Public Economics Lectures Part 1: Introduction

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Motivation 1: Practical Relevance Stakes are extremely large because of broad scope of policies Ex. Tax reforms immediately affect millions Contentious debate on the appropriate role of government in society Controversial: liberals vs. conservatives McCain: “Obama proposes higher taxes. Therefore 5M fewer jobs” Obama: “Alternative energy investment will create 5M U.S. jobs” Which view is right? Injecting science into these political debates has tremendous practical value Public Economics Lectures () Part 1: Introduction 4 / 28
Motivation 2: Academic Interest Public economics is typically the end point for many other subfields of economics Macro, development, labor, and corporate finance questions often ultimately motivated by a public economics issue Ex 1: Macro studies on costs of business cycles and intertemporal models of household behavior Ex 2: Labor studies on employment effects of the minimum wage Natural to combine public finance with another field Understanding public finance can help sharpen your research focus and ensures you are working on relevant issues Public Economics Lectures () Part 1: Introduction 5 / 28
Page 1 and 2: Public Economics Lectures Part 1: I
Page 3: Motivation 1: Practical Relevance I
Page 7 and 8: Methodological Themes 1 Micro-based
Page 9 and 10: Federal Government Revenue and Expe
Page 11 and 12: Federal Revenues (% of total revenu
Page 13 and 14: Federal Spending (% of total spendi
Page 15 and 16: Government Intervention in the Econ
Page 17 and 18: First Role for Government: Improve
Page 19 and 20: First Welfare Theorem Private marke
Page 21 and 22: Failure 2: Asymmetric Information a
Page 23 and 24: Individual Failures Recent addition
Page 25 and 26: Why Limit Government Intervention?
Page 27 and 28: Three Types of Questions in Public
Page 29 and 30: Public Economics Lectures Part 2: I
Page 31 and 32: References on Tax Incidence Kotliko
Page 33 and 34: Economic vs. Statutory Incidence Eq
Page 35 and 36: Overview of Literature Ideally, we
Page 37 and 38: Partial Equilibrium Model: Setup Tw
Page 39 and 40: Partial Equilibrium Model: Supply P
Page 41 and 42: Tax Levied on Producers Price S+t $
Page 43 and 44: Perfectly Inelastic Demand Price D
Page 45 and 46: Formula for Tax Incidence Implicitl
Page 47 and 48: Tax Incidence with Salience Effects
Page 49 and 50: Chetty et al.: Empirical Framework
Page 51 and 52: Chetty et al.: Strategy 1 Experimen
Page 53 and 54: 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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Tax Incidence with Salience Effects
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Tax Incidence with Salience Effects
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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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Public Economics Lectures () Part 2
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Triple Difference Some studies use
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Fixed Effects Include time and stat
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Evans, Ringel, and Stech (1999) Imp
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Evans, Ringel, and Stech: Incidence
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Evans, Ringel, and Stech: Demand El
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Evans, Ringel, and Stech: Long Run
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Hastings and Washington 2008 Questi
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Rothstein 2008 How does EITC affect
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Rothstein: Empirical Strategy Two m
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DFL Reweighting Widely used method
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Rothstein: Results Basic DFL compar
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Rothstein: Results Ultimately uses
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Extensions of Basic Partial Equilib
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Extensions of Basic Partial Equilib
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Harberger 1962 Two Sector Model 1 F
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Harberger Model: Effect of Tax Incr
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Harberger Model: Main Effects 2. Ou
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Harberger Model: Main Effects 3. Su
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Computable General Equilibrium Mode
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Criticism of CGE Models Findings ve
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Open Economy Application: Framework
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Open Economy Application: Empirics
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Feldstein and Horioka 1980 Second s
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Open Economy Applications: Empirics
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Capitalization and the Asset Price
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Empirical Applications 1 [Cutler 19
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Cutler 1988 First, compute excess r
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Cutler: Results Cutler finds ˆb =
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Linden and Rockoff: Results Find ho
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Excess Returns Around Drug Approval
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Distribution of Excess Returns arou
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Mandated Benefits We have focused u
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Mandated Benefits: Simple Model Lab
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Mandated Benefit Wage Rate S w 1 B
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Mandated Benefits: Incidence Formul
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Gruber 1994 Studies state mandates
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Acemoglu and Angrist 2001 Look at e
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Acemoglu and Angrist 2001 Acemoglu
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Public Economics Lectures Part 3: E
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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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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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Public Economics Lectures Part 5: I
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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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