| This dissertation is composed of the two essays. In the first essay, I use the Panel Study of Income Dynamics data to examine household's behavior following disability and displacement and during the recovery process. I, further, formulate and simulate a calibrated model of earnings shocks and recoveries and introduce a series of extensions to the model in order to replicate the patterns in the data. A model that fits the behavior of U.S. households during disability/displacement shocks and following recoveries is a model with heterogeneously skilled heads where the low-skilled are impatient.;In the second essay (co-authored with Steven G. Craig, Satadru Mukherjee and Bent E. Sorensen), we study how state governments manage the finances of their Unemployment Insurance (UI) programs. The operation of the UI programs is separate from states' general budgets with clearly specified rules of saving (in a trust fund operated by the treasury) and spending, although spending includes a large discretionary component. Using a panel of U.S. states we find that UI program spending and taxes are not described well by the PIH or by the Barro tax smoothing model. Instead, we find that states increase spending when their trust fund balance is high, and that trust fund balances seem to be clearly mean reverting. This pattern suggests that the data may be explained by a buffer stock model with forward looking but impatient politicians as suggested by Carroll (1997) for consumers. We split UI benefits spending into a compulsory part (explained by unemployment) and a discretionary part. Considering taxes as income and discretionary benefits as consumption, we calibrate and simulate a version of Carroll's buffer stock model. We find that the simulation results of the buffer stock model match well our data, where politicians adjust policy to stay close to the target level of savings as shown by simulation matching the covariance condition where consumption and savings move with differences from the target level of savings. |
