Public Economics Lectures Part 1: Introduction

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CGE Models: General Structure N intermediate production sectors M final consumption goods J groups of consumers who consume products and supply labor Each industry has different substitution elasticities for capital and labor Each consumer group has Cobb-Douglas utility over M consumption goods with different parameters Specify all these parameters (calibrated to match some elasticities) and then simulate effects of tax changes Public Economics Lectures () Part 2: Tax Incidence 96 / 142
Criticism of CGE Models Findings very sensitive to structure of the model: savings behavior, perfect competition assumption Findings sensitive to size of key behavioral elasticities and functional form assumptions Modern econometric methods conceptually not suitable for GE problems, where the whole point is “spillover effects” (contamination) Need a new empirical paradigm to deal with these problems — a major open challenge Public Economics Lectures () Part 2: Tax Incidence 97 / 142
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Public Economics Lectures Part 1: I
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Motivation 1: Practical Relevance I
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Motivation 2: Academic Interest Pub
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Methodological Themes 1 Micro-based
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Federal Government Revenue and Expe
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Federal Revenues (% of total revenu
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Federal Spending (% of total spendi
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Government Intervention in the Econ
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First Role for Government: Improve
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First Welfare Theorem Private marke
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Failure 2: Asymmetric Information a
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Individual Failures Recent addition
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Why Limit Government Intervention?
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Three Types of Questions in Public
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References on Tax Incidence Kotliko
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Economic vs. Statutory Incidence Eq
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Overview of Literature Ideally, we
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Partial Equilibrium Model: Setup Tw
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Partial Equilibrium Model: Supply P
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Tax Levied on Producers Price S+t $
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Perfectly Inelastic Demand Price D
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Formula for Tax Incidence Implicitl
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Tax Incidence with Salience Effects
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Chetty et al.: Empirical Framework
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Chetty et al.: Strategy 1 Experimen
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TABLE 1 Evaluation of Tags: Classro
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Period Effect of Posting TaxInclu
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Period Effect of Posting TaxInclu
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Chetty et al.: Strategy 2 Compare e
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Per Capita Beer Consumption and Sta
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Evaluating Empirical Studies Consid
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Cigarette Taxation: Background Ciga
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Evans, Ringel, and Stech (1999) Exp
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Page 75 and 76: Triple Difference Some studies use
Page 77 and 78: Fixed Effects Include time and stat
Page 79 and 80: Evans, Ringel, and Stech (1999) Imp
Page 81 and 82: Evans, Ringel, and Stech: Incidence
Page 83 and 84: Evans, Ringel, and Stech: Demand El
Page 85 and 86: Evans, Ringel, and Stech: Long Run
Page 89 and 90: Hastings and Washington 2008 Questi
Page 95 and 96: Rothstein 2008 How does EITC affect
Page 99 and 100: Rothstein: Empirical Strategy Two m
Page 101 and 102: DFL Reweighting Widely used method
Page 107 and 108: Rothstein: Results Basic DFL compar
Page 109 and 110: Rothstein: Results Ultimately uses
Page 111 and 112: Extensions of Basic Partial Equilib
Page 113 and 114: Extensions of Basic Partial Equilib
Page 115 and 116: Harberger 1962 Two Sector Model 1 F
Page 117 and 118: Harberger Model: Effect of Tax Incr
Page 119 and 120: Harberger Model: Main Effects 2. Ou
Page 121 and 122: Harberger Model: Main Effects 3. Su
Page 123: Computable General Equilibrium Mode
Page 127 and 128: Open Economy Application: Framework
Page 129 and 130: Open Economy Application: Empirics
Page 131 and 132: Feldstein and Horioka 1980 Second s
Page 133 and 134: Open Economy Applications: Empirics
Page 135 and 136: Capitalization and the Asset Price
Page 137 and 138: Empirical Applications 1 [Cutler 19
Page 139 and 140: Cutler 1988 First, compute excess r
Page 141 and 142: Cutler: Results Cutler finds ˆb =
Page 147 and 148: Linden and Rockoff: Results Find ho
Page 149 and 150: Excess Returns Around Drug Approval
Page 151 and 152: Distribution of Excess Returns arou
Page 153 and 154: Mandated Benefits We have focused u
Page 155 and 156: Mandated Benefits: Simple Model Lab
Page 157 and 158: Mandated Benefit Wage Rate S w 1 B
Page 159 and 160: Mandated Benefits: Incidence Formul
Page 161 and 162: Gruber 1994 Studies state mandates
Page 165 and 166: Acemoglu and Angrist 2001 Look at e
Page 167 and 168: Acemoglu and Angrist 2001 Acemoglu
Page 171 and 172: Public Economics Lectures Part 3: E
Page 173 and 174: Definition Incidence analysis: effe
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Effi ciency Cost: Introduction Gove
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Partial Equilibrium Model: Setup Tw
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Price Excess Burden of Taxation S $
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Effi ciency Cost: Marshallian Surpl
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EB Increases with Square of Tax Rat
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P P 3 P 2 P 1 S+t 1 +t 2 S+t 1 E B
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Tax Policy Implications With many g
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General Model: Demand and Indirect
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Path Dependence Problem Initial pri
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Consumer Surplus: Conceptual Proble
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Compensating and Equivalent Variati
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Equivalent Variation Measures utili
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Effi ciency Cost Formulas with Inco
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Compensating vs. Equivalent Variati
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Marshallian Surplus p h(V(p 1 ,Z))
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Excess Burden Deadweight burden: ch
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p h(V(p 1 ,Z)) ~ h(V(p 0 ,Z)) p 1 M
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Implementable Excess Burden Formula
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Harberger Formula Without pre-exist
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Goulder and Williams 2003 Show that
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Goulder and Williams Formula Obtain
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Goulder and Williams Results Calibr
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Harberger vs. Hausman Approach Unde
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Primitives Sufficient Stats. Welfar
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Heterogeneity Benefit of suff stat
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Discrete Choice Model Recast as pla
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Effi ciency Cost: Applications 1 [I
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Feldstein Model: Setup Government l
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Taxable Income Formula Simplicity o
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Excess Burden with Transfer Costs L
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Gorodnichenko, Martinez-Vazquez, an
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Public Economics Lectures () Part 3
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Poterba 1992 Estimates effi ciency
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Porterba: Results Tax reforms in 19
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Price and Tax Elasticities By Year
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Welfare Analysis in Behavioral Mode
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Behavioral Welfare Economics: Two A
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Behavioral Welfare Economics: Two A
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Bernheim and Rangel 2009: Choice Se
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Bernheim and Rangel 2009: Compensat
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Bernheim and Rangel 2009: Refinemen
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Welfare Analysis with Salience Effe
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Welfare Analysis with Salience Effe
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Preference Recovery Assumptions A1
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Excess Burden with No Income Effect
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Effi ciency Cost with Income Effect
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Directions for Further Work on Beha
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Outline 1 Commodity Taxation I: Ram
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Second Welfare Theorem Starting poi
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Four Central Results in Optimal Tax
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Ramsey Model: Key Assumptions 1 Lum
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Ramsey Model: Consumer Behavior Lag
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Ramsey Model: Government’s Proble
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Ramsey Formula: Perturbation Argume
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Ramsey Formula: Compensated Elastic
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Special Case 1: Inverse Elasticity
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Special Case 2: Uniform Taxation Th
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Diamond 1975: Many-Person Model H i
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Diamond: Many-Person Optimal Tax Fo
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Diamond: Optimal Transfer In this m
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Lipsey and Lancaster (1956): Theory
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Diamond and Mirrlees Model Two good
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Consumer’s Offer Curve Public Eco
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Production Set with Revenue Require
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Second Best: Optimal Distortionary
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Diamond and Mirrlees: General Model
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Proof of Production Effi ciency Res
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Policy Consequences: Public Sector
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Policy Consequences: No Taxation of
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Policy Consequences: No Taxation of
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Diamond and Mirrlees: Optimal Tax R
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Diamond and Mirrlees Result: Limita
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Key Concepts for Taxes/Transfers Le
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Optimal Income Tax with No Behavior
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Mirrlees 1971: Incorporating Behavi
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Mirrlees: Subsequent Work Mirrlees
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Revenue-Maximizing Tax Rate: Laffer
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Optimal Top Income Tax Rate { } dM
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Optimal Top Income Tax Rate In US t
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Connection to Revenue Maximizing Ta
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General Non-Linear Income Tax Optim
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Numerical Simulations of Optimal Ta
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Numerical Simulations Use formula e
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Commodity vs. Income Taxation Now c
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Atkinson and Stiglitz: Commodity Ta
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Atkinson-Stiglitz: Proof Revenue un
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Atkinson-Stiglitz: Intuition With s
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Atkinson-Stiglitz: Implications for
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Chamley-Judd: Capital Taxation Judd
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Taxation and Savings: Evidence Key
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Optimal Transfer Programs Several t
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Optimal Transfers: Mirrless Model M
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Saez 2002: Participation Model Mode
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Saez 2002: Optimal Tax Formula Smal
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Mankiw and Weinzierl 2009 Tagging w
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Nichols and Zeckhauser 1982: In-Kin
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Soup Kitchen without Wait: Cash Tra
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Income Taxation as Insurance (Varia
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Varian Model: Private Insurance Var
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References Surveys in labor economi
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Baseline Labor-Leisure Choice Model
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Labor Supply Behavior First order c
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Econometric Problem 1: Unobserved H
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Measurement Error and Division Bias
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Extensive vs. Intensive Margin Rela
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Progressive Taxes and Labor Supply
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Example 1: Progressive Income Tax P
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Example 3: Social Security Payroll
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Progressive Taxes and Labor Supply
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Non-Linear Budget Set Estimation: V
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Likelihood Function: Located at the
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Hausman (1981) Application Hausman
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Saez 2009: Bunching at Kinks Saez o
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Public Economics Lectures ()Part 5:
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Earnings Density and the EITC: Wage
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Taxable Income Density, 1960-1969:
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Friedberg 2000: Social Security Ear
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Friedberg: Estimates Estimates elas
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Why not more bunching at kinks? 1 T
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Chetty et al. 2009: Model Firms pos
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Cost of Bunching at Bracket Cutoff
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Marginal Tax Rates in Denmark in 19
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All Wage Earners: Top Tax Bracket C
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Married Women Frequency 0 10000 200
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Married Female Professionals with A
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Married Women, 1994 Frequency 0 100
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Married Women at the Middle Tax: 10
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Married Women at the Middle Tax: 8%
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Distribution of Individuals’Deduc
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Teachers Wage Income: 1998 Frequenc
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Wage Earnings: Teachers with Deduct
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Distribution of Modes in Occupation
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SelfEmployed: Distribution around
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Estimates of Hours and Participatio
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Problems with Experimental Design E
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Instrumental Variable Methods Anoth
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Mroz 1987: Setup and Results Uses b
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Eissa 1995: Caveats Does the common
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Bianchi, Gudmundsson, and Zoega 200
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Bianchi, Gudmundsson, and Zoega 200
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Overall Costs of Anti Poverty Progr
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Monthly Welfare Case Loads: 1963-20
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Behavioral Responses to the EITC 1
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Eissa and Liebman 1996 Study labor
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Eissa and Liebman: Results Find a s
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Meyer and Rosenbaum 2001 Analyze th
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Eissa and Hoynes 2004 EITC based on
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Meyer and Sullivan 2004 Examine the
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Relative Consumption: single women
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Meyer and Sullivan: Results Materia
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Changing Elasticities: Blau and Kah
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Intertemporal Models and the MaCurd
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Life Cycle Model: Time Separability
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Dynamic Life Cycle Model: Frisch El
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Frisch vs. Compensated vs. Uncompen
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Card Critique of ITLS models Critiq
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Blundell, Duncan, and Meghir 1998 C
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Blundell, Duncan, and Meghir: Resul
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Farber 2005: Division Bias Argues t
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Manoli and Weber 2009 Use variation
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Distribution of Tenure at Retiremen
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US Income Taxation: Trends The bigg
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Bottom 99% Tax Units 40% $40,000 35
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Feldstein 1995 First study of taxab
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Feldstein: Results Feldstein obtain
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Feldstein: Econometric Criticisms S
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18% 16% Wages SCorp. Partner. Sol
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Gruber and Saez 2002 First study to
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Gruber and Saez: Results Find an el
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Imbens et al. 2001: Income Effects
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Taxable Income Literature: Summary
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Prescott 2004 Uses data on hours wo
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Davis and Henrekson 2005 Run regres
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Optimization Frictions Many frictio
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Setup Consider a static demand mode
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Optimization Frictions Define agent
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Construction of Choice Set 151 150
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Identification with Optimization Fr
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Identification with Optimization Fr
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Calculation of Bounds on Structural
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) Lower Bound on Structural Elastic
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Application to Taxation and Labor S
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4.0 Bounds on IntensiveMargin Lab
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4.0 3.5 Bounds on IntensiveMargin
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Chetty and Saez 2009: Experimental
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Year 2 Earnings Distributions: 1 De
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Year 2 Wage Earnings Distributions:
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Labor Supply Elasticities: Implicat
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Chetty: Formula for Risk Aversion L
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u c ,u l w 0 u c (w 0 l,l) Case A:
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Chetty 2006: Results Labor supply e
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Outline 1 Motivations for Social In
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Growth of Social Insurance in the U
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Unemployment Benefit Systems in Dev
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Useful Background Reading 1 Institu
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Adverse Selection as a Motivation f
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Rothschild-Stiglitz: Key Assumption
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Rothschild-Stiglitz: Equilibrium De
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Rothschild-Stiglitz: Second Best So
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Adverse Selection: Empirical Eviden
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Aggregate Shocks as a Motivation fo
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Unemployment Insurance Start with U
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Replacement Rate Common measure of
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Baily-Chetty model Canonical analys
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Baily-Chetty model: Setup Static mo
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Baily-Chetty model: First Best Prob
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Baily-Chetty model: Second Best Pro
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Two Approaches to Optimal Social In
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Envelope Condition Why can ∂e ∂
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Suffi cient Statistic Approach to K
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Baily-Chetty model: Second Best Sol
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Baily-Chetty Consumption-Based Form
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Empirical Estimates: Duration Elast
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Hazard Models Define hazard rate h
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Meyer 1990 Meyer includes log UI be
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Consumption Smoothing Benefits of U
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Consumption Smoothing Benefits of U
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Calibrating the Model b ∗ Results
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Homeowners’Consumption around Une
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Commitments and Risk Aversion How d
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Commitments Model: Implications for
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Chetty 2008: Moral Hazard vs. Liqui
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Chetty 2008: Job Search Technology
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Chetty 2008: Value Functions Value
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Chetty 2008: Moral Hazard vs. Liqui
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Chetty 2008: Formula for Optimal UI
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Moral Hazard vs. Liquidity: Evidenc
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Figure 3a Effect of UI Benefits on
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Figure 3c Effect of UI Benefits on
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log UI ben 0.527 (0.267) TABLE 2
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Figure 5 Effect of Severance Pay on
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Figure 6b Effect of Severance Pay o
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Chetty 2008: Implications for Optim
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Figure 3 Frequency of Layoffs by Jo
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Figure 4 Selection on Observables M
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TABLE 3a Effects of Severance Pay a
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Shimer and Werning 2007: Reservatio
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Figure 5a Effect of Severance Pay o
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Figure 10b Effect of Severance Pay
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Effect of Extended Benefits on Subs
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Spike at Benefit Exhaustion Most st
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Job Finding vs. Unemployment Exit H
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Effect of Benefit Expiration on Haz
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Experience Rating in Washington, 20
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Feldstein 1978: Empirical Results F
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UI Savings Accounts Alternative to
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Feldstein and Altman 2007 Calculati
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Black, Smith, Berger, and Noel 2003
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Black, Smith, Berger, and Noel 2003
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Dynamics: Path of UI Benefits Class
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Workers Compensation Insurance agai
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Theory of Workers’Compensation Fo
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Effects of Benefits on Injuries Pot
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Effect on Equilibrium Wage Workers
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Disability Insurance See Bound et.
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Two Views on the Rise in DI Trend h
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Theory of Disability Insurance Key
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Empirical Evidence: Bound-Parsons D
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Empirical Evidence: Bound-Parsons D
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Gruber 2000 Exploits differential l
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Autor and Duggan 2003 Focus on inte
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Employment Shocks and DI Applicatio
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Employment Shocks and DI Applicatio
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Health Insurance Arrow (1963): semi
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Health Care Spending in OECD Nation
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Americans’Source of Health Insura
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Growing Health Expenditures: Key Fa
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Market Failures and Government Inte
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Measuring Health Before discussing
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Optimal Govt. Intervention in Healt
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Feldstein 1973 x = non-medical cons
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Feldstein 1973: First Best Solution
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Price of each visit $200 A B S=MC $
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Finkelstein 2006 Impact of Medicare
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Ellis and McGuire 1986 Previous ana
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Ellis and McGuire: Compensation Sch
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Ellis and McGuire: Optimal Payment
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Ellis and McGuire: Optimal Payment
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Ellis and McGuire Model: Limitation
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Crowdout of Private Insurance So fa
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Currie and Gruber 1995: Benefits of
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Public Economics Lectures Part 7: P
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Public vs. Private Goods Private go
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Public Good Person 1’s Consumptio
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Public Goods Model: Setup Economy w
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First Best if G is Private To ident
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First Best if G is a Pure Public Go
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Samuelson (1954) Rule Condition for
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Model of Private Provision: Setup P
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Lindahl Equilibrium How to achieve
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Lindahl Equilibria: Key Properties
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Voting Model: Setup Suppose that pu
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Arrow (1951) and Single-Peaked Pref
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Median Voter Theorem With single-pe
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Median Voter Choice: Effi ciency In
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Optimal Second Best Provision of PG
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Bergstrom, Blume, and Varian (1986)
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Bergstrom-Blume-Varian Model: Crowd
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BBV Model: Additional Results 1 Tot
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Empirical Evidence on Crowd-Out Two
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Hungerman 2005 Studies crowdout of
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Hungerman 2005 Estimates imply that
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Andreoni and Payne 2003 OLS still y
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Andreoni and Payne 2003 $1000 incre
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Andreoni 1988 Isaac, McCue, and Plo
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Andreoni 1993 Uses lab experiment t
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Andreoni 1993 Public good levels ar
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Financing PGs with Distortionary Ta
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PGs with Distortionary Taxes: Setup
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PGs with Distortionary Taxes: 1st B
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PGs with Distortionary Taxes: 2nd B
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Kreiner and Verdelin 2009 Consider
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Subsidies for Charity: Setup Warm-g
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Optimal Subsidies for Charity Resul
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Optimal Subsidies for Charity (Saez
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Empirical Evidence Existing studies
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Externalities: Outline 1 Definition
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Externalities: Main Questions 1 The
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Model of Externalities: Equilibrium
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Model of Externalities: Deadweight
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Remedies for Externalities 1 Coasia
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Coasian Solution: Limitations 1 Cos
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Price Pigouvian Tax SMC=PMC+MD S=PM
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Permits: Cap-and-Trade Cap total am
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Weitzman 1974: Market for Pollution
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Weitzman Model: Policy without Unce
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MB steep, Quantity regulation Publi
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Quantity Regulation Price Regulatio
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MB Flat, Quantity Regulation Public
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Quantity regulation Price Regulatio
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Optimal Second-Best Taxation with E
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Sandmo 1975: Setup Individual maxim
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Sandmo 1975: Additivity Result Main
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Double Dividend Debate Claim: gas t
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Externalities: Empirical Measuremen
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Brookshire et al. 1982 Infer willin
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Chay and Greenstone 2005 Conclusion
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Diamond and Hausman 1994 Describe p
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Becker and Murphy 1988 Show that ad
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Bernheim and Rangel 2004 Model of
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Public Economics Lectures Part 1: Introduction

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