Public Economics Lectures Part 1: Introduction

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Cutler and Richardson 1997 Propose a better definition of value of life that takes quality of life into account Measure QALY for several conditions using survey What is your quality of life relative to that of a perfectly healthy person? Define a person’s “health capital” as present value of expected QALYs times $100K This can be computed at various ages Can be used to assess which policies/interventions improve health capital the most Public Economics Lectures () Part 6: Social Insurance 177 / 207
Public Economics Lectures () Part 6: Social Insurance 178 / 207
Page 1 and 2:
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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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
Page 197 and 198:
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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Page 243 and 244:
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
Page 253 and 254:
Welfare Analysis in Behavioral Mode
Page 255 and 256:
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
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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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
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
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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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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
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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
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
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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
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Blundell, Duncan, and Meghir: Resul
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Page 543 and 544:
Farber 2005: Division Bias Argues t
Page 545 and 546:
Manoli and Weber 2009 Use variation
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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
Page 555 and 556:
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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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
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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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Page 577 and 578:
Optimization Frictions Many frictio
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Page 581 and 582:
Setup Consider a static demand mode
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Optimization Frictions Define agent
Page 585 and 586:
Construction of Choice Set 151 150
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Identification with Optimization Fr
Page 589 and 590:
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
Page 605 and 606:
Year 2 Wage Earnings Distributions:
Page 607 and 608:
Labor Supply Elasticities: Implicat
Page 609 and 610:
Chetty: Formula for Risk Aversion L
Page 611 and 612:
u c ,u l w 0 u c (w 0 l,l) Case A:
Page 613 and 614:
Chetty 2006: Results Labor supply e
Page 615 and 616:
Outline 1 Motivations for Social In
Page 617 and 618:
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
Page 647 and 648:
Replacement Rate Common measure of
Page 649 and 650:
Baily-Chetty model Canonical analys
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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
Page 659 and 660:
Envelope Condition Why can ∂e ∂
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Suffi cient Statistic Approach to K
Page 663 and 664:
Baily-Chetty model: Second Best Sol
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Baily-Chetty Consumption-Based Form
Page 667 and 668:
Empirical Estimates: Duration Elast
Page 669 and 670:
Hazard Models Define hazard rate h
Page 671 and 672:
Meyer 1990 Meyer includes log UI be
Page 673 and 674:
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
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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
Page 695 and 696:
Moral Hazard vs. Liquidity: Evidenc
Page 697 and 698:
Figure 3a Effect of UI Benefits on
Page 699 and 700:
Figure 3c Effect of UI Benefits on
Page 701 and 702:
log UI ben 0.527 (0.267) TABLE 2
Page 703 and 704:
Figure 5 Effect of Severance Pay on
Page 705 and 706:
Figure 6b Effect of Severance Pay o
Page 707 and 708:
Chetty 2008: Implications for Optim
Page 709 and 710:
Figure 3 Frequency of Layoffs by Jo
Page 711 and 712:
Figure 4 Selection on Observables M
Page 713 and 714:
TABLE 3a Effects of Severance Pay a
Page 715 and 716:
Shimer and Werning 2007: Reservatio
Page 717 and 718:
Figure 5a Effect of Severance Pay o
Page 719 and 720:
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
Page 727 and 728:
Effect of Benefit Expiration on Haz
Page 729 and 730:
Experience Rating in Washington, 20
Page 731 and 732:
Feldstein 1978: Empirical Results F
Page 733 and 734:
UI Savings Accounts Alternative to
Page 735 and 736:
Feldstein and Altman 2007 Calculati
Page 737 and 738:
Black, Smith, Berger, and Noel 2003
Page 739 and 740: Public Economics Lectures () Part 6
Page 741 and 742: Black, Smith, Berger, and Noel 2003
Page 743 and 744: Dynamics: Path of UI Benefits Class
Page 745 and 746: Workers Compensation Insurance agai
Page 747 and 748: Theory of Workers’Compensation Fo
Page 751 and 752: Effects of Benefits on Injuries Pot
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 771 and 772: Autor and Duggan 2003 Focus on inte
Page 775 and 776: Employment Shocks and DI Applicatio
Page 777 and 778: Employment Shocks and DI Applicatio
Page 779 and 780: Health Insurance Arrow (1963): semi
Page 781 and 782: Health Care Spending in OECD Nation
Page 783 and 784: Americans’Source of Health Insura
Page 785 and 786: Growing Health Expenditures: Key Fa
Page 787 and 788: Market Failures and Government Inte
Page 789: Measuring Health Before discussing
Page 793 and 794: Optimal Govt. Intervention in Healt
Page 795 and 796: Feldstein 1973 x = non-medical cons
Page 797 and 798: Feldstein 1973: First Best Solution
Page 799 and 800: Price of each visit $200 A B S=MC $
Page 805 and 806: Finkelstein 2006 Impact of Medicare
Page 807 and 808: Ellis and McGuire 1986 Previous ana
Page 809 and 810: Ellis and McGuire: Compensation Sch
Page 811 and 812: 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
Page 819 and 820: 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
Page 865 and 866:
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
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Subsidies for Charity: Setup Warm-g
Page 893 and 894:
Optimal Subsidies for Charity Resul
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Optimal Subsidies for Charity (Saez
Page 897 and 898:
Empirical Evidence Existing studies
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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
Page 923 and 924:
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
Page 935 and 936:
Externalities: Empirical Measuremen
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Page 939 and 940:
Page 941 and 942:
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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