union coverage and profitability among u s firms this paper utilizes unique survey data on labor union coverage at the firm level to examine union effects on the profitability of 705 u s companies during the 1970s market value and earnings are estimated to be about 10 15 percent lower in an average unionized company than in a nonunion company following extensive control for firm and industry characteristics deleterious union effects on firm profitability are sizable throughout the 1972 80 period but vary considerably across industries the relatively poor profit performance of unionized companies may help explain the recent decline in u s union membership the author thanks the w e upjohn institute for employment research for financial support elizabeth gregory for assistance with the union coverage survey zvi griliches for providing access to the rd donald deere terry seaks and anonymous referees for helpful suggestions and seminar participants at connecticut florida state harvard texas a m and william and mary for comments on earlier versions of this research

reputational capital opportunism and self policing in legislatures this paper examines the question of whether reputational capital can deter opportunistic behavior among legislators preparing to exit the house of representatives i create a measure of reputational trustworthiness based upon pooled samples of constituency opinion derived from the national election studies surveys i then examine the extent to which such reputational good will among constituents deters lame duck foreign travel by exiting house incumbents within the context of a quasi experimental research design the analysis suggests that legislators may be self policed by their reputations for honesty and trustworthiness to the point of discouraging unethical activity urveys i then examine the extent to which such s derived from the national election studies

taxing capital not a bad idea after all we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic uninsurable income shocks and permanent productivity difierences of households the optimal capital income tax rate is signiflcantly positive at 36 percent the optimal progressive labor income tax is roughly a at tax of 23 percent with a deduction of 7 200 relative to average household income of 42 000 the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system jel e62 h21 h24

dynamic procurement under uncertainty optimal design and implications for incomplete contracts we characterize the optimal dynamic contract for a long term basic service when an uncertain add on is required later on introducing firm risk aversion has two impacts profits for the basic service can be backloaded to induce cheaper information revelation for this service an income effect which reduces output distortions the firm must also bear some risk to induce information revelation for the add on this risk effect reduces the level of the add on but hardens information revelation for the basic service the interaction between these effects has important implications for the dynamics of distortions contract renegotiation and the value of incomplete contracts

shirking and sorting in a political market with finite lived politicians this paper analyzes principal agent slack in the context of a political market composed of voters challengers and incumbents the introduction of a last period via finite livedness in combination with voters imperfect information about politicians preferences causes time varying shirking behavior on the part of politicians political markets eventually sort out those politicians with significantly deviant policy preferences potentially providing a solution to the last period problem and enabling politicians to make credible commitments in the extreme sorting can insure that it is not worthwhile for potential shirkers to run for office a systematic relationship between political shirking and number of terms in office may exist and depends on how quickly sorting takes place we show that evidence of little if any shirking is quite consistent with politicians having diverse and strongly held policy preferences in addition if sorting is a significant feature of political markets cross sectional studies will tend to oversample little and non shirking politicians compared to longitudinal studies reinterpretations of existing empirical work are also discussed

optimal taxation merging micro and macro approaches efficient provision of social insurance and efficient redistributionofresourcesamongindividualsaresomeofthemostimportantandchallenging questions in macroeconomics and public finance a seminal contribution of mirrlees 1971 is the starting point for the modern approach to answering these questions a trade off between efficiency and insurance or equity is inherent to this approach and is a key determinant of the optimal policy in this paper we argue that the large body of research that follows mirrlees approach has been developing in two quite separate directions referred to in this paper as the micro and macro approaches we argue that merging the two directions

optimal social security with imperfect tagging workers are exposed to the risk of permanent disability we rely on a dynamic mechanism design approach to determine how imperfect information on health should optimally be used to improve the trade off between inducing the able to work and providing insurance against disability after deriving the fi rst order conditions to this problem we calibrate the model to the u s economy and run a numerical simulation the government should offer back loaded incentives and make strategic use of the difference between the age at which disability occurs and the age of eligibility to disability bene ts also the able who are mistakenly tagged as disabled should be encouraged to work until some early retirement age this makes a decrease in the strictness of the disability test desirable which would reduce the number of disabled who are not awarded the tag and hence improve insurance finally we show how the first best allocation of resources can asymptotically be implemented by making strategic use of the disability test

a non perpetual shirking model we provide a finite horizon counterpart to the shapiro and stiglitz model of unemployment to show how workers effort falls as they approach the end of an employment spell the model provides a reason for wages rising more rapidly than productivity

searching for symptoms of political shirking congressional foreign travel despite the hypothesized propensity for shirking to marklegislative institutions the evidence is rather equivocal moreover most of the research has focused exclusively onlegislator voting thereby constraining whatevergeneralizations might emerge the purpose of this paper is tocontribute to the debate over the question of politicalshirking by extending the range of phenomena examined toinclude congressional foreign travel our analysis providesevidence that opportunism is a problem in congress we findthat last period problems have arisen in the area of foreigntravel and that increased scrutiny to the problem on the partof congress only shifted consumption patterns i e legislators began taking foreign junkets near but not at theend of their legislative careers not all foreign travelshould be construed as worthless junketing since there isstrong evidence that some foreign travel is related tomembers responsibilities on congressional committees

union negotiations and corporate policy a study of labor concessions in the domestic steel industry during the 1980s abstract this paper studies managerial compensation financial reporting and dividend policies of the seven major domestic steel producers during requests for union concessions substantial layoffs reported losses and sacrifices by nonunion stakeholders buttressed managers case for union concessions from 1980 to 1988 sample firms reduced their work force by about 300 000 almost two thirds and annual wage payments from 16 1 to 8 6 billion reported income is lower during union negotiations controlling for cash flows as is managerial pay with average ceo salary plus bonus declining 18 dividend reductions and white collar pay cuts are substantial pervasive and clustered during union negotiations

using elasticities to derive optimal income tax rates this paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates a simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution in the general non linear income tax problem this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of mirrlees the optimal non linear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution these formulas are implemented numerically using empirical earning distributions and a range of realistic elasticity parameters

equal employment opportunity law and firm profitability based on a sample of 260 cases reported in the wall street journal between 1964 and 1986 this study finds that the equity value of firms charged with violating equal employment opportunity eeo laws fell at the time that a suit decision or settlement was announced most dramatically the value of firms involved in class action suits fell 15 6 percent on average around the time of the suit further the average loss to shareholders exceeds the amount firms are required to spend to settle the case this may be due to the expected costs of changing employment practices or to the information about the firm s management that is revealed by the case a staggering number of statutes amendments and court decisions regulating equal opportunity in employment have been passed during the past 25 years firms found guilty of violations of equal employment opportunity laws have been required to pay millions of dollars in back pay and to alter their employment practices to comply with the laws this study measures the costs to firms resulting from government and private lawsuits and the further costs of losing those suits i address this question by examining changes in the market value of the equity of firms at the time a lawsuit is filed for a violation of an equal employment opportunity eeo law and at the time a decision of guilty or a settlement

differential mortality and the progressivity of social security abstract there is a well established negative correlation between earnings and mortality risk using a calibrated general equilibrium macroeconomic model this paper examines how this correlation interacts with the welfare implications of social security s benefit earnings rule my primary findings suggest that the welfare ranking of alternative benefit earnings rules is somewhat sensitive to differential mortality due to their relatively high mortality risk households with unfavorable earnings histories heavily discount the expected utility from old age consumption and therefore do not put much weight on better work retirement consumption smoothing because of this reason social security s benefit earnings rule warrants less redistribution in the presence of differential mortality compared to when mortality risk is uncorrelated to earnings i find that this result continues to hold when household level labor supply distortions are ignored and also when an alternative maximin welfare criterion is considered but not when accidental bequests from the deceased are redistributed to the survivors

a recursive formulation for repeated agency with history dependence abstract we present general recursive methods to handle environments where privately observed variables are linked over time we show that incentive compatible contracts are implemented recursively with a threat keeping constraint in addition to the usual temporary incentive compatibility and promise keeping conditions journal of economic literature classification numbers d30 d31 d80 d82

a solvable continuous time dynamic principal agent model abstract i study the provision of incentives in a continuous time dynamic moral hazard model with hidden actions and hidden states i consider a principal agent model with linear production and exponential utility whose explicit solution allows me to show how allocations are distorted for incentive reasons and how access to hidden savings further alters allocations i solve the model by applying a stochastic maximum principle where the co state variables from the agent s optimization problem become state variables for the principal s problem of choosing an optimal contract i show that the main effect of moral hazard is a distortion on the effort margin with a smaller effect on the intertemporal consumption allocation access to hidden savings shuts down the intertemporal distortions and increases the effort distortion i also show how the optimal contracts can be implemented via a constant equity share a constant flow payment and a constant tax on savings

designing optimal disability insurance a case for asset testing we analyze an implementation of an optimal disability insurance system as a competitive equilibrium with taxes an optimum is implemented by an asset tested disability system in which a disability transfer is paid only if an agent has assets below a specified maximum the logic behind this result is that an agent who plans to falsely claim disability a finds doing so unattractive if he does not adjust his savings and b cannot collect disability insurance if he does adjust his savings in the desired direction upward for a calibrated economy we find that welfare gains from asset testing are significant

final voting in legislatures in representative democracies such as the united states legislatures provide the transmission mechanism through which pressure from private interests becomes public policy considerable attention has been given in the literature to explanations of the relevant forces that appear to be driving the legislative process for example much research has focused on the relative impact of economic vs ideological influences on congressional voting behavior in this approach the way that legislators vote on proposed legislation is modeled as a function of the preferences of various economic and ideological interests groups including the legislator s own preferences for wealth and ideology james kau and paul rubin 1979 joseph kalt and mark zupan 1984 sam peltzman 1985 missing from this approach is the idea that when legislatures are the transmission mechanism they are costly and imperfect organizations for generating political influence gary becker 1983 as such rules and institutions will emerge that are related to problems of internal control within the organization of a legislature in this paper we focus on the role of floor voting from the standpoint of legislator organization and control we seek to expand the interpretation of the meaning of floor voting activity by examining the timing sequence and outcomes of such votes specifically we look at final floor voting in the u s congress the patterns described in the analysis below suggest that a broader analytical perspective on the economic function of floor voting is required the findings also suggest that to identify more precisely the forces that are driving legislator voting behavior it is important to recognize the role of legislative transactional costs and institutional constraints in section i the conceptual framework for the empirical results is discussed in more detail the purpose is not to develop a fullblown theory of legislative organization rather it is to focus the reader s attention on several hypotheses about the function of final floor voting as a device for controlling legislator behavior within the legislature empirical results including an explanation of the timing and sequence of final votes on bills are reported in section ii the data for these tests are drawn from legislative activities in the u s house of representatives during the 96th and 98th congresses some concluding remarks are offered in section iii

capture and ideology in the economic theory of politics the economic theory of regulation long ago put public interest theories of politics to rest these theories have correctly been viewed as normative wishings rather than explanations of real world phenomena they have been replaced by models of political behavior that are consistent with the rest of microeconomics anthony downs 1957 james buchanan and gordon tullock 1965 george stigler 1971 sam peltzman 1976 recently however debate has arisen over whether some version of a public interest theory of regulation will have to be readmitted to our thinking about actions and results in the political arena what is at issue is the empirical importance of the altruistic publicly interested goals of rational actors in determining legislative and regulatory outcomes james kau and paul rubin 1979 kalt 1981 peltzman 1982 this study assesses the nature and significance of publicly interested objectives in a particular instance of economic policymaking u s senate voting on coal strip mining regulations the existence of such objectives is of course no contradiction of the economic view of human behavior kenneth arrow 1972 gary becker 1974 and may well be rooted in genetic biological history becker 1976 jack hirshleifer 1978 generally however individuals altruistic publicly interested goals have been given little attention this reflects the judgment that such goals are so empirically unimportant as to allow the use of occam s razor in positive models or well founded apprehensions that these goals are unusually difficult to identify measure and analyze notwithstanding the latter problem we find that approaches which confine themselves to a view of political actors as narrowly egocentric maximizers explain and predict legislative outcomes poorly the tracking and dissecting of the determinants of voting on coal strip mining policy suggest that the economic theory of politics has been prematurely closed to a broader conception of political behavior

redistribution and social insurance we study optimal redistribution and insurance in a life cycle economy with private idiosyncratic shocks we characterize pareto optima show the forces determining optimal labor distortions and derive closed form expressions for their limiting behavior the labor distortions for high productivity shocks are determined by the labor elasticity and the higher moments of the shock process the labor distortions for low productivity shocks are determined by the autocorrelation of the shock process redistributive objectives and past distortions in a model calibrated using newly available estimates of idiosyncratic shocks the labor distortions are u shaped and the savings distortions generally increase in current earnings jel d82 d91 h21 h23 i38 j22 j24

the surprising power of age dependent taxes this paper provides a new empirically driven application of the dynamic mirrleesian framework by studying a feasible and potentially powerful tax reform age dependent labour income taxation i show analytically how age dependence improves policy on both the intratemporal and intertemporal margins i use detailed numerical simulations calibrated with data from the u s panel study of income dynamics to generate robust policy implications age dependence 1 lowers marginal taxes on average and especially on high income young workers and 2 lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted finally i calculate and characterize the welfare gains from age dependence despite its simplicity age dependence generates a welfare gain equal to between 0 6 and 1 5 of aggregate annual consumption and it captures more than 60 of the gain from reform to the dynamic optimal policy the gains are due to substantial increases in both efficiency and equity when age dependence is restricted to be pareto improving the welfare gain is nearly as large

the use of accounting flexibility to reduce labor renegotiation costs and manage earnings abstract we investigate the determinants of discretionary sfas 106 choices of non regulated firms we find that more unionized firms are more likely to use immediate recognition consistent with incentives to reduce labor renegotiation costs immediate recognition is more prevalent among post adoption plan modifiers particularly if their transition obligation is large consistent with incentives to increase future reported earnings immediate recognition together with post adoption benefit plan reduction frees future income from the transition obligation amortization expense and adds a positive component as negative prior service costs are amortized immediate recognition is less prevalent among firms with higher potential debt contracting costs

pareto efficient income taxation with stochastic abilities abstract this paper studies pareto efficient income taxation in an economy with finitely lived individuals whose income generating abilities evolve according to a two state markov process the study yields three main results first when individuals are risk neutral in any period the only individuals whose earnings are distorted are those who currently are and have always been low ability in addition the degree to which these perpetual low ability types have their earnings distorted decreases over time converging to zero if the time horizon is long enough second the earnings distortions are continuous with respect to the degree of risk aversion at the risk neutral solution third pareto efficient income tax systems can be time consistent even when the degree of correlation in ability types is large the condition for time consistency suggests a novel theoretical reason why the classic equity efficiency trade off may be steeper in a dynamic environment than previously thought

how should capital be taxed this survey discusses how capital should be taxed in advanced economies we review the theoretical optimal tax literature survey empirical studies on the distribution of capital and the distortion

optimal taxation in life cycle economies abstract we use a very standard life cycle growth model in which individuals have a labor leisure choice in each period of their lives to prove that an optimizing government will almost always find it optimal to tax or subsidize interest income the intuition for our result is straightforward in a life cycle model the individual s optimal consumption work plan is almost never constant and an optimizing government almost always taxes consumption goods and labor earnings at different rates over an individual s lifetime one way to achieve this goal is to use capital and labor income taxes that vary with age if tax rates cannot be conditioned on age a nonzero tax on capital income is also optimal as it can imperfectly mimic age conditioned consumption and labor income tax rates journal of economic literature classification numbers e62 h21

employment protection and takeovers labor restructuring is a key driver of takeovers and the associated synergy gains worldwide in a difference in differences research design we show that major increases in employment protection reduce takeover activity by 14 27 and the combined firm gains synergies by over half consistent with the labor channel behind these effects deals with greater potential for workforce restructuring show a greater reduction in volume number and synergies the reforms do impede layoffs and the associated wage costs match the magnitude of synergy losses offer prices are not fully adjusted with both bidders and targets exhibiting lower returns following the reforms

insurance and taxation over the life cycle we consider a dynamic mirrlees economy in a life cycle context and study the optimal insurance arrangement individual productivity evolves as a markov process and is private information we use a first order approach in discrete and continuous time and obtain novel theoretical and numerical results our main contribution is a formula describing the dynamics for the labour income tax rate when productivity is an ar 1 our formula resembles an ar 1 with a trend where i the auto regressive coefficient equals that of productivity ii the trend term equals the covariance productivity with consumption growth divided by the frisch elasticity of labour and iii the innovations in the tax rate are the negative of consumption growth the last property implies a form of short run regressivity our simulations illustrate these results and deliver some novel insights the average labour tax rises from 0 to 37 over 40 years whereas the average tax on savings falls from 12 to 0 at retirement we compare the second best solution to simple history independent tax systems calibrated to mimic these average tax rates we find that age dependent taxes capture a sizable fraction of the welfare gains in this way our theoretical results provide insights into simple tax systems copyright 2013 oxford university press

efficient allocations in dynamic private information economies with persistent shocks a first order approach this article studies efficient allocations in a dynamic private information economy with a continuum of idiosyncratic shocks that are persistent i develop a first order approach for this environment and show that the problem has a simple recursive structure that relies on only a small number of state variables making the problem tractable i find sufficient conditions that guarantee that the first order approach is valid to illustrate the first order approach i numerically compute the efficient allocations in a mirrleesean economy with productivity shocks that follow a random walk and verify the validity of the first order approach i show that persistent shocks create a new trade off where the social planner decreases the informational rent of the agent today at the cost of providing higher insurance in the future copyright 2013 oxford university press

two views of inequality over the life cycle data on the life cycle profiles of inequality in wages earnings hours worked and consumption contain precious information for answering questions about the ability of households to insure labor market risk and about the sources of this risk this paper demonstrates that the choice of whether to control for cohort effects or for time effects has a drastic impact on the estimated age profiles for inequality and thus on the answers to those questions it also shows that time effects are required to account of the observed trends in inequality in 30 years of u s data whereas there is no evidence that cohort effects have been important jel c13 d31 d91 j22 j31

labor unions and tax aggressiveness abstract we examine the impact of unionization on firms tax aggressiveness we find a negative association between firms tax aggressiveness and union power and a decrease in tax aggressiveness after labor union election wins this relation is consistent with labor unions influencing managers in one or both of two ways 1 constraining managers ability to invest in tax aggressiveness through increased monitoring or 2 decreasing returns to tax aggressiveness that arise from unions rent seeking behavior we also find preliminary evidence that the market expects these reductions around union elections and discounts firms that likely add shareholder value via aggressive tax strategies

education and optimal dynamic taxation the role of income contingent student loans we study the optimal design of integrated education finance and tax systems the distribution of wages is endogenously determined by the costly education decisions of heterogeneous individuals before labor market entry consistent with empirical evidence this human capital investment decision is risky we find that an integrated education and tax system in which the government provides education loans to young individuals coupled with income contingent repayment can always be designed in a pareto optimal way we present a simple empirically driven application of the framework to us data in which individuals make a college entry decision we find the optimal repayment schemes for college loans can be well approximated by a schedule that is linearly increasing in income up to a threshold and constant afterwards so although the full optimum could lead to complicated non linear schedules in theory very simple instruments can replicate it fairly well the welfare gains from income contingent repayment are significant

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

capital taxation quantitative explorations of the inverse euler equation economies with private information provide a rationale for capital taxation in this paper we ask what the welfare gains from following this prescription are we develop a method to answer this question in standard general equilibrium models with idiosyncratic uncertainty and incomplete markets we find that general equilibrium forces are important and greatly reduce the welfare gains once these effects are taken into account the gains are relatively small in our benchmark calibration these results do not imply that dynamic aspects of social insurance design are unimportant but they do suggest that capital taxation may play a modest role

working or shirking expenses and attendance in the uk parliament this paper studies the determinants of mps expense claims and of their attendance at parliamentary meetings using a multiple regression framework we correlate the expenses with three sets of variables constituency characteristics political variables and individual characteristics we then look at the ratio of parliamentary expenses claimed to votes cast in parliament as a crude measure of value for money this take on the data provides a somewhat benign view of the usage of expense claims we use the results to reflect on two views of the motivation of mps the public choice view and the public service view

the impact of labour unions on external auditor selection and audit scope evidence from the korean market abstractwe examine whether labour unions influence external auditor selection and audit scope as a major user group of financial information labour unions likely demand financial information of high quality and thus high quality audits as a union s request for wage increases is likely strong when a firm is performing well management facing wage negotiations with the labour union has incentives to manipulate earnings downward and may therefore prefer auditors who allow more discretion using union data unique to korea during 2005 2008 we find that firms with a stronger labour union tend to choose higher quality auditors i e big n or industry specialist auditors we also find that unionization is negatively positively associated with positive negative abnormal audit fees and audit hours and the effects are more pronounced when the union is stronger and more active given that departures from normal audit fees and audit hours in either direction arguably impair audit quality this finding is con

the industrial organization of congress or why legislatures like firms are not organized as markets this paper provides a theory of legislative institutions that parallels the theory of the firm and the theory of contractual institutions like market institutions legislative institutions reflect two key components the goals or preferences of individuals here representatives seeking reelection and the relevant transactions costs we present three conclusions first we show how the legislative institutions enforce bargains among legislators second we explain why given the peculiar form of bargaining problems found in legislatures specific forms of nonmarket exchange prove superior to market exchange third our approach shows how the committee system limits the types of coalitions that may form on a particular issue

a critical review and an extension of the political shirking literature after substituting actual and real changes for proposed and nominal changes in budgetary and employment levels it is clear that the size and scope of the federal leviathon had not been reduced over 1982 83 it is also clear that the agencies which witnessed real budget cuts over this period were of minor importance in terms of the total u s budget future research on why only small agencies receive real budget cuts will provide us with a better understanding of the budgetary process

optimal life cycle capital taxation under self control problems we study optimal taxation of savings in an economy where agents face self control problems and we allow the severity of self control to change over the life cycle we focus on quasi hyperbolic discounting with constant elasticity of inter temporal substitution utility functions and linear markov equilibria we derive explicit formulas for optimal taxes that implement the efficient commitment allocation we show analytically that if agents ability to self control increases concavely with age then savings should be subsidised and the subsidy should decrease with age we also study the quantitative effects of age dependent self control problems and find that the optimal subsidies in our environment are much larger than those implied by models with constant self control finally we compare our optimal subsidies with those implied by the 401 k plan although the subsidy levels in the two cases are of comparable magnitudes the 401 k plan implies an increasing pattern of subsidies while the optimal subsidies decrease over the life cycle

providing business information to production workers correlates of compensation and profitability this study investigates some of the effects of a company s providing production workers with information on its financial condition productivity and relative standing in the labor market analyzi

wages profits and rent sharing the paper suggests a new test for rent sharing in the u s labor market using an unbalanced panel from the manufacturing sector it shows that a rise in a sector s profitability leads after some years to an increase in the long run level of wages in that sector the paper controls for workers characteristics for industry fixed effects and for unionism lester s range of wages is estimated for rent sharing reasons alone at approximately 24 per cent of the mean wage

concession bargaining the impact on shareholders equity this analysis of bargaining settlements in 1982 83 shows that on average shareholders in those firms that negotiated concessionary settlements enjoyed an 8 to 10 percent increase in the value of their holdings the author interprets this result to mean not that the value of the firm increased but rather that concessions enlarged the shareholders portion of the firm s value at the expense of the workers portion on the other hand concession bargaining does not seem to have reallocated business risk between shareholders and labor finally the evidence suggests that firm specific sources of risk can explain in part not only the magnitude of the concession effects but also the probability that concession bargaining will occur

on the taxation of durable goods this paper proposes a mirrleesian theory of commodity taxation in the presence of durable goods nondurable goods should be taxed uniformly provided that the preferences over nondurable consumption are weakly separable from labor effort a uniform taxation across all goods is optimal if the utility from durable consumption is linear and the preferences are additively separable between durable goods nondurable goods and labor effort if those conditions are not met wealth effects and substitution effects justify the use of differential commodity taxes to characterize the sign of the tax differential the paper exploits a substitution euler equation that links the marginal rate of substitution between durable and nondurable consumption across time finally an application of this theory suggests that housing investment should face higher tax rates than nondurable consumption

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

optimal savings distortions with recursive preferences abstract this paper derives an intertemporal optimality condition for economies with private information focusing on a class of recursive preferences by comparing it to the situation where agents can freely save in a risk free asset market we derive the optimal savings distortions necessary for constrained optimality our recursive preferences are homogeneous and satisfy a balanced growth condition while allowing us to separate the role of risk aversion and intertemporal elasticity of substitution we perform some quantitative exercises that disentangle the respective roles played by these two parameters in optimal distortions and the implied welfare gains

optimal taxation with behavioral agents this paper develops a theory of optimal taxation with behavioral agents we use a general framework that encompasses a wide range of biases such as misperceptions and internalities we revisit the three pillars of optimal taxation ramsey linear commodity taxation to raise revenues and redistribute pigou linear commodity taxation to correct externalities and mirrlees nonlinear income taxation we show how the canonical optimal tax formulas are modified and lead to novel economic insights we also show how to incorporate nudges in the optimal taxation framework and jointly characterize optimal taxes and nudges

optimal redistribution a life cycle perspective abstract in this paper i characterize the optimal redistribution policy in a simple life cycle framework with both an intensive and an extensive margin of labor supply the extensive margin corresponds to the choice of a retirement age the optimal allocation cannot be implemented in a decentralized economy by a standard non linear income tax alone it can however be implemented by a history dependent social security system which redistributes resources across agents a calibration of the model to the u s economy reveals that the retirement age should optimally be sharply increasing in productivity and that implementing the optimal life cycle redistribution policy can generate large social welfare gains

the last period problem in politics do congressional representatives not subject to a reelection constraint alter their voting behavior this study of roll call voting behavior in the u s house of representatives empirically documents the existence of an important simultaneity bias in the heretofore much investigated relationship between legislator ideological shirking and the security with which a legislator holds office the results indicate that while greater security allows a policymaker more leeway for ideological consumption increases in ideological on the job consumption also diminish a policymaker s security in office

union rent seeking intangible capital and market value of the firm abstract this study considers the effect of unions on intangi ble capital investment and profitability within the context of a market value rather than a more traditional accounting based approach theory is provided suggesting unions are able to affect profitability by sharing in the economic returns to firm specific intangible capital in support of this hypothesis we find unionization reduces the returns to r d and produces a corresponding limiting influence on r d investment at the firm level i introduction a n extensive literature in economics has ex amined the determinants of profitability with much of the focus centering on the role of market structure only recently however have the effects of labor unions on profitability been analyzed ths is surprising since labor economists long have emphasized union influences on wages and productivity that in turn may affect profitabil ity in recent studies freeman 1983 and karier 1985 report a significant limiting influence of unions on price cost margins in high concentra tion manufacturing industries using firm level data and the market based tobin s

the desirability of commodity taxation under non linear income taxation and heterogeneous tastes abstract this paper revisits the atkinson stiglitz result on uselessness of commodity taxation in the presence of optimal non linear income taxation in a more general setup namely when tastes are heterogeneous this general analysis displays the key economic assumptions under which the atkinson stiglitz result is robust a small tax on a given commodity is desirable if high income earners have a relatively higher taste for this commodity or if consumption of this commodity increases with leisure an application to the case of savings suggests that even in the presence of optimal non linear earnings taxation there is a role for a supplemental capital income tax in the standard overlapping generation model

union firm bargaining and the influence of product market power and production technology on systematic risk the relationship between the capm firm beta and the firm s microeconomic decisions is studied by a model under uncertainty which combines the feature of an ex ante inputs substituable production technology and the existence of a union which bargains over various economic dimensions of the firm it is shown that the earlier findings of a relationship between the firm beta the firm product market power and the labor capital ratio may be reinforced through the indirect channel of labor market bargaining but the relationship becomes more complex and heavily depends on the scope of the union firm bargaining process this yields the empirical prediction confirmed for a panel of belgian firms that any proper estimation of the determinants of firm beta must control for firms in the sample being unionized

machines buildings and optimal dynamic taxes abstract the effective taxes on capital returns differ depending on capital type in the u s tax code this paper uncovers a novel reason for the optimality of differential capital taxation we set up a model with two types of capital equipments and structures and equipment skill complementarity under a plausible assumption we show that it is optimal to tax equipments at a higher rate than structures in a calibrated model the optimal tax differential rises from 27 to 40 percentage points over the transition to the new steady state the welfare gains of optimal differential capital taxation can be as high as 0 4 of lifetime consumption

on the efficiency of equal sacrifice income tax schedules abstract in an economy which primitives are exactly those in mirrlees 1971 we investigate the efficiency of tax schedules derived under the equal sacrifice principle for a given exogenous government consumption level we assess whether there is an alternative tax schedule that raises more revenue while delivering less utility to no one for our preferred parametrizations we find that inefficiency only arises at the top of the income distribution for marginal tax rates well above the ones we currently observe in most countries we also recover the implicit marginal social weights associated with the equal sacrifice schedule and find them not to be monotonic in types for the environments we study

dynamic managerial compensation a variational approach abstract we study the optimal dynamics of incentives for a manager whose ability to generate cash flows changes stochastically with time and is his private information we show that distortions aka wedges under optimal contracts may either increase or decrease over time in particular when the manager s risk aversion and ability persistence are small distortions decrease on average over time for sufficiently high degrees of risk aversion and ability persistence instead distortions increase on average with tenure our results follow from a novel variational approach that permits us to tackle directly the full program thus bypassing some of the difficulties of the first order approach encountered in the dynamic mechanism design literature

persistent private information this paper studies the design of optimal contracts in dynamic environments where agents have private information that is persistent in particular i focus on a continuous time version of a benchmark insurance problem where a risk averse agent would like to borrow from a risk neutral lender to stabilize his utility the agent privately observes a persistent state variable typically either income or a taste shock and he makes reports to the principal i give verifiable sufficient conditions showing that incentive compatible contracts can be written recursively conditioning on the report and two additional state variables the agent s promised utility and promised marginal utility of the private state i then study two examples where the optimal contracts can be solved in closed form showing how persistence alters the nature of the contract unlike the previous discrete time models with independent and identically distributed i i d private information the agent s consumption under the contract may grow over time furthermore in my setting the efficiency losses due to private information increase with the persistence of the private information and the distortions vanish as i approximate an i i d environment

unionization and profitability evidence from the capital market this paper examines the effect of unionization on the profitability of firms abnormal monthly common stock returns for a sample of 253 nyse listed firms are estimated for the month in which the union petitions for an election and for the month in which the national labor relations board certifies the election outcome the results suggest that unionization on average is associated with a reduction in equity value when unions win an election the average loss associated with the unionization drive is 3 8 percent of equity value when unions lose an election there is an average net reduction of 1 3 percent in the equity value of the firm

age dependent taxes with endogenous human capital formation we assess the gains attained by the introduction of age dependent labor income taxes in an overlapping generations economy where individuals live a meaningful life cycle and endogenously accumulate human capital the model is sufficiently rich to isolate the role of general equilibrium effects credit market imperfections and different forms of human capital accumulation the large welfare gains we obtain cannot be attained without age dependence nor can they be attained with age dependent taxes if progressivity of labor income taxes and capital income tax rates are not suitably adjusted to profit from the complementarity of these instruments

dynamic optimal taxation with private information we study dynamic optimal taxation in a class of economies with private information optimal allocations in these environments are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is similar to that in bewley 1986 agents supply labour and trade risk free claims to future consumption subject to a budget constraint and a debt limit optimal taxes are conditioned only on two observable characteristics an agent s accumulated stock of claims or wealth and her current labour income we show that optimal taxes are generally non linear and non separable in these variables and relate the structure of marginal wealth and income taxation to the properties of agent preferences this paper studies optimal taxation in a class of dynamic economies with private information we consider an environment in which agents preferences are defined over consumption and labour and each agent receives a privately observed sequence of i i d preference shocks incentivecompatibility constraints stemming from private information imply that socially optimal or constrained efficient allocations in this environment are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is identical to that in bewley 1986 huggett 1993 or aiyagari 1994 agents can trade current consumption for claims to future consumption subject to a budget constraint and a borrowing limit these claims have a non contingent pre tax return crucially taxes are conditioned upon only two observable characteristics of an agent current wealth given by the agent s accumulated stock of claims and current labour income they do not depend on any other aspect of an agent s past history most models of dynamic optimal taxation follow the ramsey approach in which the set of fiscal instruments available to the government is exogenously specified 1 linear labour and capital income taxes are typically included in this set while lump sum taxes are ruled out the exclusion of the latter is justified by appealing to incentive or administrative constraints but these are not explicitly modelled these exogenous restrictions on fiscal instruments represent frictions that the government seeks to ameliorate through its optimal choice of tax rates the approach we adopt in this paper builds on the optimal taxation literature initiated by mirrlees 1971 mirrlees assumes that agents receive privately observed shocks to their

optimal indirect and capital taxation we consider an environment in which agents skills are private information and follow arbitrary stochastic processes we prove that it is typically pareto optimal for an individual s marginal benefit of investing in capital to exceed his marginal cost of doing so this wedge is consistent with a positive tax on capital income we also prove that it is pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation this lack of a wedge is consistent with uniform taxation of consumption goods within a period

long term contracting with markovian consumers to study how a firm can capitalize on a long term customer relationship we characterize the optimal contract between a monopolist and a consumer whose preferences follow a markov process the optimal contract is nonstationary and has infinite memory but is described by a simple state variable under general conditions supply converges to the efficient level for any degree of persistence of the types and along any history though convergence is history dependent in contrast as with constant types the optimal contract can be renegotiation proof even with highly persistent types these properties provide insights into the optimal ownership structure of the production technology

liquidity and insurance for the unemployed we study the optimal design of unemployment insurance for workers sampling job opportunities over time we focus on the optimal timing of benefits and the desirability of allowing workers to freely access a riskless asset when workers have constant absolute risk aversion preferences it is optimal to use a very simple policy a constant benefit during unemployment a constant tax during employment that does not depend on the duration of the spell and free access to savings using a riskless asset away from this benchmark for constant relative risk aversion preferences the welfare gains of more elaborate policies are minuscule our results highlight two largely distinct roles for policy toward the unemployed a ensuring workers have sufficient liquidity to smooth their consumption and b providing unemployment benefits that serve as insurance against the uncertain duration of unemployment spells

can union labor ever cost less this paper examines the effect of unions on efficiency by estimating cost function systems over three different sets of construction projects the results show that union contractors have greater economies of scale this gives them a cost advantage in large commercial office buildings but in school and hospital construction nonunion contractors have lower costs at all output levels despite the cost differences profits for nonunion contractors in school and hospital construction are no higher than those for union contractors because the burden of higher union costs is shifted to buyers

fiscal rules and discretion under persistent shocks this paper studies the optimal level of discretion in policymaking we consider a fiscal policy model where the government has time inconsistent preferences with a present bias toward public spending the government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending we analyze the optimal fiscal rule when the shocks are persistent unlike under independent and identically distributed shocks we show that the ex ante optimal rule is not sequentially optimal as it provides dynamic incentives the ex ante optimal rule exhibits history dependence with high shocks leading to an erosion of future fiscal discipline compared to low shocks which lead to the reinstatement of discipline the implied policy distortions oscillate over time given a sequence of high shocks and can force the government to accumulate maximal debt and become immiserated in the long run

optimal income taxation when asset taxation is limited several frictions restrict the government s ability to tax assets first it is very costly to monitor trades on international asset markets second agents can resort to nonobservable low return assets such as cash gold or foreign currencies if taxes on observable assets become too high this paper shows that limitations in asset taxation have important consequences for the taxation of labor income we study a simple dynamic moral hazard model of social insurance with observable and nonobservable saving decisions we find that optimal labor income taxes become less progressive when the ability to tax savings is limited

a test of the household income process using consumption and wealth data the evolution of household income can be explained almost equally well by rival models however rival models have very different implications for other household behaviours such as consumption i therefore test between two prominent models in the uk using panel data on consumption and wealth as well as income over 1991 2006 to operate the test i show that long lived income shocks transmit far less than one for one through to consumption and particularly so for younger households i then compare these estimates of transmission with estimates of households ability to smooth shocks captured by the data on wealth conditional on the suitability of the consumption model my estimates provide evidence against the restricted income process rip and in favour of an alternative heterogeneous income process hip this finding also explains why cross sectional consumption inequality grew slowly over the period even though the variance of long lived shocks was high finally i conclude that it is important to consider mean reversion of shocks when constructing life cycle consumption models

optimal government policies in models with heterogeneous agents abstract in this paper we develop a new approach for finding optimal government policies in economies with heterogeneous agents using the calculus of variations we present three classes of equilibrium conditions from government s and individual agent s optimization problems 1 the first order conditions the government s lagrange euler equation and the individual agent s euler equation 2 the stationarity condition on the distribution function and 3 the aggregate market clearing conditions these conditions form a system of functional equations which we solve numerically the solution takes into account simultaneously the effect of the government policy on individual allocations the resulting optimal distribution of agents in the steady state and therefore equilibrium prices we illustrate the methodology on a ramsey problem with heterogeneous agents finding the optimal limiting tax on total income

consumption and risk sharing over the life cycle a striking feature of u s data on income and consumption is that inequality increases with age this paper asks if individual specific earnings risk can provide a coherent explanation we find that it can we construct an overlapping generations general equilibrium model in which households face uninsurable earnings shocks over the course of their lifetimes earnings inequality is exogenous and is calibrated to match data from the u s panel study on income dynamics consumption inequality is endogenous and matches well data from the u s consumer expenditure survey the total risk households face is decomposed into that realized before entering the labor market and that realized throughout the working years in welfare terms the latter is found to be more important than the former

optimal life cycle unemployment insurance we argue that us welfare would rise if unemployment insurance were to be increased for young workers and decreased for old this is because young workers have little means to smooth consumption during unemployment and want jobs to accumulate high return human capital so unemployment insurance is highly valuable to them while the induced moral hazard problem is mild we consider a life cycle model with unemployment risk and endogenous search eort that we calibrate to match us labor market institutions we nd that allowing unemployment replacement rates and other government transfers to decline with age yields sizeable welfare gains which amount to around two thirds of the gains attained under the constrained optimal scheme for unemployment insurance over the life cycle

optimal taxation in a habit formation economy abstract this paper studies habit formation in consumption preferences in a dynamic mirrlees economy we derive optimal labor and savings wedges based on a recursive approach we show that habit formation creates a motive for subsidizing labor supply and savings in particular habit formation invalidates the well known no distortion at the top result we demonstrate that the theoretical findings are quantitatively important in a parametrized life cycle model average labor and savings wedges fall by more than one third compared with the case of time separable preferences

do unions capture monopoly profits this paper challenges the conclusion reached in recent studies that unions reduce profits exclusively in highly concentrated industries from their review of previous studies and their analysis of 1977 data on 367 fortune 500 firms the authors conclude that there is no convincing evidence that concentration produces monopoly profits for unions to capture moreover they find that the union wage effect is not greater in concentrated industries as suggested by the hypothesis that unions capture concentration related profits evidence is found suggesting that a firm s market share its expenditures on research and development and its protection from foreign competition provide more likely sources for union rents than does industry concentration several recent studies have found that unions reduce profits significantly and some have concluded that this profit reduction is restricted to highly concentrated industries both conclusions are important the finding that unions reduce profitability indicates that in general the cost increasing effects of unions outweigh any positive productivity effects they may bring to the workplace such a

optimal fiscal policy with redistribution i study the optimal taxation oflabor and capital in a dynamic economy subject to government expenditure and technology shocks unlike representative agent ramsey models workers are heterogenous and lump sum taxation is not ruled out i consider two tax scenarios a linear taxation with a lump sum intercept and b nonlinear mirrleesian taxation when taxes are linear i derive a partial equivalence result with ramsey settings that provides a reinterpretation of such analyses i find conditions for perfect tax smoothing oflabor income taxes and zero capital taxation implications that contrast with ramsey are derived for public debt management for the nature of the time inconsistency problem and for the viability of replicating complete markets without state contingent bonds shifts in the distribution of skills provide a novel source for variations in tax rates for the nonlinear tax scenario i show that taxation based on income averages is optimal

union certification in ontario its effect on the value of the firm event study methodology is used to determine the effect of union certification in ontario on the expected profitability of firms raid and non raid applications and the method of certification are examined contrary to expectations we find no strong negative response to certification applications in most cases in general the more contentious the certification process the greater the negative abnormal returns this is not only true within ontario but also when our results are compared to those of the u s

equilibrium subprime lending this paper develops an equilibrium model of a subprime mortgage market our goal is to offer a benchmark with which the recent subprime boom and bust can be compared the model is tractable and delivers plausible orders of magnitude for borrowing capacities as well as default and trading intensities we offer simple explanations for several phenomena in the subprime market such as the prevalence of teaser rates and the clustering of defaults in our model both nondiversifiable and diversifiable income risks reduce debt capacities thus debt capacities need not be higher when a larger fraction of income risk is diversifiable