Uncertain Medical Expenses and Portfolio Choice Over
the Life Cycle (August, 2006)
In this paper, I explore the effects of uninsurable risk of health expenditures as well as labor income risk on portfolio choice in a realistically calibrated life-cycle model. Most of the existing literature that examines labor income risk and its effect on portfolio composition over the life cycle can provide compelling explanations for the vast differences in portfolios between young and old investors; but few of these studies can explain continued declines in risk-taking with age after retirement. This paper uses MEPS (Medical Expenditure Panel Survey) and HRS (Health and Retirement Study) data to calibrate uncertain medical expenses ...
Research Papers
Optimal Unemployment Insurance with Consumption
Commitments
-- Can Current UI Policy Be Justified?
(February, 2006)
Unemployment insurance programs are important ingredients of social welfare policies in developed countries. Over the past two decades, there has been a branch of literature that deals with the optimal design of insurance plans. However, no theory so far has been able to justify the current UI program in the U.S. Classical models claim that unemployment benefits should decrease gradually in order to induce the appropriate incentive to be reemployed, while the current program is a flat replacement ratio of approximate 66% for 6 months which then drops down to zero afterwards. This paper considers the environment with consumption commitments ...
Business Cycles, Policy Distortion and Bank Runs in China (August,2004)
Empirical evidence suggests that bank
runs are a natural outgrowth of business cycles. In this paper, I develop a
theoretical model to show how cyclical fluctuations generate bank crises in a
general equilibrium. Two types of firms, heavy industry and light industry, are
introduced into the model. I explore the effects on the banking system of
distorted government policies, such as the policy in China that gives priority
to heavy industry. In this paper, I numerically compute the optimal risk-sharing
capital allocations and the probability of firm insolvency and bank run in the
economy where banks’ loan rates to heavy industry are distorted ...
Test of Myopic Loss Aversion Theory: The Case of Taiwan (March, 2004)
In this paper,
I develop a loss aversion portfolio choice model to test the myopic loss
aversion theory using data from the Taiwanese stock market. The concept of loss
aversion was first proposed by Kahneman and Tversky (1979) in their prospect
theory, in which investors behave according to “loss aversion” instead of “risk
aversion”. Benartzi and Thaler (1995) propose the myopic loss aversion theory by
combining loss aversion and evaluation frequency to explain the equity premium
puzzle. They claim that high equity premiums can be caused by loss-averse
investors’ frequent evaluation of their assets. In this paper, I take the first
order conditions as moment functions and use a two-stage General Method of
Moments (GMM) to estimate ...
Working Papers
Optimal Labor Income Taxation with Enforcement Frictions
I explore the
optimal labor income tax policy in a dynamic endogenously incomplete market
which is caused by limited enforceability of wage contracts. In the model, I
assume that workers can default on a wage contract, however, once they default,
they will be banned from the labor market forever and only consume their
stochastic labor incomes. With the redistribution effects, a progressive tax is
traditionally regarded as a risk-sharing device against uncertainty from
idiosyncratic labor income. However, this redistributive property changes the
severity of punishment for default as well, therefore leading to less
risk-sharing ...
Health Insurance Coverage of the Near Elderly: Extension of the Medicare System
This paper builds a life cycle model to
investigate the benefits and costs of extending current Medicare coverage to the
near elderly. With increasing health care costs and more and more baby boomers
entering retirement in the coming decades, a broad and fundamental reform of the
U.S. health care system seems necessary. The goal of this paper is to contribute
to providing the optimal design of the Medicare program. The near elderly
population, aged 55-64, is a vulnerable age group. They are more likely to be in
poor health than other non-elderly age groups. Due to lack of insurance, a
substantial number of the near elderly forego or postpone physician visits ...