wall street occupations many finance jobs entail the risk of large losses and hard to monitor effort we analyze the equilibrium consequences of these features in a model with optimal dynamic contracting we show that finance jobs feature high compensation up or out promotion and long work hours and are more attractive than other jobs moral hazard problems are exacerbated in booms even though pay increases employees whose talent would be more valuable elsewhere can be lured into finance jobs while the most talented employees might be unable to land these jobs because they are too hard to manage

are future taxes discounted in this paper i examine empirically the question of whether or not the public recognizes the future taxes implied by current deficitfinanced expenditures as discussed by barro 1 it seems that such recognition does not occur but that by a new hypothesis presented here the aggregate economy behaves much as if it did this alternative hypothesis relies on the widely accepted efficient markets and permanent income hypotheses and it requires considerably less sophistication and information on the part of the average economic agent than does barro s hypothesis

bonus culture competitive pay screening and multitasking to analyze the impact of labor market competition on the structure of compensation we embed multitasking and screening within a hotelling framework competition for talent leads to an escalation of performance pay shifting effort away from long term investments risk management and cooperation efficiency losses can exceed those from a single principal who dulls incentives to extract rents as competition intensifies monopsonistic underincentivization of low skill agents first decreases and then gives way to growing overincentivization of high skill ones aggregate welfare is thus hill shaped while inequality tends to rise monotonically bonus caps can help restore balance in incentives but may generate other distortions

dynamics of innovation and risk we study the dynamics of an innovative industry in which agents learn about the likelihood of negative shocks managers can exert risk prevention effort to mitigate the consequences of shocks if no shock occurs confidence improves attracting managers to the innovative sector but when confidence becomes high inefficient managers exerting low risk prevention effort also enter this stimulates growth while reducing risk prevention the longer the boom the larger the losses if a shock occurs although these dynamics arise in the first best asymmetric information generates excessive entry of inefficient managers earning informational rents inflating the innovative sector and increasing its vulnerability

crop prices and the demand for titled land evidence from uganda abstract i investigate how agricultural prices affect demand for titled land using panel data on ugandan farmers and a price index that weighs international crop prices by the structure of land use at the sub county level higher prices increase farmers share of titled land i also present evidence of a positive impact of prices on agricultural incomes the effect of prices on land tenure is stronger when farmers have access to roads and markets when they have undertaken investment on the land and when households fear land grabbing

performance gender gap does competition matter using data for students undertaking a series of real world academic examinations with high future payoffs we examine whether the differences in these evaluations competitive nature generate a performance gender gap in the univariate setting we find that women s performance is first order stochastically dominated by that of men when the competition is higher whereas the reverse holds true in the less competitive or noncompetitive tests these results are confirmed in the multivariate setting our findings from a real world setting with important payoffs at stake are in line with the evidence from experimental research that finds that females tend to perform worse in more competitive contexts

occupations fields of study and returns to education this paper considers several possible channels behind the well documented effect of education on earnings the first channel is that education makes workers more productive on a given task as in a conventional human capital framework the second channel is based on the idea that education helps workers get assigned to higher paying occupations where output is more sensitive to skill a third and final channel is that workers are more productive and earn more when they are matched to a job related to their field of study using data from the 2005 national graduate survey and the 2006 canadian census i find that channels two and three account for close to half of the conventionally measured return to education the results indicate that the return to education varies greatly depending on occupation field of study and the match between these two factors

wages and human capital in the u s financial industry 1909 2006 we study the allocation and compensation of human capital in the u s finance industry over the past century across time space and subsectors we find that financial deregulation is associated with skill intensity job complexity and high wages for finance employees all three measures are high before 1935 and after 1980 but not in the interim period workers in the finance industry earn the same education adjusted wages as other workers until 1990 and significantly more afterward by 2006 the premium is 40 on average and 200 for top earners and ceos earnings risk and firm size effects account for some of the premium but the majority does not appear to be sustainable

the determinants of earnings a behavioral approach we survey the determinants of earnings and propose a framework for understanding labor market success we suggest that the advantages of the children of successful parents go considerably beyond the benefits of superior education the inheritance of wealth or the genetic inheritance of cognitive ability we suggest that noncognitive personality variables such as attitudes towards risk ability to adapt to new economic conditions hard work and the rate of time preference affect both earning and the transmission of economic status across generations

international differences in saving rates and the life cycle hypothesis this paper demonstrates that life cycle and demographic variables explain about two thirds of the observed variation in the saving rates of oecd nations during the 1970s they explain more of the variation in the household than the national saving rate and much more when the sample is weighted by population than when it is not finally the study demonstrates that the labor force participation rate of the working age population is an important determinant of the aggregate saving rate

ceo pay and appointments a market based explanation for recent trends ceos increased from an average of 700 000 in 1970 in 2002 constant dollars to over 2 2 million in 2000 1 during the same period the ratio of ceo cash compensation to average pay for production workers increased from about 25 in 1970 to nearly 90 in 2000 2 the most prevalent explanation in the popular press for this trend is the fat cat theory a variant of which has been espoused among academics by lucian bebchuk et al 2002 3 accord

extreme wage inequality pay at the very top we provide new evidence on the growth in pay at the very top of the wage distribution in the united kingdom sectoral decompositions show that workers in the financial sector have accounted for the majority of the gains at the top over the last decade new results are also presented on the pay of ceos in the united kingdom we show how improved measurement of pay points to a stronger pay performance link than previously estimated this link is stronger and more symmetric for those firms in which institutional investors play a larger role

income inequality in the united states 1913 1998 this paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the united states using individual tax returns data top income and wages shares display a u shaped pattern over the century our series suggest that the large shocks that capital owners experienced during the great depression and world war ii have had a permanent effect on top capital incomes we argue that steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks top wage shares were flat before world war ii dropped precipitously during the war and did not start to recover before the late 1960s but are now higher than before world war ii as a result the working rich have replaced the rentiers at the top of the income distribution

family education and sources of wealth among the richest americans 1982 2012 we examine characteristics of the 400 wealthiest individuals in the u s over the past three decades as tabulated by forbes magazine and analyze which theories of increasing inequality are most consistent with these data the forbes 400 in recent years did not grow up as advantaged as in decades past they are more likely to have started their businesses and to have grown up upper middle class not wealthy today s forbes 400 were able to access education while young and apply their skills to the most scalable industries technology finance and mass retail most of the change occurred by 2001

has moral hazard become a more important factor in managerial compensation we estimate a principal agent model of moral hazard with longitudinal data on firms and managerial compensation over two disjoint periods spanning 60 years to investigate increased value and variability in managerial compen sation we find exogenous growth in firm size largely explains these secular trends in compensation in our framework exogenous firm size works through two channels first conflicts of interest between shareholders and managers are magnified in large firms so optimal compensation plans are now more

lessons from the bell curve this paper examines the argument presented in the bell curve a central argument is that one factor g accounts for correlation across test scores and performance in society another central argument is that g cannot be manipulated these arguments are combined to claim that social policies designed to improve social performance cannot be effective a reanalysis of the evidence contradicts this story the factors that explain wages receive different weights than the factors that explain test scores more than g is required to explain either other factors besides g contribute to social performance and they can be manipulated

within firm pay inequality financial regulators and investors have expressed concerns about high pay inequality within firms using a proprietary data set of public and private firms this paper shows that firms with higher pay inequality relative wage differentials between top and bottom level jobs are larger and have higher valuations and stronger operating performance moreover firms with higher pay inequality exhibit larger equity returns and greater earnings surprises suggesting that pay inequality is not fully priced by the market our results support the notion that differences in pay inequality across firms are a reflection of differences in managerial talent received march 14 2016 editorial decision january 21 2017 by editor itay goldstein

consumers are not ricardian evidence from nineteen countries i introduction in conventional macroeconomic analysis government debt affects the economy because households view it as net wealth the larger the government debt is the wealthier households feel and the more they consume in principle however households need not view government debt as net wealth david ricardo pointed out that they might conceivably treat the future taxes servicing the government debt as exactly offsetting it 1 robert barro 1974 has shown that maximizing households will actually do so if they accurately anticipate future taxes if they face perfect capital markets and if they have effectively infinite horizons ricardian equivalence is said to hold if households do treat future servicing taxes as an exact offset to the government debt many empirical papers on consumption have investigated whether ricardian equivalence is consistent with observation kochin 1974 barro 1978 tanner 1979 seater 1982 kormendi 1983 aschauer 1985 seater and mariano 1985 kormendi and meguire 1986 1990 leiderman and razin 1988 evans 1988 and evans and hasan 1993 have reported evidence consistent with ricardian equivalence by contrast blinder and deaton 1985 feldstein 1978 1982 boskin and kotlikoff 1985 modigliani and sterling 1986 1990 and feldstein and elmendorf 1990 have reported evidence inconsistent with ricardian equivalence unfortunately most of these studies do not estimate regression equations that derive from well specified theoretical models nesting both ricardian equivalence and an alternative theory in which budget deficits and current taxes are not equivalent consequently their results are often hard to interpret moreover these studies consider the data for only one country typically the united states as a result the tests that are performed may not have much power to distinguish an economy for which ricardian equivalence would be a good approximation from one for which it would be a bad approximation olivier blanchard 1985 has provided one of the few models in the literature that tractably nests ricardian equivalence and an alternative in which households view government debt as net wealth depending upon whether a crucial parameter is zero or positive households have infinite horizons internalize all future generations and exhibit ricardian behavior or have finite horizons are at least somewhat disconnected from future generations and exhibit non ricardian behavior that strengthens as the parameter becomes larger the model has testable implications that this paper examines using annual data for nineteen countries when the data for the countries are pooled the tests have sufficient power not only to reject ricardian equivalence in favor of blanchard s alternative but also to yield a precise estimate of the deviation from ricardian equivalence this estimated deviation is approximately what one would expect if capital and insurance markets were perfect and households did not have altruistic bequest motives the deviation is however also economically unimportant for many purposes the rest of the paper is organized as follows section ii lays out blanchard s model and derives the testable implications of ricardian equivalence section iii tests these implications section iv summarizes the findings of the paper and interprets them ii empirical implications of ricardian equivalence in the stochastic variant of blanchard s model formulated in this section the economy is inhabited by a constant population of households that have finite horizons and face perfect capital and insurance markets 2 each household has a finite horizon because it has a probability p of dying each period and being replaced by another household from which it is entirely disconnected with the population normalized to unity the number of households born 0 1 2 periods earlier is always p p 1 p p 1 p sup

why do firms use incentives that have no incentive effects this paper illustrates why firms might choose to implement stock option plans or other pay instruments that reward luck i consider a model where adjusting compensation contracts is costly and where employees outside opportunities are correlated with their firms performance the model may help to explain the use and recent rise of broad based stock option plans as well as other financial instruments even when these pay plans have no effect on employees on the job behavior the model suggests that agency theory s often overlooked participation constraint may be an important determinant of some common compensation schemes particularly for employees below the highest executive ranks many compensation plans reward or punish employees for factors they cannot control an often discussed example of this phenomenon is executive compensation where stock options are not generally indexed to the overall market however many firms also offer firm wide stock options and profit sharing plans that provide even weaker incentives than executive plans after all most workers can expect to reap trivial personal gain from their contribution to firm value or profits i consider an explanation for this phenomenon in which firms contract with employees as a means of indexing wages to market rates rather than to provide incentives while much of the agency literature has concentrated on inducing optimal effort i consider the importance of the generally overlooked participation constraint i study a model in which employees outside opportunities are correlated with firm profits or stock price and in which both turnover and adjusting the pay scheme parameters are costly given these assumptions the firm may find it most profitable to pay the employee in a way that is correlated with the outside options presented by the outside labor market despite the requisite risk premium rather than pay a fixed wage that insures participation in all states the model derived below starts from the assumption that wage adjustments are costly but that workers are willing to make part of their pay contingent

aggregate consumption and deficit financing an attempt to separate permanent from transitory effects many previous empirical studies of the ricardian equivalence hypothesis have found a relatively high degree of future tax liability discounting such that current deficits appear to have relatively little or no influence on current consumption demand however the validity of these empirical estimates can be questioned as they may not have adequately distinguished between permanent and transitory income flows this paper attempts to address this problem by using cycle averaging as a simple method of capturing the permanent path of income over time the empirical evidence generated in this paper rejects the strict debt neutrality proposition of the ricardian equivalence hypothesis

does unmeasured ability explain inter industry wage differentials this paper provides empirical assessments of the two leading explanations of measured inter industry wage differentials 1 true wage differentials exist across industries and 2 the measured differentials simply reflect unmeasured differences in workers productive abilities first we summarize the existing evidence on the unmeasured ability explanation second we construct a simple model which shows that if matching is important then endogenous job change decisions can create important self selection biases even in first differenced estimates of industry wage differentials third we analyze a sample that approximates the experiment of exogenous job loss we find that i the wage change experienced by a typical industry switcher closely resembles the difference in the relevant industry differentials estimated in a cross section and ii pre displacement industry affiliation plays an important role in post displacement wage determination

bankers and their bonuses we analyse the role of financial sector workers in the huge rise of the share of earnings going to those at the very top of the pay distribution in the uk rising bankers bonuses accounted for two thirds of the increase in the share of the top 1 after 1999 surprisingly bankers share of earnings showed no decline between the peak of the financial boom in 2007 and 2011 three years after the global crisis began nor did bankers relative employment position deteriorate over this period we discuss proposed policy responses such as transparency bonus clawbacks numerical bonus targets and tax

performance pay and wage inequality an increasing fraction of jobs in the u s labor market explicitly pay workers for their performance using bonus pay commissions or piece rate contracts using data from the panel study of income dynamics we show that compensation in performance pay jobs is more closely tied to both observed and unobserved productive characteristics of workers than compensation in non performance pay jobs we also find that the return to these productive characteristics increased faster over time in performance pay than in non performance pay jobs we show that this finding is consistent with the view that underlying changes in returns to skill due for instance to technological change induce more firms to offer performance pay contracts and result in more wage inequality among workers who are paid for performance thus performance pay provides a channel through which underlying changes in returns to skill get translated into higher wage inequality we conclude that this channel accounts for 21 of the growth in the variance of male wages between the late 1970s and the early 1990s and for most of the increase in wage inequality above the eightieth percentile over the same period

ricardian equivalence and the public and private saving nexus in india abstractthis study tests the ricardian equivalence theorem ret and examines the responsiveness of private saving to public saving in india most estimators do not provide support for the empirical validity of ret and long run cointegration between public and private saving the increases in household saving hhs seem to have been engendered by the provision of saving incentives institution of saving schemes self driven motivation to save and the precautionary accumulations induced by uncovered uncertainties in incomes rather than by ricardian behaviour of households the self imposed aversion to debt and debt bequest borrowing and liquidity constraints and the intertemporal smoothing of consumption have been the added catalysts that contributed to the increases in hhs the households with binding borrowing constraints inadequate or no insurance and uncovered uncertainties in incomes seem to have been saving more to pay for higher inflation tax the fiscal consolidation and generation of public s

intersectoral labor mobility and the growth of the service sector one of the most striking changes in the u s economy over the past 50 years has been the growth in the service sector between 1950 and 2000 service sector employment grew from 57 to 75 percent of total employment however over this time the real hourly wage in the service sector grew only slightly faster than in the goods sector in this paper we assess whether or not the essential constancy of the relative wage implies that individuals face small costs of switching sectors and we quantify the relative importance of labor supply and demand factors in the growth of the service sector we specify and estimate a two sector labor market equilibrium model that allows us to address these empirical issues in a unified framework our estimates imply that there are large mobility costs output in both sectors would have been double their current levels if these mobility costs had been zero in addition we find that demand side factors that is technological change and movements in product and capital prices were responsible for the growth of the service sector

are consumers ricardian evidence for the united states this paper derives three empirical implications of a well specified model of consumer behavior a model that nests both ricardian equivalence and an alternative non ricardian theory ricardian equivalence is then tested against this alternative the tests reveal that ricardian equivalence cannot be rejected

transitions career and family life cycles of the educational elite among life s most vital transitions are those concerning family and career we decide when and whom to marry how many children to have whether to further our education and which occupations and jobs to pursue fundamental aspects of these transitions began to change around the early 1970s for the college educated generally and for women in particular the median age at first marriage among college graduate women which had been stable at about 22 5 years old from the 1950s to the early 1970s for birth cohorts from the 1930s to about 1950 increased by 2 5 years between 1972 and 1979 for birth cohorts from about 1950 to 1955 the fraction of women not having a first birth by around 40 years old increased from 20 percent for those graduating in the early 1960s to 28 percent for those graduating in the 1970s college graduate women greatly increased their education in professional schools the fraction female among first year law and medical school students for example was 10 percent in 1970 but rose to 40 percent by 1990

returns to talent and the finance wage premium to study the role of talent in finance workers pay we exploit a special feature of the french higher education system wage returns to talent have been significantly higher and have risen faster since the 1980s in finance than in other sectors both wage returns to project size and the elasticity of project size to talent are also higher in this industry last the share of performance pay varies more for talent in finance these findings are supportive of finance wages reflecting the competitive assignment of talent in an industry that exhibits a high complementarity between talent and scale received october 11 2017 editorial decision september 4 2018 by editor stijn van nieuwerburgh authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

the making of an investment banker stock market shocks career choice and lifetime income i show that stock market shocks have important and lasting effects on the careers of mbas stock market conditions while mba students are in school have a large effect on whether they go directly to wall street upon graduation further starting on wall street immediately upon graduation causes a person to be more likely to work there later and to earn on average substantially more money the empirical results suggest that investment bankers are largely made by circumstance rather than born to work on wall street

the growing importance of social skills in the labor market the labor market increasingly rewards social skills between 1980 and 2012 jobs requiring high levels of social interaction grew by nearly 12 percentage points as a share of the u s labor force math intensive but less social jobs including many stem occupations shrank by 3 3 percentage points over the same period employment and wage growth were particularly strong for jobs requiring high levels of both math skill and social skills to understand these patterns i develop a model of team production where workers trade tasks to exploit their comparative advantage in the model social skills reduce coordination costs allowing workers to specialize and work together more efficiently the model generates predictions about sorting and the relative returns to skill across occupations which i investigate using data from the nlsy79 and the nlsy97 using a comparable set of skill measures and covariates across survey waves i find that the labor market return to social skills was much greater in the 2000s than in the mid 1980s and 1990s

sectoral shifts and interindustry wage differentials the observed differences in wages across industries may arise from a lack of worker mobility particularly among experienced workers allowing the effects of industry shocks to persist for some time although young workers arbitrage wage shocks they will have little effect on the dispersion of experienced workers wages if young and old workers are poor substitutes in production this explanation is investigated using the five censuses of population between 1940 and 1980 the evidence strongly suggests that differences in pay are not temporary phenomena the data provide some support for the role of human capital and ability

executive compensation a modern primer this article studies traditional and modern theories of executive compensation bringing them together under a simple unifying framework accessible to the general interest reader we analyze assignment models of the level of pay and static and dynamic moral hazard models of incentives and compare their predictions to empirical findings we make two broad points first traditional theories find it difficult to explain the data suggesting that compensation results from rent extraction by ceos however more modern shareholder value theories that arguably better capture the ceo setting do deliver predictions consistent with observed practices suggesting that these practices need not be inefficient second seemingly innocuous features of the modeling setup often made for tractability or convenience can lead to significant differences in the model s implications and conclusions on the efficiency of observed practices we close by highlighting apparent inefficiencies in executive compensation and additional directions for future research