Public Economics Lectures Part 1: Introduction

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Heterogeneity: Gaube 2000 In a setting with heterogeneity in prefs for PG (v h ), proves that 1 Without redistributive prefs., G SB < G FB . 2 With redistributive tastes, could have G SB > G FB . Intuition: if public parks benefit mostly low income households, over-provide parks to enhance redistribution First-best level of redistribution cannot be achieved using standard tax instruments. By providing park instead of welfare, redistribute income without distorting incentive to work. Example of theory of the second best (Lipsey and Lancaster 1956) Public Economics Lectures () Part 7: Public Goods and Externalities 68 / 138
Kreiner and Verdelin 2009 Consider a general model with non-linear income taxes (including lump sum) Q: What threshold should be used for PG’s in this setting? A: Depends on whether non-linear tax system is reoptimized when PG’s are funded If yes, then Samuelson rule correct again E.g. if public good benefits all equally, then simply raise lump sum tax and distributional problem is unchanged More generally, changes in optimal non-linear tax system will have second-order effects on welfare → can be ignored. Illustrates danger of Ramsey analyses Public Economics Lectures () Part 7: Public Goods and Externalities 69 / 138
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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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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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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
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: Public Economics Lectures () Part 7
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 863 and 864: Hungerman 2005 Studies crowdout of
Page 865 and 866: Hungerman 2005 Estimates imply that
Page 867 and 868: Andreoni and Payne 2003 OLS still y
Page 869 and 870: Andreoni and Payne 2003 $1000 incre
Page 873 and 874: Andreoni 1988 Isaac, McCue, and Plo
Page 875 and 876: Andreoni 1993 Uses lab experiment t
Page 879 and 880: Andreoni 1993 Public good levels ar
Page 881 and 882: 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: PGs with Distortionary Taxes: 2nd B
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
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
Page 931 and 932: Sandmo 1975: Additivity Result Main
Page 933 and 934: Double Dividend Debate Claim: gas t
Page 935 and 936: 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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