can a raise in your wage make you worse off a public goods perspective abstract we show that a seemingly paradoxical result is possible an increase in one s wage can reduce one s welfare such outcome can occur in an economy populated by agents who value a private good bought using labor income and a public good produced by voluntary time contributions a raise in the wage in general opportunity cost of time makes each agent substitute away from contributing to the public good failing to internalize the negative externality imposed on others the result is a decrease in public good provision under quite general conditions the implied cumulative negative effect on agents welfare can more than offset the positive effect of the wage raise from increased private good consumption and lead to an equilibrium in which all agents are worse off our result is particularly relevant for developing economy settings as it holds for relatively low initial wage levels we discuss the applicability of our findings to a number of important problems in development such as market integration cooperation in common pool resource conservation and social capital

marriage and consumption insurance what s love got to do with it when markets are incomplete individuals may choose to marry to diversify their labor income risk love however can complicate the picture if love is fleeting or the resolution of agents income uncertainty occurs predominantly later in life then marriages with good economic matches last longer in contrast if love is persistent and the resolution of uncertainty to agents income occurs early then marriages with good economic matches are more likely to be caught short with too little love to save a marriage consequently once married the partners will be more likely to divorce evidence is provided to distinguish between these alternative scenarios

immigration search and loss of skill this article develops and estimates an on the job search model of the entry of highly skilled immigrants from the former soviet union into the israeli labor market the estimated parameters of the model together with information on the wages of immigrants from earlier waves imply that on average immigrants can expect lifetime earnings to fall short of the lifetime earnings of comparable natives by 57 of this figure 14 percentage points reflect frictions associated with nonemployment and job distribution mismatch and 43 percentage points reflect the gradual adaptation of imported schooling and experience to the local labor market

multiplicative background risk although there has been much attention in recent years on the effects of additive background risks the same is not true for its multiplicative counterpart we consider random wealth of the multiplicative form xy where x and y are statistically independent random variables we assume that x is endogenous to the economic agent but that y is an exogenous and nontradable background risk that represents a type of market incompleteness our main focus is on how the presence of the multiplicative background risk y affects risk taking behavior for decisions on the choice of x we extend the results of gollier and pratt 1996 to characterize conditions on preferences that lead to more cautious behavior

formal and informal risk sharing in ldcs theory and empirical evidence in village economies limited commitment models have been proposed as theoretical alternatives to the complete markets hypothesis and have been shown to be empirically relevant yet village institutions might be able to enforce some contracts we construct a theoretical model which shows how households can insure through both formal and informal contracts when some verifiable production takes place in an environment of incomplete markets this theoretical setting nests the case of complete markets when all risks can be insured by formal contracts because all states of nature would be verifiable and the case where only informal agreements are available agreements specifying informal transfers that needs to be self enforceable we derive two equations of interest the income equation which is partially determined by the formal contract and an euler type equation where consumption growth is affected by lagged consumption instead of being a martingale using semi parametric specifications we derive testable restrictions of our model we estimate both equations using data of village economies in pakistan empirical results are consistent with the model the estimation and allows to show that the incentive constraints due to selfenforcement bind and that formal contracts are used to reduce the probability of binding the constraint

the poor are twice cursed wealth inequality and inefficient credit market abstract this paper investigates the role of unobservable wealth differences on credit market equilibrium given there is also asymmetric information concerning effort preferences and choices in equilibrium poor but able entrepreneurs may subsidise the rich and incompetent or be excluded as a result investment may exceed or fall short of the optimal level low inequality may deliver conditions for perfect screening and an efficient level of investment the equilibrium with cross subsidisation is consistent with otherwise puzzling empirical observations

precautionary saving under liquidity constraints evidence from rural pakistan this paper investigates precautionary saving under liquidity constraints in pakistan using household panel data in particular while we estimates kimball s 1990 prudence parameter we deviate from dynan s 1993 framework by explicitly considering liquidity constraints as in zeldes 1989 by doing so we attempt to differentiate the standard precautionary saving caused by uncertainty from the one due to liquidity constraints furthermore endogenous liquidity constraints are considered to resolve issues of selection biases in this study we document substantial evidence of the presence of precautionary saving in pakistan more specifically the estimated prudence is significantly higher for liquidity constrained households as compared with unconstrained ones the results support the emerging view that facilitating saving may often be more important than finding better ways of lending to the poor

when borch s theorem does not apply some key implications of market incompleteness with policy relevance today markets are incomplete when the assets available to the agents do not span the space of future contingencies efficiency is then assessed by the weak criterion of constrained efficiency efficiency relative to the set of allocations compatible with the asset structure that criterion requires firms to optimise relative to shadow prices reflecting shareholders preferences yet even when firms do so competitive equilibria on the markets for assets and commodities fail generically to be constrained efficient section 3 pareto superior allocations can be implemented through price wage rigidities and quantity constraints section 4 but nominal rigidities are conducive to multiple equilibria implying endogenous macroeconomic uncertainties that compound the primitive exogenous uncertainties section 5 various policy implications can be drawn which are of some relevance to the current crisis

prospect theory in the health domain a quantitative assessment it is well known that expected utility eu has empirical deficiencies cumulative prospect theory cpt has developed as an alternative with more descriptive validity however cpt s full function had not yet been quantified in the health domain this paper is therefore the first to simultaneously measure utility of life duration probability weighting and loss aversion in this domain we observe loss aversion and risk aversion for gains and losses which for gains can be explained by probabilistic pessimism utility for gains is almost linear for losses we find less weighting of probability 1 2 and concave utility this contrasts with the common finding of convex utility for monetary losses however cpt was proposed to explain choices among lotteries involving monetary outcomes life years are arguably very different from monetary outcomes and need not generate convex utility for losses moreover utility of life duration reflects discounting causing concave utility

beauty vs earnings gender differences in earnings and priorities over spousal characteristics in a matching model abstract i develop a model of marriage matching where males and females care about two distinct characteristics of their spouse beauty and earnings each individual s beauty is exogenous but earnings depend on human capital investments made by each individual prior to entering the marriage market i show that even if males and females constitute ex ante identical populations with identical underlying preferences and equal access to human capital investment and labor market opportunities there can still exist an equilibrium where on average one gender invests more in human capital than the other and moreover members of one gender are more likely to prioritize beauty over earnings in a spouse while members of the other gender are more likely to prioritize a potential spouse s earnings over beauty

testing efficient risk sharing with heterogeneous risk preferences previous papers have tested e cient risk sharing under the assumption of identical risk preferences in this paper we show that if in the data households have heterogeneous risk preferences the tests proposed in the past reject e ciency even if households share risk e ciently to address this issue we propose a method that enables one to test e ciency even when households have difierent preferences for risk the method is composed of three tests the flrst one can be used to determine whether in the data under investigation households have homogeneous risk preferences the second and third test can be used to evaluate e cient risk sharing when the hypothesis of homogeneous risk preferences is rejected we use this method to test e cient risk sharing in rural india using the flrst test we strongly reject the hypothesis of identical risk preferences we then test e ciency with and without the assumption of preference homogeneity in the flrst case we reject e cient risk sharing at the village and caste level in the second case we still reject e ciency at the village level but we cannot reject this hypothesis at the caste level this flnding suggests that the relevant risk sharing unit in rural india is the caste and not the village

consumption insurance an evaluation of risk bearing systems in low income economies the hypothesis of full risk sharing can be taken to data from low income countries and evaluate formal and informal financial systems in many contexts idiosyncratic risks are high so credit insurance arrangements could be beneficial statistical tests reveal that households in southern india take advantage of these possibilities villages in cote d ivoire and countries in thailand do not do as well the paper includes an empirical description of the devices used to smooth consumption and a theoretical discussion of private information and incentives on ideal operating systems the full information and mechanism design frameworks provide benchmarks for policy analysis

who benefits more from higher household consumption the intra household allocation of nutrients in china abstract previous studies find that human capital investments in boys are less income elastic than investments in girls attributing this result to favoritism toward boys i show theoretically that it is plausible for more productive or favored household members to have higher income elasticities i then investigate this question empirically utilizing panel data on individual nutrient intake from the china health and nutrition survey chns to analyze how changes in household per capita nutrient intake affect the intra household allocation of nutrients to deal with potential biases due to omitted variables and simultaneity i use measures of rainfall variation as instruments i find that nutritional intakes are more elastic for males especially prime age men than for females and significantly less elastic for the elderly

risk sharing between and within families this paper uses the panel study of income dynamics to test whether risk sharing is complete between or within american families the tests accommodate a wide variety in the configuration and availability of family data the test results reject inter as well as intra family full risk sharing even assuming that leisure is endogenous or that leisure and consumption are nonseparable

wealth weather risk and the composition and profitability of agricultural investments despite the growing evidence that farmers in low income environments are risk averse there has been little empirical evidence on the importance of risk in shaping the actual allocation of production resources among farmers differentiated by wealth the authors use panel data on investments in rural india to examine how the composition of productive and nonproductive asset holdings varies across farmers with different levels of total wealth and across farmers facing different degrees of weather risk income variability is a prominent feature of the experience of rural agents in low income countries the authors report evidence based on measures of rainfall variability that the agricultural investment portfolio behavior of farmers in such settings reflects risk aversion due evidently to limitations on consumption soothing mechanisms such as crop insurance or credit markets the authors results suggest that uninsured weather risk is a significant cause of lower efficiency and lower average incomes a one standard deviation decrease in weather risk measured by the standard deviation of the timing of the rainy season would raise average profits by up to 35 percent among farmers in the lowest wealth quartile moreover rainfall variability induces a more unequal distribution of average incomes for a given distribution of wealth wealthier farmers are willing to absorb significant risk without giving up profits to reduce production risk smaller farmers have to invest their limited wealth in ways that reduce their exposure to risk at the cost of lower profit rates the authors found that at high levels of rainfall variability differences in rates of profit per unit of agricultural assets were similar across classes of wealth but over the sample range of rainfall variability these rates of profit were always higher for the poorer farmers than for the wealthier ones suggesting that the disadvantages of small farmers in risk diffusion are more than offset by their labor cost advantage

time horizon and the discount rate abstract we consider an economy a la lucas 1978 econometrica46 1429 1446 with a risk averse representative agent the exogenous growth rate of the economy follows a random walk we characterize the set of utility functions for which it is efficient to discount more distant cash flows at a lower rate the benchmark result is that when the growth rate is almost surely nonnegative the yield curve is decreasing if and only if relative risk aversion is decreasing with wealth relaxing the assumption on the absence of recession requires more restrictions on preferences such as increasing relative prudence journal of economic literature classification numbers d81 d91 q25 q28

wealth varying intertemporal elasticities of substitution evidence from panel and aggregate data abstract this paper constructs and estimates a model of consumer preferences in which the intertemporal elasticity of substitution ies of consumption expenditure rises with the level of wealth the purpose of this paper is to measure the effect that systematic variation in the ies of poor and rich consumers has on the ies of aggregate consumption expenditure we find economically significant differences in the ies of poor and rich consumers in indian panel data on the consumption of individual households we also find economically significant differences in the ies measured in aggregate time series data for the u s and india

risk sharing with limited commitment and preference heterogeneity structural estimation and testing in order to analyze the role of limited commitment and preference heterogeneity in explaining the consumption allocation i propose a theoretical and empirical framework to estimate and evaluate a risk sharing model where insurance transfers have to be self enforcing and the coefficient of relative risk aversion may depend on observable household characteristics i compare this model to benchmark models with full commitment and or without preference heterogeneity using data from three indian villages i find that the limited commitment model with heterogeneous preferences outperforms the benchmark models in a statistical sense and in terms of i explaining the dynamic response of consumption to idiosyncratic income shocks ii accounting for the variation of consumption unexplained by household and time effects and iii capturing the variation of inequality across time and villages and predicting changes in inequality i also use the estimated models to predict the effects of a counterfactual tax and transfer policy on the consumption allocation the limited commitment model with preference heterogeneity predicts larger benefits to the poor than its homogeneous counterpart

income risk borrowing constraints and portfolio choice economic theory suggests that uninsurable income risk and the expectation of future borrowing constraints can reduce the share of risky assets in a household s portfolio if the utility function exhibits decreasing absolute risk aversion and decreasing prudence an individual will reduce his exposure to rate of return risks when confronted with other independent risks if there are transaction costs the expectation of future borrowing constraints should induce individuals to keep a lower proportion of their wealth in the form of illiquid and risky assets the authors find support for these propositions in a cross section of italian households copyright 1996 by american economic association

social interactions in labor supply our research examines the effect of interdependence on estimation and interpretation of earnings labor supply equations we consider the cases of 1 a positive spillover from others labor supplied and 2 a need for conformity with others labor supplied qualitative and quantitative comparative statics results with a stone geary utility function demonstrate how spillover effects increase labor supply uniformly alternatively conformity effects move labor supplied toward the mean of the reference group so that in the limit labor supply becomes perfectly inelastic at the reference group average when there are unmodeled exogenous social interactions conventional wage elasticities are still relatively well estimated although structural parameters may not be omitting endogenous social interactions may seriously misrepresent the labor supply effects of policy however jel d11 j22 z13

the newsvendor problem under multiplicative background risk this note studies the single period newsvendor problem when the newsvendor faces a multiplicative neutral independent background risk in an expected utility framework it is shown that multiplicative risk vulnerability is a sufficient condition to guarantee a decrease in the optimal order a weaker sufficient condition which has more interpretability is also provided and discussed this result sheds light on situations where exchange tax or inflation rates risks which apply multiplicatively to the final wealth are at work

implications of endogenous group formation for efficient risk sharing the existing literature on sub game perfect risk sharing suffers from a basic inconsistency while a group of size n is able to coordinate on a risk sharing outcome it is assumed that deviating subgroups cannot i relax this assumption and characterise the optimal contract among all coalition proof history dependent contracts this alters the predictions of the standard dynamic limited commitment model i show that the consumption of constrained agents depends on both the history of shocks and its interaction with the current income of other constrained agents from this i derive a formal test for the presence of endogenous group formation under limited commitment

rate of time preference intertemporal elasticity of substitution and level of wealth the rate of time preference rtp and the intertemporal elasticity of substitution ies are two important factors shaping intertemporal consumption decisions models in which the rtp and or the ies differ systematically between rich and poor households have different empirical and policy implications for economic development growth and the distribution of income and consumption from those of standard models in which these parameters are constant across households in this chapter we estimate a model in which both rtp and ies are allowed to differ across rich and poor households using household level panel data from india our empirical results are consistent with the view that the rtp is constant across poor and rich households but the ies is larger for the rich than it is for the poor

decreasing aversion under ambiguity abstract under which condition does the set of desirable uncertain prospects expand when wealth increases we show that the decreasing concavity dc of the utility function u is necessary and sufficient in the maxmin expected utility model in the smooth ambiguity aversion model with the ambiguity valuation function the dc of u and of u is necessary and sufficient an alternative classical definition of decreasing aversion is based on the hypothesis that the investment in a risky asset is increasing in wealth we show that this hypothesis does not hold in general under ambiguity aversion and that one needs to constrain the structure of ambiguity to obtain unambiguous results

unfair credit allocations this article investigates the impact of credit allocation on heterogeneous wealth entrepreneurs we show that with decreasing risk aversion and unobservable wealth poorer borrowers exert more effort as a consequence of endogenous adverse selection they are either excluded from the market or necessarily subsidize richer borrowers in a pooling equilibrium resulting in a paradoxical and inequitable redistribution alternatively a less likely separating equilibrium may occur in which poor types bear the entire weight of separation in the form of excess risk taking

decreasing relative risk aversion risk sharing and the permanent income hypothesis this article develops a method for testing the risk sharing hypothesis rsh against various versions of the permanent income hypothesis pih while allowing for heterogeneity in risk preferences across households using 1 year and longer differences in household total nondurable consumption data from indian villages we find evidence that favors the rsh over the pih at the village level

prudence in bargaining the effect of uncertainty on bargaining outcomes abstract we investigate the outcome of bargaining when a player s pay off from agreement is risky we find that a risk averse player typically increases his equilibrium receipts when his pay off is made risky this is because the presence of risk makes individuals behave more patiently in bargaining strong analogies are drawn to the precautionary saving literature we show that the effect of risk on receipts can be sufficiently strong that a decreasingly risk averse player may be better off receiving a risky pay off than a certain pay off

full insurance in the presence of aggregate uncertainty this paper tests implications of full consumption insurance the object is to determine how much mileage can be obtained from a model with complete markets with such features as private information or liquidity constraints omitted the implication exploited is that individual consumption responds to aggregate risk but not to idiosyncratic risk the test involves regressing the change in household consumption onto the change in aggregate consumption and other right hand side variables such as the change in household income and change in employment status all variables other than the change in aggregate consumption are predicted to be insignificant in explaining the change in household consumption with observations on consumption and income for 10 695 households from the consumer expenditure survey the results are mixed the results for one specification exponential utility are mostly consistent with full consumption insurance the results for the other specification power utility are not

output prices and the distribution of consumption in rural india this article analyzes the relation among agricultural output inflation and the distribution of consumption in rural india using both the singh maddala and dagum families to model the entire distribution parametrically employing a benchmark case in which growth is distributionally neutral and idiosyncratic shocks are completely smoothed and using a gmm estimator to deal with potential simultaneity between output and consumption we conclude that i growth was not distributionally neutral ii good harvests relative to trend yielded improvements according to first order stochastic dominance iii slow growth before 1980 went with decreasing inequality iv accelerated growth thereafter tended to increase inequality though yielding improvements according to first order stochastic dominance v consumption smoothing was incomplete

household choices in equilibrium this paper is an empirical investigation of equilibrium restrictions on household consumption and male labor supply it exploits a simple factor structure rationalized by two assumptions that household allocations are pareto optimal and that the labor market is competitive the paper estimates household preferences and tests how well this parsimonious factor structure represents panel data on married couples and time series data on asset returns most of the estimates are roughly comparable to those found in previous work no evidence against the simple factor representation is found and the intertemporal capital asset pricing model is not rejected copyright 1990 by the econometric society

a simple test of consumption insurance are consumers effectively insured against idiosyncratic shocks to income or wealth either by formal institutions such as charities private insurance and government programs or by informal mechanisms such as gifts and loans from relatives friends and neighbors under full insurance consumption growth should be cross sectionally independent of idiosyncratic variables that are exogenous to consumers this proposition is tested by cross sectional regressions of consumption growth on a variety of exogenous variables full insurance is rejected for long illness and involuntary job loss but not for spells of unemployment loss of work due to strike and an involuntary move

asset pricing with multiplicative habit and power expo preferences abstract multiplicative habit introduces an additional consumption risk as a determinant of the equity premium and allows time preference and habit strength in addition to risk aversion to affect the price of risk a model combining multiplicative habit and power expo preferences cannot be rejected

intertemporal choice and consumption mobility the theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption not just about its conditional mean in the paper we study the empirical transition matrix of consumption using a panel drawn from the bank of italy survey of household income and wealth we estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution the transition matrix generated by our estimates matches remarkably well the empirical matrix both in the aggregate and in samples stratified by education our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis jel d52 d91 i30

brand retrieval consideration set composition consumer choice and the pioneering advantage recent research on the pioneering advantage has shown that consumers often prefer pioneering brands to follower brands recent research on consumer choice suggests that information about brands is filtered through a series of sequential cognitive processes this study attempts to integrate these two separate lines of research by investigating the effects of pioneering on each stage of the multistage decision process a within subjects longitudinal experiment was conducted to simulate brand order of entry into a new market we also developed a sequential logit model to isolate the direct impact of pioneering on each stage of the decision process while controlling for indirect effects of pioneering on previous stages the results revealed that the pioneering brand vs followers is more likely to be retrieved considered and selected moreover the results revealed that consumers are more likely to bypass consideration set formation when the choice decision is simple vs complex theoretical and practical implications of the results are discussed

the effect of income taxation on consumption and labor supply we estimate the incentive effects of income taxation in a life cycle model of consumption and labor supply without intratemporal strong separability we find that consumption and hours worked are direct complements in utility both increase with a compensated increase in the net wage the compensated net wage elasticity is about 0 3 nearly double estimates for u s men from a linear labor supply specification estimated intertemporal elasticities indicate significant intertemporal smoothing of utility the estimated marginal welfare cost of government revenue is 6 20 which is about half the estimated welfare cost when additivity between consumption and leisure is incorrectly imposed

stochastic volatility implies fourth degree risk dominance applications to asset pricing abstract what is the contribution of stochastic volatility to the resolution of asset pricing puzzles i demonstrate that increasing the risk surrounding the variance of future consumption does not change its unconditional variance but it generates a fourth degree risk deterioration in future consumption yielding in particular an increase in its excess kurtosis if shocks to the volatility of consumption growth are persistent the term structure of annualized excess kurtosis is increasing in a lucas economy with a eu representative agent this increases the aggregate risk premium if and only if the fourth derivative of the utility function u is negative and it makes its term structure increasing persistent stochastic volatility also reduces the interest rate if and only if the fifth derivative of u is positive and it makes its term structure decreasing these conditions are satisfied under constant relative risk aversion and these results are robust to epstein zin preferences we show that persistent stochastic volatility is supported by the evidence that the excess kurtosis of consumption growth is positive and has an increasing term structure using quarterly growth data in the u s between 1947 and 2016

decreasing relative risk aversion and tests of risk sharing the relative risk aversion rra coefficient of a household whose consumption is close to the subsistence level may be very high for example if consumption is exactly at the subsistence level the household may not be willing to bear any risk if this is the case then the rra coefficient must be a decreasing function of wealth for poor households therefore we should allow the possibility of decreasing rra drra in testing the full risk sharing hypothesis however existing tests in the empirical literature are derived using preferences that exhibit either increasing or constant rra even when they are applied to data containing low income households we therefore use a hyperbolic absolute risk aversion hara utility which implies increasing constant and decreasing rra as special cases to test full risk sharing hypothesis using the international food policy research institute ifpri and the international crops research institute of the semi arid tropics icrisat household level data sets we find evidence in support of the drra hypothesis along with evidence favoring full risk sharing hypothesis at the village level and evidence against the hypothesis at the inter village level when rra is restricted to be constant we replicate the previous results in the literature reject the full risk sharing hypothesis at both levels our tests however reject this restriction and favor drra in almost all cases these results suggest that it is important to allow for drra in testing the full risk sharing hypothesis when data containing low income households are investigated this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this item this abstract was borrowed from another version of this this abstract was borrowed from another version of this item

do stockholders share risk more effectively than nonstockholders abstract this paper analyzes the extent of risk sharing among stockholders and nonstockholders to evaluate the empirical importance of market incompleteness it is essential to determine whether idiosyncratic shocks are important for the wealthy who have access to better insurance opportunities but also face different risks than the average household we study a model where each period households decide whether to participate in the stock market by paying a fixed cost due to this endogenous entry decision the testable implications of perfect risk sharing take the form of a sample selection model which we estimate using a semiparametric gmm estimator proposed by kyriazidou 2001 using data from psid we strongly reject perfect risk sharing among stockholders but perhaps surprisingly do not find evidence against it among nonstockholders this result appears to be robust to several extensions this finding suggests further focus on risk factors that primarily affect the wealthy such as entrepreneu

consumption risk sharing in social networks we develop a model of informal risk sharing in social networks where relationships between individuals can be used as social collateral to enforce insurance payments we characterize incentive compatible risk sharing arrangements and obtain two results 1 the degree of informal insurance is governed by the expansiveness of the network measured by the number of connections that groups of agents have with the rest of the community relative to group size twodimensional networks where people have connections in multiple directions are su ciently expansive to allow very good risk sharing we show that social networks in peruvian villages satisfy this dimensionality property thus our model can explain townsend s 1994 puzzling observation that village communities often exhibit close to full insurance 2 in second best arrangements agents organize in endogenous risk sharing islands in the network where shocks are shared fully within but imperfectly across islands as a result network based risk sharing is local socially closer agents insure each other more

wealth information acquisition and portfolio choice i solve with an approximation a grossman stiglitz economy under general preferences thus allowing for wealth effects because information generates increasing returns decreasing absolute risk aversion in conjunction with the availability of costly information is sufficient to explain why wealthier households invest a larger fraction of their wealth in risky assets one no longer needs to resort to decreasing relative risk aversion an empirically questionable assumption furthermore i show how to distinguish empirically between these two explanations finally i find that the availability of costly information exacerbates wealth inequalities copyright 2004 oxford university press

ramsey tax cycles this paper asks whether tax cycles or tax smoothing represents the optimal policy in models without any extrinsic uncertainty to answer this question i develop a general framework for studying tax cycles in a large class of models that feature various types of frictions this framework adds various wedges resembling tax wedges to the labour market to the product market and to money acquisition into an otherwise frictionless economy so that it nests a large class of models used for policy analysis i derive a criterion for this general framework that indicates when cycles are welfare improving in a frictionless economy and why frictions make cycles more likely to be optimal i then calibrate two models with frictions a labour search model and a monetary model and show that cycles are welfare improving under standard preferences copyright wiley blackwell