Ken Kasa - Department of Economics, Simon Fraser University
Office: WMX 2666
Phone: 778-782-5406


Short CV

Teaching

Working Papers

       Doubts, Inequality, and Bubbles  (with In-Koo Cho) 

      ABSTRACT:  Two agents trade an indivisible asset. They are risk neutral and share a common benchmark dividend model.
       However, each has doubts about the specification of this model. These doubts manifest themselves as a preference for
       robustness (Hansen and Sargent (2008)). Robust preferences introduce pessimistic drift distortions into the benchmark
       dividend process. These distortions increase with the level of wealth, and give rise to endogenous heterogeneous beliefs.
       Belief heterogeneity allows asset price bubbles to emerge, as in Scheinkman and Xiong (2003). A novel implication of
       our analysis is that bubbles occur when wealth inequality increases. Empirical evidence supports this prediction. Detection
       error probabilities suggest that the implied degree of belief heterogeneity is empirically plausible.

      Risk, Uncertainty, and the Dynamics of Inequality  (with Xiaowen Lei)  forthcoming in Journal of Monetary Economics

      ABSTRACT:  This paper studies the dynamics of wealth inequality in a continuous-time Blanchard/Yaari model. Its key
      innovation is to assume that idiosyncratic investment returns are subject to (Knightian) uncertainty. In response, agents
      formulate `robust' portfolio policies (Hansen and Sargent (2008)). These policies are nonhomothetic; wealthy agents invest
      a higher fraction of their wealth in uncertain assets yielding higher mean returns. This produces an endogenous feedback
      mechanism that amplifies inequality. It also produces an accelerated rate of convergence, which helps resolve a puzzle recently
      identified by Gabaix, Lasry, Lions, and Moll (2016). We ask the following question - Suppose the US was in a stationary
      distribution in 1980, and the world suddenly became more `uncertain'. Could this uncertainty explain both the magnitude and
       pace of recent US wealth inequality? Using detection error probabilities to discipline the degree of uncertainty, we conclude
       that an empirically plausible increase in uncertainty can account for about half of the recent increase in top wealth shares.

      A Behavioral Defense of Rational Expectations

      ABSTRACT:  This paper studies decision making by agents who value optimism, but are unsure of their environment. As in
      Brunnermeir and Parker (2005), an agent's optimism is assumed to be tempered by the decision costs it imposes. As in
      Hansen and Sargent (2008), an agent's uncertainty about his environment leads him to formulate `robust' decision rules. It is
      shown that when combined, these two considerations can lead agents to adhere to the Rational Expectations Hypothesis.
      Rather than being the outcome of the sophisticated statistical calculations of an impassive expected utility maximizer, Rational
      Expectations can instead be viewed as a useful approximation in environments where agents struggle to strike a balance
      between doubt and hope.