Inheritance taxation, unemployment, and asset pricing in frictional labour markets

Abstract

This thesis studies the role of labour market frictions for optimal taxation, unemployment, and asset pricing. Chapter 1 studies inheritance taxation of family-owned firms. Using administrative tax data, this chapter shows that generous deductions for family-owned businesses reduce effective inheritance tax rates in Germany. The tax code does not achieve horizontal equity. A tractable model rationalizes the deductions under incomplete capital markets. A firm that is not marketable and cannot hire an external manager needs an intra-family succession to survive. A firm liquidation causes considerable earnings losses for employees with match-specific human capital. Inheritance tax deductions for business assets, conditional on firm continuation, let firm heirs internalize these earnings losses and incentivize succession of the parents' business. The chapter analytically derives an optimal tax formula. In the baseline calibration, the optimal tax rate for small businesses is close to zero, while it is confiscatory for large firms. Chapters 2 and 3 study the co-movement of equity prices and labour market transitions. The chapters study whether extensions of the Diamond-Mortensen-Pissarides (DMP) framework can jointly generate i) a high volatility of unemployment and stock prices, ii) the striking correlation of unemployment and stock prices and iii) a large equity premium. Chapter 2 globally solves DMP models with endogenous separations and wage rigidity. Models are parametrized to post-war U.S. data. Neither a model with cyclical fluctuations nor a model driven by a small autoregressive component of productivity growth can generate a large risk premium. Chapter 3 presents a DMP model with slow-moving habits and capital adjustment costs. The framework solves both the equity premium and the Shimer puzzle and reproduces the high correlation of employment and equity prices.