efficient methods of measuring welfare change and compensated income in terms of ordinary demand functions a utility maximizing consumer with a completely known system of ordinary demand functions q h p c is considered let p qo and p q be two arbitrary equilibrium situations the problem is to evaluate in which of the situations the utility is higher without knowing the utility function revealed preference theory tells that the ordinary demand functions which are in principle observable contain enough information to solve the problem remaining difficulties are therefore mainly computational we present how the compensated income c i c p qo and the compensated demand h p cl1 are calculated with arbitrary accuracy using only the ordinary demand system our two efficient algorithms also have interesting interpretations in terms of index numbers and consumer surplus measures

optimal taxation with endogenously incomplete debt markets abstract empirical analyses of labor tax and public debt processes provide prima facie evidence for imperfect government insurance this paper considers a model in which the government s inability to commit to future policies or to report truthfully its spending needs renders government debt markets endogenously incomplete a method for solving for optimal fiscal policy under these constraints is developed such policy is found to be intermediate between that implied by the complete insurance ramsey model and a model with exogenously incomplete debt markets in contrast to optimal ramsey policy optimal policy in this model is consistent with a variety of stylized fiscal policy facts such as the high persistence of labor tax rates and debt levels and the positive covariance between government spending and the value of government debt sales

empirical strategies for incorporating weak complementarity into consumer demand models abstract this article appraises existing empirical strategies for incorporating weak complementarity into consumer demand models the repackaging integrating back and discontinuity approaches are evaluated in terms of their behavioral implications and potential usefulness for applied research the appraisal suggests that the repackaging approach offers the most flexibility and tractability in the multi good demand system framework but the integrating back approach holds considerable promise in the single good context a multi good empirical comparison suggests that qualitatively similar policy inference arises from different repackaging approaches

public goods as characteristics of non market commodities in benefit cost analysis it is useful to model public goods as the quality of privately consumed nonmarketed goods this strategy is often pursued in valuing environmental amenities the theoretical foundations of this model have not been fully developed in this paper comparative statics results are derived for quality changes of nonmarket goods the results reveal some common misconceptions about welfare measurement of quality changes conditions are presented for a quality induced change in the marshallian consumer surplus of the nonmarket good to approximate the true compensated welfare measure the conditions are equally necessary for obtaining exact welfare measures copyright 1993 by royal economic society

macroeconomic features of the french revolution this paper describes aspects of the french revolution from the perspective of theories about money and government budget constraints we describe how unpleasant fiscal arithmetic gripped the old regime how the estates general responded to reorganize france s fiscal affairs and how fiscal exigencies impelled the revolution into a procession of monetary experiments ending in hyper inflation

computing multi period information constrained optima this paper presents a detailed theoretical derivation and justification for methods used to compute solutions to a multi period including infinite period continuum agent unobservedeffort economy actual solutions are displayed illustrating cross sectional variability in consumption and labour effort in the population at a point in time and variability for a typical individual over time the optimal tradeoff between insurance and incentives is explored and the issue of excess variability is addressed by consideration of the analogue full information economy and various restricted contracting regimes

fiscal discriminations in three wars in 1790 a u s paper dollar was widely held in disrepute something shoddy was not worth a continental by 1879 a u s paper dollar had become as good as gold these outcomes emerged from how the u s federal government financed three wars the american revolution the war of 1812 and the civil war in the beginning the u s government discriminated greatly in the returns it paid to different classes of creditors but that pattern of discrimination diminished over time in ways that eventually rehabilitated the reputation of federal paper money as a store of value

a diagrammatic exposition of weak complementarity and the willig condition this article provides a graphical explanation for one of the most important restrictions to utility functions used in revealed preference approaches for measuring the demand for public goods and product quality weak complementarity it also describes how the willig condition is an important element along with weak complementarity in measuring hicksian consumer surplus for changes in public goods or quality using marshallian demand curves

principles of fiscal and monetary policy abstract this paper describes a complete and internally consistent set of principles for the conduct of a welfare maximizing fiscal and monetary policy issues of time consistency that arise in applying these principles to actual economics are also discussed

estimating the general equilibrium benefits of large changes in spatially delineated public goods the purpose of this article is to report a new approach for measuring the general equilibrium willingness to pay for large changes in spatially delineated public goods such as air quality we estimate the parameters of a locational equilibrium model and compute equilibria for alternative scenarios characterizing the availability of public goods within a system of communities welfare measures take into consideration the adjustments of households in equilibrium to nonmarginal changes in public goods the framework is used to analyze willingness to pay for reductions in ozone concentrations in southern california between 1990 and 1995

fiscal consequences for mexico of adopting the dollar dollarization implies a reduction in the menu of assets available to the government and to the private sector in managing risk whatever the gains from dollarization the costs of reducing the asset menu need to be weighed against them this paper presents models one a simple generalization of a well known model of tax smoothing by ba1ao in which these costs are explicit along the way it suggests that there is likely to be no reduction in interest costs to the government from dollarization recently economists have been paying increasing attention to a dynamic general equilibrium approach to the theory of the price level that is often called the fiscal theory of the price level or ftpl this way of thinking emphasizes the role of fiscal and monetary policy in determining the risk and return properties of government liabilities it is particularly useful in analyzing proposals for large scale institutional changes that imply shifts in monetary and fiscal policies when dollarization is considered from this perspective some disadvantages are brought to light that may not be so apparent from other points of view section 1 below lays out the main ideas of ftpl section 2 displays a model that extends an earlier one of barro s to argue that optimal fiscal policy will use surprise inflation to achieve lower deadweight tax loss than would otherwise be possible section 3 considers the composition of government liabilities along the lines of the theory of corporate finance asking if dollarization will reduce the cost of funds section 4 presents annual estimates of the unanticipated returns to holders of u s government debt to show that these are substantial and are to some extent timed to match legitimate periods of fiscal stress as the optimality theory of section 2 would suggest section s discusses the lendel of last resort function and its connection to these fiscal issues section 6 briefly discusses some alternatives to pure dollarization in our concluding section 7 we sum up finding much to worry about in the prospect of dollarization

optimal fiscal policy in a business cycle model this paper develops the quantitative implications of optimal fiscal policy in a business cycle model in a stationary equilibrium the ex ante tax rate on capital income is approximately zero there is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation within this class the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk the tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks thus there is no presumption that optimal labor tax rates follow a random walk most of the welfare gains realized by switching from a tax system like that of the united states to the ramsey system come from an initial period of high taxation on capital income

can weak substitution be rehabilitated this paper develops a graphical analysis and an analytical model that demonstrate how weak substitution can be used for non market valuation weak complementarity and weak substitution represent preference restrictions that allow us to develop equivalent price changes to describe quantity or quality changes in non market goods the price changes are hicksian equivalents in that they yield the same utility changes as would the quantity or quality changes after discussion of several potential applications of weak substitution the paper develops the parallel between the restriction and recent strategies from modeling differentiated goods

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

assets general equilibrium and the neutrality of money when government liabilities including money are held in private portfolios only as stores of value and do not provide additional services such as liquidity real variables are not affected by changes in the money supply due to the government s trading in real assets open market operations this neutrality of monetary policy fails if the government either trades in nominal assets or it distributes subsidies and levies taxes the ability of monetary policy to affect real variables is an important issue and has been the subject of numerous theoretical and empirical studies the most useful theoretical framework within which to address the problem is a model of asset markets where the demand for money or other government liabilities is determined by rational portfolio choice tobin 1958 these assets may of course provide additional services such as transactions and liquidity we assume here however that these services do not exist the standard argument for the effectiveness of monetary policy goes as follows changes in the supply of money affect the price level and hence the distribution of returns to money as an asset as individuals realign their portfolios and prices adjust to maintain market clearing the equilibrium holdings of physical assets change in this case money is not neutral we shall argue however that as long as changes in the supply of money are effected through the government s trading in real assets this argument is in general not valid it is well known that the effectiveness of monetary policy depends on the method of injection of new money into the economy two procedures are used by the government to effect changes in the supply of money it either trades in assets nominal or real open market operations or it distributes subsidies and levies taxes we show here that open market operations in real assets capital or indexed bonds have no effects on real variables in a general equilibrium model with market clearing the argument which can also be applied to the management of the public debt is presented in a most general framework in the next section it does not depend on the existence of a complete system of contingent securities or on an operative bequest motive furthermore it is compatible with incomplete and differential information the result is similar to the modigliani miller theorem in corporate finance that an argument along these lines can be employed to demonstrate the irrelevance of open

swimming with the tide solidary wage policy and the gender earnings gap this paper addresses the consequences of wage compression for the gender wage gap in sweden during the period 1968 1991 we find that the effects of changes in the wage structure on women s wages have varied over time and have been partly counteracting changes in industry wage differentials have systematically worked against women while changes in the returns to human capital and unobserved characteristics have contributed to reductions in the gender wage gap changes in the wage structure were particularly important between 1968 and 1974 when there was a dramatic reduction in overall wage inequality jel classification j16 j31 j51

exact consumer s surplus and deadweight loss consumer s surplus is a widely used tool in applied welfare economics both economic theorists and cost benefit analysis often use consumer s surplus despite its somewhat dubious reputation the basic idea is to evaluate the value to a consumer or his willingness to pay for a change in price of a good from say pricep to pricep because price changes affect consumer welfare an evaluation of this effect is often a key input to public policy decisions yet consumer s surplus is probably the most controversial of widely used economic concepts both paul samuelson and ian little conclude that the economics profession would be better off without it it is my feeling of the situation that substantial agreement exists on the correct quantities to be measured the amount the consumer would pay or would need to be paid to be just as well off after the price change as he was before the price change the quantities correspond to john hicks compensating variation measures an alternative measure which takes ex post price change utility as the basis of comparison is hicks equivalent variation the controversy arises in the measurement of these quantities the usual measurement procedure is to use the area to the left of the marshallian market demand curve between two price levels jules dupuit originated this measure of welfare change and alfred marshall and hicks derived appropriate conditions for its use the primary condition for the area to the left of the demand curve to correspond to the compensating variation is to have constant marginal utility of income marshall gave this condition and if it holds the same quantity will be derived as the area to the left of the compensated hicksian demand curve this area to the left of the compensated demand curve is exactly what the compensating variation and equivalent variation measure thus the constant marginal utility of income is a sufficient condition for marshallian consumer s surplus to be equal to hicks consumer s surplus in this case arnold harberger s plea to use the welfare triangle as one half times the product of the price change times the quantity change to measure deadweight loss corresponds to the correct theoretical amount of welfare change in a recent paper robert willig derives bounds for the percentage difference between the correct measure of either the compensating or equivalent variation and the marshallian measure derived form the market demand curve his bounds which depend on the income elasticity of demand for the single good in the region of price change being considered as well as the proportion of the consumer s income spent on the good demonstrate that the marshallian consumer s surplus is often a good approximation to hicks consumer s surplus the fact that the proportion of the consumer s income spent matters as well as the income elasticity was first pointed out by harold hotelling willig contends that the approximation error will be less than the errors involved in estimating the demand curve thus he hopes to remove the need for apology that applied economists often need to give to theorists who remark on the inappropriateness of using marshallian consumer s surplus to measure welfare change however in this paper i show that for the case primarily considered by willig of a single price change which is also the situation in which consumer s surplus is often used in applied work no approximation is necessary professor of economics massachusetts institute of technology and research associate national bureau of economic research i would like to thank peter diamond erwin diewert daniel mcfadden robert merton robert solow hal varian joel yellin and the referees for help and comments research support from the national science foundation is acknowledged the reason that we still have two rather than one of samuelson s six measures of consumer s surplus arises from an index number problem of the correct basis for the welfare comparison i will give both measures but plan to concentrate on the compensating variation

distributional incentives in an equilibrium model of domestic sovereign default the european debt crisis shares features of historical episodes of outright default on domestic public debt about which little research has been done this paper proposes a theory of domestic sovereign default in which a government chooses debt and default optimally responding to distributional incentives affecting the welfare of risk averse agents who are split into debt holders and non holders equilibria with debt do not exist if the government is utilitarian and default is costless adding exogenous default costs the model supports equilibria with debt exposed to default risk in which debt falls as the fraction of agents who own the debt falls debt can also be sustained if the government s welfare weights are biased in favor of bond holders resulting in equilibria in which debt rises as debt ownership is more concentrated these results are robust to adding a second asset opening the economy to foreign investors or introducing taxes as an alternative redistributive policy instrument

a nonparametric revealed preference approach to measuring the value of environmental quality we develop an approach to valuing non market goods using nonparametric revealed preference analysis we show how nonparametric methods can also be used to bound the welfare effects of changes in the provision of a non market good our main context is one in which the non market good affects the marginal utility of consuming a related market good this can also be framed as a shift in the taste for or quality of the market good a systematic approach for incorporating quality taste variation into a revealed preference framework for heterogeneous consumers is developed this enables the recovery of the minimal variation in quality required to rationalise observed choices of related market goods the variation in quality appears as a adjustment to the price for related market goods which then allows a revealed preference approach to bounding compensation measures of welfare effects to be applied

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

a price discrimination analysis of monetary policy monetary policy is analysed within a model that appeals to legal restrictions on private intermediation to explain the coexistence of currency and interest bearing default free bonds the interaction between such legal restrictions and monetary policy is illustrated in a version of the overlapping generations model the model shows that legal restrictions and the use of both currency and bonds permit the government to levy a nonlinear inflation tax and that such a tax may be better in terms of the pareto criterion than a linear inflation tax

on measuring the value of a nonmarket good using market data we use line integral theory to lay out in a more general theoretical framework the conditions under which it is possible to measure with market data the welfare effects of a change in a nonmarket good we present in detail a numerical method of measuring the value of nonmarket goods using market data under either weak neutrality or weak complementarity our numerical method is more flexible than the existing analytical method because it can be used with any well behaved marshallian demand function and can be used even when the willig condition does not hold

stochastic inflation and government provision of indexed bonds abstract this paper examines the consequences of using indexed bonds as one of the government financing instruments along with money and taxes it is shown that open market operations between money and indexed bonds do not matter in a real sense despite their different risk characteristics increasing the share of indexed bonds in the government portfolio increases the volatility and the conditional mean of real rates of return on money when provided by means other than open market operations indexed bonds can affect the allocation of resources but these reallocations cannot be pareto improving

parental altruism and child lead exposure inferences from the demand for chelation therapy we use parents decisions to treat their children s body burdens of lead to infer parental ex ante willingness to pay for reduced burdens willingness to pay is estimated with a data set containing 256 observations the data were originally gathered to assess the impact of children s body lead burdens upon their intellectual and behavioral development our results indicate that parental ex ante willingness to pay for a 1 percent reduction in child body lead burden exceeds the estimated ex post savings in medical treatment and compensatory education costs caused by the same reduction

on the optimal taxation of capital income abstract we show that in models in which labor services are supplied jointly with human capital the chamley and judd result on zero capital income taxation in the limit extends to labor taxes as long as accumulation technologies are constant returns to scale moreover for a class of widely used preferences consumption taxes are zero in the limit as well however we show by the construction of two examples that these results no longer hold for certains types of restrictions on tax rates or if there are profits generated journal of economic literatureclassification numbers e62 h21

quality adjusted price indexes and the willig condition abstract this paper provides a graphical explanation of willig s condition for developing consistent price indexes for quality change the framework also describes how the single crossing condition generalizes the willig condition

weak complementarity path independence and the intuition of the willig condition abstract weak complementarity is usually invoked for valuing public goods using information on private goods however using uncompensated demands requires a second condition the willig condition this paper present an intuitive explanation of the willig condition and shows that the alternative versions are equivalent to a path independence condition for line integrals this condition is fulfilled for compensated demands but not uncompensated demands except in restrictive special cases it is shown that this is a type of quasi homotheticity and requires that the income flexibility of quality must equal the income elasticity of the weak complement the importance and restrictiveness of the willig condition are shown using three alternative functional forms

recovering weakly complementary preferences abstract this paper demonstrates a method for recovering weakly complementary expenditure and indirect utility functions while integrating back from marshallian demand specifications that do not intrinsically embody weak complementarity weak complementarity of a good with quality provides information about how the constant of integration over price must behave with respect to quality and this information can be incorporated into the process of recovering preferences the weakly complementary expenditure and indirect utility functions are recovered for the linear demand specification and for the stone geary utility function with any value of the subsistence parameter

consumer s surplus without apology the purpose of this paper is to settle the controversy surrounding consumer s surplus and by so doing to validate its use as a tool of welfare economics i will show that observed consumer s surplus can be rigorously utilized to estimate the unobservable compensating and equivalent variations the correct theoretical measures of the welfare impact of changes in prices and income on an individual i derive precise upper and lower bounds on the percentage errors of approximating the compensating and equivalent variations with consumer s surplus these bounds can be explicitly calculated from observable demand data and it is clear that in most applications the error of approximation will be very small in fact the error will often be overshadowed by the errors involved in estimating the demand curve the results in no way depend upon arguments about the constancy of the marginal utility of income consequently this paper supplies specific empirical criteria which can replace the apologetic caveats frequently employed by those who presently apply consumer s surplus moreover the results imply that consumer s surplus is usually a very good approximation to the appropriate welfare measures to preview below i establish the validity of these rules of thumb for a

optimal taxation with private government information the ramsey model of fiscal policy implies that taxes should be smooth in the sense of having small variances in contrast empirical labour tax processes are smooth in the sense of being random walks they provide prima facie evidence for incomplete government insurance this paper considers whether private government information might lie behind such incomplete insurance it shows that optimal incentive compatible policies exhibit limited use of state contingent debt and greater persistence in taxes and debt and it argues that they are better approximations to empirical fiscal policies than those implied by the ramsey model the paper also establishes that optimal incentive compatible allocations converge to allocations such that the government s incentive compatibility constraint no longer binds generally these limiting allocations are ones in which the government is maximally indebted their credibility and the interaction of incentive compatibility and credibility is briefly discussed

history remembered optimal sovereign default on domestic and external debt abstract infrequent but turbulent sovereign defaults on domestic creditors were a forgotten history in macroeconomics we propose a bewley model in which the government chooses debt and default on domestic and foreign creditors by balancing distributional incentives versus the benefits of debt for self insurance liquidity and risk sharing a feedback mechanism links debt issuance the debt distribution the default decision and risk premia calibrated to eurozone data the model is consistent with key long run and debt crisis statistics defaults are rare and preceded by surging debt and spreads debt sells at the risk free price most often but lack of commitment cuts sustainable debt sharply

income fluctuation and asymmetric information an example of a repeated principal agent problem we examine a simple repeated principal agent model with discounting there are a risk averse borrower with an unobservable random income and a risk neutral lender the efficient contract is characterized it tends to the first best constant consumption contract as the discount factor tends to one and the time horizon extends to infinity if the time horizon is infinite and the contract is legally enforceable the borrower s utility becomes arbitrarily negative with probability one if the borrower has constant absolute risk aversion consumption is transferred between any two states at a constant interest rate which is less than the rate of time preference

international lending with moral hazard and risk of repudiation in this paper i examine the constrained optimal pattern of capital flows between a lender and a borrower in an environment in which there are two impediments to forming contracts the first impediment to contracting arises from the assumption that lenders cannot observe whether borrowers invest or consume borrowed funds this assumption leads to a moral hazard problem in investment the second impediment arises from the assumption that the borrower as a sovereign nation may choose to repudiate his debts the optimal contract is shown to specify that the borrowing country experience a capital outflow when the worst realizations of national output occur this seemingly perverse capital outflow forms a necessary part of the optimal solution to the moral hazard problem in investment