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Thesis (Ph. D.)--University of Rochester. Dept. of Economics, 2010.
This thesis is a collection of essays on the role of time allocation in incomplete
markets. An incomplete market is defined as an environment where individuals
are unable to insure against some shocks such as unemployment shocks and
health shocks. In such an environment, individuals have partial insurance
opportunities with different channels including asset markets, government provided
public insurance, family transfers, and adjustment of time allocation.
In my thesis, I focus on the role of time allocation as a partial insurance
mechanism in incomplete markets.
In Chapter 1, I study the role of home production on optimal unemployment
insurance policy. Here, time allocation has an important role due to home
production decision, and the environment is an incomplete market due to uninsurable
unemployment shocks. Individuals can smooth their consumption with
more home production during unemployment spells which reduces the cost of
unemployment shocks. Therefore, optimal unemployment insurance policies
are affected by the fact that individuals partially insure themselves through
home production. In order to quantify this effect, I incorporate home production
into a quantitative model of unemployment, and show that realistic levels
of home production have a significant impact on the optimal unemployment
insurance rate. Using data from the American Time Use Survey (ATUS), I first show that unemployed workers spend an additional 10 hours per week
in home production compared to employed workers, which is roughly a 50%
increase. I use the Panel Study of Income Dynamics (PSID) data on housework
to confirm that this difference is robust to controlling for unobserved
heterogeneity between employed and unemployed adults. Motivated by this
fact, I augment an incomplete markets model of unemployment with a home
production technology, which allows unemployed workers to use their extra
non-market time as partial insurance against the drop in income due to unemployment.
In the benchmark model, I find that the optimal replacement rate in
the presence of home production is roughly 40% of wages, which is 40% lower
than the no-home production models optimal replacement rate of 65%. The
40% optimal rate is also close to the estimated rate in practice. The fact that
home production makes a significant difference in the optimal unemployment
insurance is robust to a variety of parameterizations and alternative model
environments.
In Chapter 2 (joint with Yavuz Arslan), we analyze the effect of price search
on the life-cycle profile of consumption inequality. In this paper, time allocation
has a role through price search and the environment is incomplete due
to uninsurable income shocks. Individuals with bad income shocks and lower
wealth can increase their consumption by searching for cheaper prices, which
reduces the variance in log consumption relative to the variance in log expenditure over the life-cycle. In this paper, we incorporate price search decision
into a life cycle model, and differentiate consumption from expenditure. The
consumers with low wealth and bad income shocks search more for cheaper
prices and pay less which makes their consumption higher than a model without
search option. A plausibly calibrated version of our model predicts that the
cross sectional variance of consumption is around 15% smaller than the cross
sectional variance of expenditure through out the life cycle. Price search has
an alternative productive activity role for the lower income people to increase
their consumption levels.
In Chapter 3, I investigate the effect of unemployment policies on home
production. In this paper, I explore to what extend households substitute
private insurance with public insurance. I use American Time Use Survey
(ATUS) and heterogeneity in unemployment insurance policies across states to
examine the relationship between unemployment insurance policies and home
production. The empirical results suggest that moving to a two times more
generous state would decrease time spent on home production about 11 hours
per week for unemployed.
