Essays on Inequality and Policy Design in Macroeconomics

Abstract

This thesis examines how inequality arises and how public policy shapes economic outcomes across several interconnected dimensions. It brings together questions related to racial income differences, education policy with externalities, and the forces that lead to wealth concentration at the top of the distribution. The analysis combines structural modeling, quantitative methods, and administrative and survey data to study how individual behavior and policy interventions interact over the life cycle and across generations. The thesis is organized into three chapters, each addressing one of these dimensions in greater depth.

The first chapter documents how racial differences in labor income may simultaneously explain both crime and wealth disparities between Black and White individuals. Using an overlapping generations model that endogenously determines crime rates alongside consumption and savings decisions, we find that equalizing labor incomes results in a significant decline in both the Black crime rate and the proportion of Black individuals in the lowest wealth quintile. Higher crime and incarceration rates of Black individuals, on the other hand, do not significantly contribute to their low wealth. This is primarily because most crimes are committed by already poor and young individuals who are not saving in any case.

The second chapter examines how optimal education subsidies adjust in the presence of consumption externalities. We derive an optimal education subsidy formula using estimable parameters in a context where individuals exhibit "keeping up with the Joneses" behavior. In a static model where agents invest in their own human capital, we find that a lower education subsidy is warranted when a consumption externality exists and income is insensitive to the subsidy. Conversely, in an intergenerational setup where parents decide on their children's human capital investments while facing consumption externalities, human capital tends to be underaccumulated. In this case, the marginal effect of the consumption externality on the education subsidy depends on long-run elasticities and distributional parameters, which can be estimated using sufficient statistics.

The third chapter analyzes the mechanisms behind wealth concentration through a heterogeneous quantitative model calibrated to Norwegian administrative data. The model incorporates three mechanisms: superstar worker states, entrepreneurial activity, and intergenerational wealth transfer. It matches both the cross-sectional wealth concentration and the wealth dynamics of New Money and Old Money households. We conduct counterfactual experiments to isolate the role of each mechanism. Removing the superstar worker state mainly reduces overall inequality but has little effect on the top 1\% wealth share. Shutting down entrepreneurial activity lowers the wealth concentration at the very top but has limited effects on the overall distribution. Equalizing inheritances reduces the initial wealth gap between New Money and Old Money and significantly slows down Old Money's wealth accumulation process. Taken together, the results show that labor income heterogeneity shapes income inequality, entrepreneurship drives wealth accumulation at the very top, and intergenerational transfers determine the early-life wealth positions that lead to the persistent gap between New Money and Old Money. Show more