Three essays in macroeconomics

Xue Qiao

ISU General Staff Papers from Iowa State University, Department of Economics

Abstract: This dissertation is concentrated on two different economic topics: unemployment insurance (UI) and longevity. The first two chapters examine how a government UI program affects individuals' behavior and the labor market performance. The last chapter investigates the role of the interaction between public health expenditure and private health investment in promoting a longer lifetime span.;In the first chapter, I study the effects of a publicly funded unemployment insurance (UI) system on a firm's decision to terminate employment contracts in a dynamic moral hazard model. It is shown that the optimal employment contract involves termination of both sufficiently rich (too rich to motivate with compensation) and sufficiently poor (too poor to punish) workers. Unemployment insurance, by reducing the termination cost to firms, reduces the cutoff wealth level at which it becomes optimal to fire workers. When calibrated to the U.S. data, the model suggests that the presence of an unemployment insurance system may cause more job terminations but may also reduce the unemployment rate. While consumption of unemployed agents is shown to be changed little, aggregate welfare of all workers is reduced. The upshot is that a firm that offers long-horizon employment contracts can provide substantial consumption insurance and a publicly funded UI system would only crowd out the firm's insurance provision.;The second chapter evaluates the effects of the current unemployment insurance (UI) program in a model where agents are able to borrow and lend, and the government holds an unemployment insurance trust fund (UITF) balance. The only borrowing constraint in this economy is that an agent's consumption must be non-negative. It appears that the current positive UITF balance improves the welfare by 0.65%, relative to the economy with a UITF balance of 0 and yet the existing UI program is still available. In addition, removing the current UI program from the economy improves the welfare by 1.79%, which suggests that the public UI program may not be needed when agents are able to smooth consumptions by borrowing.;The last chapter introduces endogenous longevity in an otherwise standard overlapping generations model with capital. In the model, a young agent may increase the length of her old age by incurring investments in health funded from her wage income. Such private health investments are assumed to be more "productive'' if accompanied by complementary tax-financed public health programs. The presence of such a complementary public input in private longevity is shown to expose the economy to aggregate endogenous fluctuations and even chaos, and such volatility is impossible in its absence.

Date: 2007-01-01
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