Education and Self-Employment: Changes in Earnings and Wealth Inequality

The author quantitatively studies the interaction between education and occupation choices and its implication for the relationship between the changes in earnings inequality and the changes in wealth inequality in the United States over the 1983–2001 period. Among households whose head is a college graduate, the ratio of average household earnings between the self-employed and workers increased by 57 per cent. At the same time, the ratio of the average household wealth increased by 137 per cent. These findings suggest that both earnings and wealth inequality increased over this period. Did this change in relative average earnings lead to the change in relative average wealth? The author builds on a model of wealth distribution to include education and occupation choices, where earnings opportunities are dictated by productivity processes that are education-occupation specific. By calibrating these productivity processes to match the earnings observations separately for 1983 and 2001, the author quantitatively derives the model-implied changes in wealth inequality between different education-occupation groups of households. The results show that this exercise leads to one-third of the change in the relative average wealth between college self-employed and college worker households.Economic models; Labour markets

Uninsurable Investment Risks and Capital Income Taxation

This paper studies the capital accumulation and welfare implications of reducing capital income taxation in a general equilibrium economy with uninsurable investment risks. It has been shown that, with uninsurable investment risks, under-accumulation of capital may result compared to the complete markets economy. We show that reducing somewhat the capital income tax rate increases the capital stock and leads to a welfare gain. The complete elimination of the capital income tax, however, is not necessarily welfare improving.Economics models

Unsecured Debt, Consumer Bankruptcy, and Small Business

In this paper we develop a quantitative model of entrepreneurial activity (risk-taking) and consumer bankruptcy choices and use the model to study the effects of bankruptcy regulations on entrepreneurial activity, bankruptcy rate and welfare. We show that eliminating bankruptcy exemptions leads to a modest increase in the fraction of entrepreneurs, a large decrease in the overall bankruptcy rate and a significant welfare gain. In contrast, eliminating the whole consumer bankruptcy system leads to a large fall in the fraction of entrepreneurs and a substantial welfare loss. These two findings suggest that the consumer bankruptcy system is desirable but it must be well-designed with regard to bankruptcy asset exemptions. In particular, excessive bankruptcy exemptions can be counter-productive. Finally, we argue that entrepreneurial activity is important when studying different bankruptcy rules or regulations.Economic models; Financial stability; Financial system regulation and policies

Are There Canada-U.S. Differences in SME Financing?

Previous surveys of Canadian and U.S. business owners suggest that access to financing in Canada may be more problematic than in the United States. Using the 2003 Survey of Small Business Financing in the United States and the 2004 Survey on Financing of Small and Medium Enterprises in Canada, this paper examines whether this perception can be better quantified. Compared to U.S. SMEs, Canadian SMEs are found to have greater reliance on loans from individuals (family, friends and others) and less reliance on loans from financial institutions. This result can be interpreted either as indicative of lower availability of formal credit in Canada, or a lower need for formal credit. Furthermore, while evidence validating the perception that Canadian financial institutions are less likely to approve loan application of risky SMEs cannot be found, there is evidence that supports the notion that Canadian financial institutions are following a more uniform pricing policy than U.S. financial institutions.Financial services

Productivity in Canada: Does Firm Size Matter?

The research findings highlighted in this article suggest that firm-size differences play a significant role in explaining the productivity gap between Canada and the United States. The authors review factors that lead to a positive relationship between productivity and size and then look at Canadian evidence of this relationship at the firm level. They quantify the extent to which the change in Canadian productivity as well as the Canada-U.S. productivity differences can be accounted for by the change in the importance of large firms and identify several factors that play a role in determining average firm size and aggregate productivity.

Price-Level Uncertainty, Price-Level Targeting, and Nominal Debt Contracts

Many central banks around the world have embraced inflation targeting as a monetary policy framework. Interest is growing, however, in price-level targeting as an alternative. The choice of frameworks has important consequences for financial contracts, most of which are not fully indexed to the price level. Changes in the price level therefore lead to changes in the real value of contracts. Price-level targeting would reduce the size of these changes in real wealth and decrease uncertainty about the future price level. This article assesses the merits of price-level targeting vis-à-vis inflation targeting from a debt-revaluation perspective, with a focus on channels affecting risk premiums, the maturities of nominal debt contracts, and redistribution of wealth. A general conclusion flowing from the analysis is that accounting for the revaluation of nominal debts and assets strengthens the relative merits of price-level targeting compared with inflation-targeting.

Inflation, Nominal Portfolios, and Wealth Redistribution in Canada

There is currently a policy debate on potential refinements to monetary policy regimes in countries with low and stable inflation such as the U.S. and Canada. For example, in Canada, a systematic review of the current inflation targeting framework is underway. An issue that has generally received relatively less attention in this debate is the redistributional effects of inflation. This omission is likely to be important since the welfare costs of inflation depend not only on aggregate effects but also on redistributional consequences. The goal of this paper is to contribute to this policy debate by assessing the redistributional effects of inflation in Canada that arise through the revaluation of nominal assets and liabilities.We find that the redistributional effects of inflation are sizeable even for low and moderate inflation episodes. The main winners are young middle-class households with substantial amounts of mortgage debt. Besides young households, inflation also represents a windfall gain for the government because of its long-term debt. Old households, rich households, and the middle-aged middle-class lose from inflation, largely due to their sizeable holdings of bonds and non-indexed defined benefit pension assets.Monetary policy framework; Sectoral balance sheet; Inflation: costs and benefits; Inflation targets; Inflation and prices

Deformation of Okamoto-Painlev\'e Pairs and Painlev\'e equations

In this paper, we introduce the notion of generalized rational Okamoto-Painlev\'e pair (S, Y) by generalizing the notion of the spaces of initial conditions of Painlev\'e equations. After classifying those pairs, we will establish an algebro-geometric approach to derive the Painlev\'e differential equations from the deformation of Okamoto-Painlev\'e pairs by using the local cohomology groups. Moreover the reason why the Painlev\'e equations can be written in Hamiltonian systems is clarified by means of the holomorphic symplectic structure on S - Y. Hamiltonian structures for Okamoto-Painlev\'e pairs of type $\tilde{E}_7 (= P_{II})$ and $\tilde{D}_8 (= P_{III}^{\tilde{D}_8})$ are calculated explicitly as examples of our theory.Comment: 38 pages, 4 figures, minor corrections, typo