Economic Determinants of Fertility: The Case of German Reunification, coming out December 2017
with Franziska Deutschmann
draft in preparation

The fertility rate in East Germany fell by around 50% in four years after the German reunification in the 1990. We analyze the age-specific fertility profiles of various cohorts of East German females. We document that older cohorts who started their fertility life in the socialist regime react by strongly reducing their fertility in the aftermath of the reunification. Later in their life-cycle they start to adopt West German patterns of fertility. We construct a life-cycle model of fertility decisions and estimate it to the 1968 birth cohort of East German women. The results of a series of counterfactual experiments point out that the increased human capital depreciation of female income is responsible for the observed fertility drop. The strong income growth of male income in the East is behind the adoption of the fertility pattern of West Germany in the later part of the fertility life-cycle.

Low Homeownership in Germany – A Quantitative Exploration, November 2017
with Leo Kaas, Edgar Preugschat and Nawid Siassi

The homeownership rate in Germany is one of the lowest among advanced economies. To better understand this fact, we analyze the role of three specific policies which discourage homeownership in Germany: an extensive social housing sector with broad eligibility criteria, high transfer taxes when buying real estate, and no tax deductions for mortgage interest payments by owner-occupiers. We build a lifecycle model with uninsurable income risk and endogenous homeownership in order to quantify the policy effects on homeownership and welfare. We find that all three policies have sizable effects on the homeownership rate. At the same time, household welfare would be reduced by moving to a policy regime with low transfer taxes and mortgage interest tax deductions, but it would improve in the absence of social housing, in particular when coupled with housing subsidies for low-income households.

Family Planning and Development: Aggregate Effects of Contraceptive Use, February 2017
with Tiago Cavalcanti and Cezar Santos

What is the role of family planning interventions on fertility, savings, human capital investment and development? To examine this, endogenous unwanted fertility is embedded in an otherwise standard quantity-quality overlapping generations model of fertility and growth. The model features costly fertility control and families can (partially) insure against a fertility risk by using costly modern contraceptives. In the event of unexpected pregnancies, households can also opt to costly abort some pregnancies. Given the number of children born, parents decide how much education to provide them and how much they save out of their income. We fit the model to Kenyan data, implement several family planning policies and decompose their aggregate effects. Our results suggest that for a small budget (up to 0.5 percent of GDP) legalizing and subsidizing the price of abortion is a more cost-effective policy in improving long-run living standard and reducing inequality than policies that either subsidize the price of modern contraceptives or subsidize basic education.

Envelope Wages, Hidden Production and Labor Productivity, July 2017
with Alessandro Di Nola and Aleksandar Vasilev

We evaluate the relative importance of aggregate labor productivity versus income taxes and social contributions for tax compliance in an economy with a large degree of informality. Empirical evidence points out that tax evasion in Europe happens through partially concealing wages and profits in formally registered enterprises. To this end, we build a model in which employer-employee pairs of heterogeneous productive capacities make joint decisions on the degree of tax evasion. The quantitative model is used to analyze the case of Bulgaria which has the largest informal economy in Europe. The estimation strategy relies on matching the empirical series for the size of the informal economy and other aggregate outcomes for 2000-2014. Our counterfactual experiments show that the most important factor for the changing size of the informal economy is labor productivity, which accounts for more than 75% of the change. The variation in corporate income tax accounts for the rest.

Teenage Childbearing and the Welfare State, January 2017
with Andra Filote and Jan Mellert

Teenage childbearing is a common incident in developed countries. However, the occurrence of teenage births is much more likely in the United States than in any other industrialized country. The majority of these births are delivered by female teenagers coming from low-income families. The hypothesis put forward here is that the welfare state (a set of redistributive institutions) plays a significant role for teenage childbearing behavior. We develop an economic theory of parental investments and risky sexual behavior of teenagers. The model is estimated to fit stylized facts about income inequality, intergenerational mobility, and sexual behavior of teenagers in the United States. The welfare state institutions are introduced via tax and public education expenditure functions derived from U.S. data. In a quantitative experiment, we impose Norwegian taxes and/or education spending in the economic environment. The Norwegian welfare state institutions go a long way in explaining the differences in teenage birth rates between the United States and Norway.

Does Homeownership Promote Wealth Accumulation?, April 2017
with Leo Kaas and Edgar Preugschat

It is well known that homeowners are richer than renters, even after controlling for observable characteristics. This is often used as an argument for policies that foster homeownership. However, the causal link between homeownership and wealth is difficult to establish due to many potential sources of endogeneity. Utilizing the Household Finance and Consumption Survey for the Euro area, we correct for endogeneity by using inheriting the household’s main residence as an instrument. The exclusion restriction is that conditional on the total amount of inheritance, inheriting a home affects the wealth position of the household only through homeownership. For the sample of inheritors we find that the local average treatment effect for households that inherit a home and stay homeowners is negative. Owning a home reduces riches due to sizable reductions in the net holdings of financial and other real wealth of the treated households.

CESifo Featured Paper Discussion

Wealth Inequality and Homeownership in Europe, April 2016
with Leo Kaas and Edgar Preugschat
revision requested at the Annals of Economics and Statistics

The recently published Household Finance and Consumption Survey has revealed large differences in wealth inequality between the countries of the Euro area. We find a strong negative correlation between wealth inequality and homeownership rates across countries. We use two decomposition methods to shed more light on this correlation. First, a Gini decomposition by homeownership status shows that the negative relationship is mostly driven by large between-group inequality across owners and renters. Second, to control for other observables, we conduct a detailed counterfactual decomposition of cross-country inequality differences. We confirm the major role for homeownership rates in accounting for the wealth inequality differences. Our analysis suggests that the cross-country variation is mostly driven by differences in the savings behavior of households in the bottom half of the wealth distribution and that those differences in savings are to a large extent channeled through housing wealth.

Technology and the Changing Family: A Unified Model of Marriage, Divorce, Educational Attainment and Married Female Labor-Force Participation
with Jeremy Greenwood, Nezih Guner and Cezar Santos
American Economic Journal: Macroeconomics, 8(1), 1-41, 2016

Marriage has declined since 1960, with the drop being bigger for non-college educated individuals versus college educated ones. Divorce has increased, more so for the non-college educated. Additionally, positive assortative mating has risen. Income inequality among households has also widened. A unified model of marriage, divorce, educational attainment and married female labor-force participation is developed and estimated to fit the postwar U.S. data. Two underlying driving forces are considered: technological progress in the household sector and shifts in the wage structure. The analysis emphasizes the joint role that educational attainment, married female labor-force participation, and assortative mating play in determining income inequality.

Hear about this paper in Nezih Guner’s TEDx talk

Marry Your Like: Assortative Mating and Income Inequality (Revised Version)
with Jeremy Greenwood, Nezih Guner and Cezar Santos
American Economic Review: Papers and Proceedings, 104(5), 348-353, 2014

Has there been an increase in positive assortative mating on the marriage market since 1960? How does positive assortative mating in the marriage market contribute to income inequality across households? How does the increase in single households, due to the decline in marriage and the rise in divorce, affect income inequality?


Published version

From Planning to Chaos to Market: Ethnic Inequality in Bulgaria, September 2016
with Vigile Fabella

We document changes in relative earnings of the ethnic Turkish workers in Bulgaria through the country’s transition from planning to markets. Using data from four periods: pre-transition communist era (late 1980s), early transition years (early 1990s), late transition years (early 2000s), and post-transition (late 2000s), we find that the level of raw ethnic inequality (measured as earnings differences between Turkish and Bulgarian workers) increased immediately after the regime change and plateaued throughout the course of transition. Ethnic inequality measures adjusted for observable characteristics follow a similar pattern but post-transitional differences between ethnic groups disappear. Changes over time in the ethnic earnings gaps differ for men and women. The raw and adjusted male ethnic gaps increased steadily during transition years but dropped post-transition, while the raw female ethnic gap fluctuated across the four periods. The adjusted female ethnic gap disappeared completely in the post-transitional years. We identify different sources of the changes in the level of ethnic inequality, such as changes in the labor market characteristics and in the wage structure. Evidence suggests that the decline in the relative earnings of Turkish men was due primarily to the widening of the wage structure. Turkish working women improved their relative standing mainly from more favorable changes in labor market characteristics. These changes were only partially due to a selection in labor force participation.

Abortions and Inequality
coming soon

In the last three decades over a million abortions were performed annually in the United States. Recent empirical studies assess the impact of legalization of abortions on living conditions of children and argue that legalization of abortions provides better living conditions and human capital endowments to surviving children. This paper takes seriously the hypothesis that legalized abortion can improve the living conditions of children and hence alter their future labor market outcomes. The main question of the paper is what are the implications of abortions for long-term income inequality. A model of marriage, fertility, human capital transmission, contraception and abortion decisions is built to answer this question quantitatively. Inequality will be higher in a world without abortions. The main reason for this is the higher and more unequally distributed number of children across households. Children also receive less human capital.