Essays on uncertainty, consumption-portfolio choice, and labor search

Abstract

This dissertation consists of three related essays, aiming to understand how agents' fear of model uncertainty and labor search frictions influence macroeconomic outcomes, such as inequality levels and unemployment rates. The first part tries to answer how agents' optimal decisions and equilibrium outcomes change when agents have a fear of model uncertainty. The paper establishes a continuous-time general equilibrium heterogeneous-agent model with ambiguity aversion to study its effect on wealth and consumption inequality. The preference for ambiguity aversion reduces the interest rate, increases the risk premium, and reduces wealth and consumption inequality in the general equilibrium. Also, we examine the welfare effects of ambiguity aversion in the general equilibrium.

The second essay examines the impact of retirement policy on the unemployment rates for both young and old workers. It employs a labor search framework with a constant elasticity of substitution production function and cross-market matching to investigate the channels through which the delayed retirement policy has impacts. The findings show that through the cross-market matching channel, retirement policy increases the unemployment of young workers (it is ambiguous for old workers) and has a negative effect on the wages of cross-market matched workers. The latter effect is negative for young workers (positive for old workers) through the capital-skill complementarity. The paper calibrates the model to the U.S. data and quantifies the effects of retirement policy during the first decade of this century. Counterfactual experiments highlight the contribution of each channel.

The third essay explores the effects of foreign aid on human capital acquisition and educated unemployment in the recipient economy by tying aid to the productive purpose of the skilled sector. Utilizing a search and matching model, a rise in the allocation of aid used for the productive purpose can provide incentives to firms for more job entries and result in a lower unemployment rate among skilled workers. However, this result can be mitigated or even overturned when endogenous human capital acquisition is incorporated. We also show that an increase in the portion of foreign aid used for education subsidy can increase the supply but reduce the demand for skilled labor. This thus results in a higher educated unemployment rate in the economy.