibrate the model using matched employer-employee data from Denmark. The marginal deadweight loss is 33 percent of the tax base, and primarily arise from distorted search effort and vacancy creation. Steeply rising deadweight losses from distorted vacancy creation imply that the deadweight loss in the calibrated economy exceeds those incurred by very inequality averse social planners.

In an optimizing model of epidemics several externalities arise when agents shield to avoid infection. Optimizing behaviour delays herd immunity but also reduces overall infections to approximately the minimum consistent with herd immunity. For reasonable parameter values, and with no vaccine, we find that agents delay too much because of a "rat race to shield": they shield too much in the hope that others catch the disease and reach herd immunity. This and other externalities drive large wedges between private and social outcomes. The expectation of a vaccine reverses the effects, and agents shield too little.

Partner selection is a vital feature of human behavior with important consequences for individuals, families, and society. Hypergamy occurs when a husband’s earning capacity systematically exceeds that of his wife. We provide a theoretical framework that rationalizes hypergamy even in the absence of gender differences in the distribution of earnings capacity. Using parental earnings rank, a predetermined measure of earnings capacity that solves the simultaneity problem of matching affecting earnings outcomes, we show that hypergamy is an important feature of Norwegian mating patterns. A vignette experiment identifies gender differences in preferences that can explain the observed patterns.

We study the optimal taxation of labor income in the presence of search frictions. Heterogeneous workers undertake costly search off- and on-the-job in order to locate more productive jobs that pay higher wages. More productive workers search harder, resulting in equilibrium sorting where low-type workers are overrepresented in low-wage jobs while high-type workers are overrepresented in high-wage jobs. Absent taxes, worker search effort is efficient, because the social and private gains from search coincide. The optimal tax system balance efficiency and equity concerns at the margin. Equity concerns make it desirable to levy low taxes on (or indeed, subsidize) low-wage jobs including unemployment, and levy high taxes on high-wage jobs. Efficiency concerns limit how much taxes an optimal tax system levy on high-paid jobs, as high taxes distort the workers' incentives to search. The model is simulated for reasonable parameter values. The model is also extended to allow for amenities that are unobservable to the tax authorities and therefore cannot be taxed. Ultimately, we want to estimate the model using a Danish matched employer-employee data set.