Abstract:
Energy price shocks are large and persistent relative to other price shocks. How do these shocks affect households across income groups? To quantify the welfare effects of energy price shocks, I develop a heterogeneous-agent incomplete market model featuring non-homothetic consumption preferences, commuting costs, and energy as a factor of production for non-energy goods, taking the energy price as exogenous. A calibrated version of the model successfully reproduces many salient features of United States data, including the cross-sectional distributions of employment, income, wealth, and expenditure shares on energy consumption for both commuting and residential utilities. Quantitatively, I find that a positive energy price shock similar to the one in 2021 results in disproportionate welfare losses across income groups, with households in the bottom quintile losing nearly twice as much as the top quintile in terms of consumption on impact. About half of the consumption inequality generated by the shock's direct impact is offset by adjustments in wages and rental rates, indicating stronger indirect effects on high-income households. I also find that work from home (WFH) exacerbates the resulting consumption inequality yet reduces the shock-induced utilitarian welfare loss. In contrast, a lump-sum transfer to low-income households financed by a progressive labor income tax mitigates the rise in consumption inequality, although it delivers only a modest reduction in welfare loss relative to WFH.
Publications
Progressive Income Taxation and Consumption Baskets of Rich and Poor
Journal of Economic Dynamics and Control, December 2023, 157: 104758
Abstract: In this paper, I analyze the implications of differences in consumption baskets across income groups to evaluate the effects of redistributive taxation on efficiency and inequality. To this end, I develop a static multi-sector general equilibrium model incorporating a parametric tax function, non-homothetic consumption preferences, and endogenous labor supply, with varying compositions of skilled and unskilled labor in production across sectors. A calibrated version of the model captures the cross-sectional differences in the compositions of households' consumption baskets in the United States. I find that considering the differences in consumption baskets between high- and low-income households leads to a lower optimal choice of income tax progressivity compared to the conventional approach that ignores this feature of the data.
Works in Progress
Capital–Skill Complementarity, Inflation Heterogeneity, and the U.S. Tax Progressivity Puzzle