Paula Roth defends her thesis Essays on Inequality, Insolvency and Innovation

The thesis addresses the topic off income inequality, especially its consequences on the economic decisions of households and individuals, with a focus on consumption and over-indebtedness. The thesis also discusses questions related to social comparisons and the driving forces behind innovation and is based on both theory and empirical work.

The Discussant is Professor Erik Lindqvist, Stockholm University and the members of the Grading committee are Professor Eva Mörk, Department of Economics, Uppsala University, Associate Professor Olle Folke, Department of Government, Uppsala University and Professor Jesper Roine, Stockholm Institute of Transition Economics, Stockholm School of Economics.

The Advisors are Professor Daniel Waldenström, Institute of Industrial Economics, Stockholm University and Associate Professor Hans Grönqvist, Department of Economics, Uppsala University.

Abstract: 

Top Incomes and Consumption of the Nonrich – Is there a Swedish Trickle-Down Effect? (with Elin Molin): A recent empirical study by Bertrand and Morse (2016) suggests that the surge in US income inequality has led to higher consumption among nonrich households. Their evidence indicates that this is driven by a preference for maintaining status. Sweden is the country within the OECD where inequality has increased the most during the last decades. We use detailed Swedish micro data and replicate the study by Bertrand and Morse (2016). Moreover, we extend the analysis by exploring local inequality within age groups, to capture that households are more likely to interact with households in a similar phase of life. In both analyzes we find a positive relationship between rising top incomes and nonrich consumption. An increase of 10 percent of the 90th or 95th percentile of the income distribution is associated with an increase in the consumption-to-income ratio of 0.09-1.65 percent. However, in the replication we cannot rule out that the effect is driven by a rational expectation of future income growth or lower income volatility. In our extension, we find no evidence for the non-causal channels; permanent income, precautionary savings and wealth effects. We provide suggestive evidence that this relationship can be explained by a status-maintaining motive.

Abstract [en]

Inequality, Relative Deprivation and Financial Distress – Evidence from Swedish Register Data: Several studies have linked rising insolvency rates to increasing inequality and argued that this can be explained by individuals' desire to "Keep up with the Joneses". Using unique administrative register data on individual insolvencies in Sweden, I test whether the probability to become insolvent is related to inequality in one's reference group or to one’s income distance relative to peers. Identification relies on area fixed effects, an extensive set of background characteristics and varying the definition of relevant reference groups. The main finding is that it is not inequality per se that drives insolvency, but that higher relative deprivation increases an individual’s probability to become insolvent.

Abstract [en]

Risk-sharing and Entrepreneurship (with Matilda Kilström): In this paper, we study the role of risk-sharing in facilitating innovation. Studying entrepreneurship and innovation entails modeling an occupational choice and an effort choice. Risk-sharing may increase the number of individuals who become entrepreneurs by limiting the downside risk. The effort of entrepreneurs may, however, be hampered by high risk-sharing if this limits the returns faced by successful entrepreneurs relative to unsuccessful entrepreneurs. We construct a theoretical model where risk-sharing may be either private or provided through the welfare state by means of taxation. We show that the level of risk-sharing matters for the characteristics of entrepreneurs. Moreover, high taxes, which imply high equilibrium benefits paid out to unsuccessful entrepreneurs, encourage entrepreneurship but discourage effort.

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