Public Economics Lectures Part 1: Introduction

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1996 Welfare Reform Largest change in welfare policy Reform modified AFDC cash welfare program to provide more incentives to work by 1 Requiring recipients to go to job trainings 2 Limiting the duration for which families able to receive welfare 3 Reducing phase out to 66 cents of benefits per $1 earnings instead of 100% cliff Variation across states because Fed govt. gave block grants with guidelines EITC also expanded during this period: general shift from welfare to “workfare” Public Economics Lectures ()Part 5: Income Taxation and Labor Supply 106 / 217
Monthly Welfare Case Loads: 1963-2000 Public Economics Lectures ()Part 5: Income Taxation and Labor Supply 107 / 217
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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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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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Page 107 and 108:
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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Page 145 and 146:
Page 147 and 148:
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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Page 165 and 166:
Acemoglu and Angrist 2001 Look at e
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Acemoglu and Angrist 2001 Acemoglu
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Page 171 and 172:
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
Page 195 and 196:
Path Dependence Problem Initial pri
Page 197 and 198:
Consumer Surplus: Conceptual Proble
Page 199 and 200:
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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Page 243 and 244:
Poterba 1992 Estimates effi ciency
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Page 247 and 248:
Porterba: Results Tax reforms in 19
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Page 251 and 252:
Price and Tax Elasticities By Year
Page 253 and 254:
Welfare Analysis in Behavioral Mode
Page 255 and 256:
Behavioral Welfare Economics: Two A
Page 257 and 258:
Behavioral Welfare Economics: Two A
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Bernheim and Rangel 2009: Choice Se
Page 261 and 262:
Bernheim and Rangel 2009: Compensat
Page 263 and 264:
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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Page 339 and 340:
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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Page 347 and 348:
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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Page 399 and 400:
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
Page 409 and 410:
Extensive vs. Intensive Margin Rela
Page 411 and 412:
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
Page 423 and 424:
Hausman (1981) Application Hausman
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Saez 2009: Bunching at Kinks Saez o
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Public Economics Lectures ()Part 5:
Page 429 and 430:
Earnings Density and the EITC: Wage
Page 431 and 432:
Taxable Income Density, 1960-1969:
Page 433 and 434:
Friedberg 2000: Social Security Ear
Page 435 and 436:
Friedberg: Estimates Estimates elas
Page 437 and 438:
Page 439 and 440:
Why not more bunching at kinks? 1 T
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Page 443 and 444:
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
Page 451 and 452: Married Women Frequency 0 10000 200
Page 453 and 454: Married Female Professionals with A
Page 455 and 456: Married Women, 1994 Frequency 0 100
Page 463 and 464: Married Women at the Middle Tax: 10
Page 465 and 466: Married Women at the Middle Tax: 8%
Page 467 and 468: Distribution of Individuals’Deduc
Page 469 and 470: Teachers Wage Income: 1998 Frequenc
Page 471 and 472: Wage Earnings: Teachers with Deduct
Page 473 and 474: Distribution of Modes in Occupation
Page 475 and 476: SelfEmployed: Distribution around
Page 477 and 478: Estimates of Hours and Participatio
Page 479 and 480: Public Economics Lectures ()Part 5:
Page 483 and 484: Problems with Experimental Design E
Page 485 and 486: Instrumental Variable Methods Anoth
Page 487 and 488: Mroz 1987: Setup and Results Uses b
Page 493 and 494: Eissa 1995: Caveats Does the common
Page 495 and 496: Bianchi, Gudmundsson, and Zoega 200
Page 499 and 500: Bianchi, Gudmundsson, and Zoega 200
Page 501: Overall Costs of Anti Poverty Progr
Page 505 and 506: Behavioral Responses to the EITC 1
Page 507 and 508: Eissa and Liebman 1996 Study labor
Page 509 and 510: Eissa and Liebman: Results Find a s
Page 513 and 514: Meyer and Rosenbaum 2001 Analyze th
Page 515 and 516: Eissa and Hoynes 2004 EITC based on
Page 517 and 518: Meyer and Sullivan 2004 Examine the
Page 519 and 520: Relative Consumption: single women
Page 521 and 522: Meyer and Sullivan: Results Materia
Page 523 and 524: Changing Elasticities: Blau and Kah
Page 525 and 526: Intertemporal Models and the MaCurd
Page 527 and 528: Life Cycle Model: Time Separability
Page 529 and 530: Dynamic Life Cycle Model: Frisch El
Page 533 and 534: Frisch vs. Compensated vs. Uncompen
Page 535 and 536: Card Critique of ITLS models Critiq
Page 537 and 538: Blundell, Duncan, and Meghir 1998 C
Page 539 and 540: Blundell, Duncan, and Meghir: Resul
Page 543 and 544: Farber 2005: Division Bias Argues t
Page 545 and 546: Manoli and Weber 2009 Use variation
Page 547 and 548: Distribution of Tenure at Retiremen
Page 549 and 550: US Income Taxation: Trends The bigg
Page 551 and 552: Bottom 99% Tax Units 40% $40,000 35
Page 553 and 554:
Feldstein 1995 First study of taxab
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Feldstein: Results Feldstein obtain
Page 557 and 558:
Feldstein: Econometric Criticisms S
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18% 16% Wages SCorp. Partner. Sol
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Page 563 and 564:
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
Page 571 and 572:
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
Page 579 and 580:
Page 581 and 582:
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
Page 603 and 604:
Year 2 Earnings Distributions: 1 De
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Year 2 Wage Earnings Distributions:
Page 607 and 608:
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:
Page 613 and 614:
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
Page 621 and 622:
Useful Background Reading 1 Institu
Page 623 and 624:
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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Page 631 and 632:
Rothschild-Stiglitz: Second Best So
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Page 637 and 638:
Page 639 and 640:
Adverse Selection: Empirical Eviden
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Page 643 and 644:
Aggregate Shocks as a Motivation fo
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Unemployment Insurance Start with U
Page 647 and 648:
Replacement Rate Common measure of
Page 649 and 650:
Baily-Chetty model Canonical analys
Page 651 and 652:
Baily-Chetty model: Setup Static mo
Page 653 and 654:
Baily-Chetty model: First Best Prob
Page 655 and 656:
Baily-Chetty model: Second Best Pro
Page 657 and 658:
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
Page 671 and 672:
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
Page 679 and 680:
Homeowners’Consumption around Une
Page 681 and 682:
Commitments and Risk Aversion How d
Page 683 and 684:
Commitments Model: Implications for
Page 685 and 686:
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
Page 699 and 700:
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
Page 721 and 722:
Effect of Extended Benefits on Subs
Page 723 and 724:
Spike at Benefit Exhaustion Most st
Page 725 and 726:
Job Finding vs. Unemployment Exit H
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Effect of Benefit Expiration on Haz
Page 729 and 730:
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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Page 741 and 742:
Black, Smith, Berger, and Noel 2003
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Dynamics: Path of UI Benefits Class
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Workers Compensation Insurance agai
Page 747 and 748:
Theory of Workers’Compensation Fo
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Page 751 and 752:
Effects of Benefits on Injuries Pot
Page 753 and 754:
Page 755 and 756:
Effect on Equilibrium Wage Workers
Page 757 and 758:
Disability Insurance See Bound et.
Page 759 and 760:
Two Views on the Rise in DI Trend h
Page 761 and 762:
Theory of Disability Insurance Key
Page 763 and 764:
Empirical Evidence: Bound-Parsons D
Page 765 and 766:
Empirical Evidence: Bound-Parsons D
Page 767 and 768:
Gruber 2000 Exploits differential l
Page 769 and 770:
Page 771 and 772:
Autor and Duggan 2003 Focus on inte
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Page 775 and 776:
Employment Shocks and DI Applicatio
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Employment Shocks and DI Applicatio
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Health Insurance Arrow (1963): semi
Page 781 and 782:
Health Care Spending in OECD Nation
Page 783 and 784:
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
Page 791 and 792:
Page 793 and 794:
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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Page 803 and 804:
Page 805 and 806:
Finkelstein 2006 Impact of Medicare
Page 807 and 808:
Ellis and McGuire 1986 Previous ana
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Ellis and McGuire: Compensation Sch
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Ellis and McGuire: Optimal Payment
Page 813 and 814:
Ellis and McGuire: Optimal Payment
Page 815 and 816:
Ellis and McGuire Model: Limitation
Page 817 and 818:
Crowdout of Private Insurance So fa
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Currie and Gruber 1995: Benefits of
Page 821 and 822:
Public Economics Lectures Part 7: P
Page 823 and 824:
Public vs. Private Goods Private go
Page 825 and 826:
Public Good Person 1’s Consumptio
Page 827 and 828:
Public Goods Model: Setup Economy w
Page 829 and 830:
First Best if G is Private To ident
Page 831 and 832:
First Best if G is a Pure Public Go
Page 833 and 834:
Samuelson (1954) Rule Condition for
Page 835 and 836:
Model of Private Provision: Setup P
Page 837 and 838:
Lindahl Equilibrium How to achieve
Page 839 and 840:
Lindahl Equilibria: Key Properties
Page 841 and 842:
Voting Model: Setup Suppose that pu
Page 843 and 844:
Arrow (1951) and Single-Peaked Pref
Page 845 and 846:
Median Voter Theorem With single-pe
Page 847 and 848:
Median Voter Choice: Effi ciency In
Page 849 and 850:
Page 851 and 852:
Optimal Second Best Provision of PG
Page 853 and 854:
Bergstrom, Blume, and Varian (1986)
Page 855 and 856:
Bergstrom-Blume-Varian Model: Crowd
Page 857 and 858:
BBV Model: Additional Results 1 Tot
Page 859 and 860:
Empirical Evidence on Crowd-Out Two
Page 861 and 862:
Page 863 and 864:
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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Page 873 and 874:
Andreoni 1988 Isaac, McCue, and Plo
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Andreoni 1993 Uses lab experiment t
Page 877 and 878:
Page 879 and 880:
Andreoni 1993 Public good levels ar
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Financing PGs with Distortionary Ta
Page 883 and 884:
PGs with Distortionary Taxes: Setup
Page 885 and 886:
PGs with Distortionary Taxes: 1st B
Page 887 and 888:
PGs with Distortionary Taxes: 2nd B
Page 889 and 890:
Kreiner and Verdelin 2009 Consider
Page 891 and 892:
Subsidies for Charity: Setup Warm-g
Page 893 and 894:
Optimal Subsidies for Charity Resul
Page 895 and 896:
Optimal Subsidies for Charity (Saez
Page 897 and 898:
Empirical Evidence Existing studies
Page 899 and 900:
Externalities: Outline 1 Definition
Page 901 and 902:
Externalities: Main Questions 1 The
Page 903 and 904:
Model of Externalities: Equilibrium
Page 905 and 906:
Model of Externalities: Deadweight
Page 907 and 908:
Remedies for Externalities 1 Coasia
Page 909 and 910:
Coasian Solution: Limitations 1 Cos
Page 911 and 912:
Price Pigouvian Tax SMC=PMC+MD S=PM
Page 913 and 914:
Permits: Cap-and-Trade Cap total am
Page 915 and 916:
Weitzman 1974: Market for Pollution
Page 917 and 918:
Weitzman Model: Policy without Unce
Page 919 and 920:
MB steep, Quantity regulation Publi
Page 921 and 922:
Quantity Regulation Price Regulatio
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MB Flat, Quantity Regulation Public
Page 925 and 926:
Quantity regulation Price Regulatio
Page 927 and 928:
Optimal Second-Best Taxation with E
Page 929 and 930:
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
Page 955 and 956:
Becker and Murphy 1988 Show that ad
Page 957 and 958:
Bernheim and Rangel 2004 Model of
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Public Economics Lectures Part 1: Introduction

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