Jia Luo                                                                                               jialuo@ucla.edu
Department of Economics                                                    http://jialuo.bol.ucla.edu
University of California, Los Angeles

Research Interests

My fields of specialization are macroeconomics, health policy and financial economics. I am interested in building theoretical models as well as conducting quantitative analysis to study policy-oriented economic issues and to provide policy implications. My current research includes households’ financial decision-making with medical expense risks, the influence on individuals’ portfolio choices of Medicare policy adjustment, optimal design of unemployment insurance programs, and vulnerability of the banking system caused by distorted policies in China.

In my job market paper, “Uncertain Medical Expenses and Portfolio Choice Over the Life Cycle”, 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. This paper uses MEPS (Medical Expenditure Panel Survey) and HRS (Health and Retirement Study) data to calibrate uncertain medical expenses for the retired. With the consideration of idiosyncratic health expense risk in addition to labor income risk, the model can generate declining financial risk-taking with age after retirement, and therefore fit the data much better than those studies which consider labor income alone. In addition, I find that modeling health uncertainty provides motives for precautionary saving, which helps to explain the under-spending puzzle for elderly Americans. Furthermore, regressions of simulated data show that investors with poorer health tend to hold a smaller share of stock in their portfolios, which is consistent with the actual empirical relationship between health status and financial risk-taking. Finally, since risk of medical expenses is the main determinant of financial decision-making for elderly Americans, this paper has important policy implications: changes in government health insurance programs not only bring changes directly to individuals in their consumption and welfare, but also influence their investment behavior by increasing or decreasing exposure to the stock market. Simulated results show that a more generous Medicare policy significantly increases the proportion of financial wealth held in equities for the retired.

My second paper, “Optimal Unemployment Insurance with Consumption Commitments: Can Current UI Policy Be Justified?”, proposes the optimal design of the unemployment insurance contract in an environment with consumption commitments in which people cannot substitute freely among different goods within a single period. The optimal plan I obtain involves a relatively flat decreasing sequence of insurance payments over some duration, which is then followed by a large drop to a very low level of transfer. The results fit current policy well, and therefore give an explanation to justify the current policy. Additionally, the model predicts that if we change from the current unemployment program to the optimal contract, the government will only save 1.7% in unemployment payments, which shows that current policy is not as flawed as researchers have traditionally believed. In fact, to achieve efficiency, the efficient unemployment transfers should include a jump, similar to what we observe in practice.

My future research agenda involves contributing to providing the optimal design of government economic policies relating to the Medicare program and labor income taxation.

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 my study is to build a life cycle model to investigate the benefits and costs of extending current Medicare coverage to the near elderly. 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 and other medical services until becoming eligible for Medicare. The benefits of providing some public health insurance to the near elderly can be substantial, and include the reduction of future uncertainties from income shock and health shock, as well as the decrease in delay of medical care until the age of 65, thereby improving the health status of the population that Medicare covers, which will in turn result in the reduction of total Medicare expenditure.

I also plan to 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 re-distributive property changes the severity of punishment for defaulting as well, therefore leading to less risk-sharing via private contracts. In addition, the progressive tax system will distort earnings after tax, and therefore distort labor supply. My research will be to study the effects of a progressive tax on risk-sharing and labor supply: the welfare consequences of changes in tax progressiveness depend on relative magnitudes of increased risk-sharing necessitated by the tax system, reduced risk-sharing through the private insurance market, and labor supply distortion. I want to examine whether a progressive labor income tax is needed and how progressive it should be.

In addition, based on my research on unemployment insurance programs and households’ portfolio choice behavior in the U.S., I plan to study similar issues in developing countries as well. I am also interested in current macroeconomic problems, such as development of financial markets and reform of fixed exchange rate regimes in emerging Asian economies, especially that of China. In my future research, I plan to use macroeconomic and econometric tools to scrutinize these applied questions.