Essays on Macroeconomics with Heterogeneous Agents

Abstract

This doctoral dissertation consists of the intersection of dynamic stochastic general equilibrium modeling, including heterogeneous agents, and the subjects of public finance and labor economics. The first chapter explains a puzzling empirical phenomenon regarding fertility rate in the United States. Over the last few decades, high-income females have demonstrated a tendency to have more children in the U.S. At the same time, household income structure has changed, becoming more unequal and more favorable to females. However, these changes appear contradictory to the predictions found in classical fertility literature, which suggest that high-income women exhibit low fertility due to the high opportunity cost of raising children. To account for this puzzling empirical phenomenon, we offer a fertility choice model with preference heterogeneity on having children, which allows for a comparative advantage between employment outside the home and child-rearing. We highlight the composition effect of females who desire children newly entering the high-income group, while females less desirous of children exit as the income structure changes. Our model accounts for 55% of the observed variation in the complete fertility rate, while the comparable model without composition effect fails to explain the observation. We also decompose various income shocks and find that changes in skill premium represent the major factor behind the phenomenon. The second chapter examines the quantitative effects of population aging driven by declining mortality and fertility rates. We also study the macroeconomic effects of raising the mandatory retirement age in such an aging economy. When the mortality rate decreases, aggregate capital increases since individuals save more for a longer retirement. In contrast, an increase in aggregate labor input is negligible since lower mortality rates primarily affect those who are out of the labor force. When the fertility rate decreases, both aggregate labor and capital inputs shrink radically because the aggregate population diminishes along with the working age population and aggregate savings plunges due to a downsized population. We analyze the effects of population aging when the mortality rate of all ages decreases by 1% each year and the population growth rate declines from 0.7% to 0.3%. A huge drop in aggregate labor input drags down aggregate output by about 15%. The pension system will run a big budget deficit with more retirees and a smaller number of workers. The government can alleviate the negative effects of population aging by raising the mandatory retirement age. When workers retirements are postponed by either three or five years, both aggregate labor input and capital increase, and pension deficits are significantly reduced.