better than pre commitment mean variance portfolio allocation strategies a semi self financing hamilton jacobi bellman equation approach we generalize the idea of semi self financing strategies originally discussed in ehrbar 1990 and later formalized in cui et al 2012 for the pre commitment mean variance mv optimal portfolio allocation problem the proposed semi self financing strategies are built upon a numerical solution framework for hamilton jacobi bellman equations and can be readily employed in a very general setting namely continuous or discrete re balancing jump diffusions with finite activity and realistic portfolio constraints we show that if the portfolio wealth exceeds a threshold an mv optimal strategy is to withdraw cash these semi self financing strategies are generally non unique numerical results confirming the superiority of the efficient frontiers produced by the strategies with positive cash withdrawals are presented tests based on estimation of parameters from historical time series show that the semi self financing strategy is robust to estimation ambiguities

the effects of taxation price control and government contracts in oligopoly and monopolistic competition abstract many government contracts with or policies towards oligopolistic sectors essentially involve private firms selling a given proportion or quantity of output to the government at a fixed price p r with the remainder being sold on the open market often this is combined with consumer rationing examples include cement and sugar in india and health housing and defence in many countries the paper investigates the effects of these schemes including sales and excise taxation on prices output and household welfare under oligopoly and monopolistic competition less government control reduced may raise prices and tax shifting can be above or below 100 percent

do cigarette producers price discriminate by state an empirical analysis of local cigarette pricing and taxation abstract this study analyzes the interactive effects of oligopoly pricing state taxation and anti smoking regulations on retail cigarette prices by state using panel data for the 50 us states between 1960 and 1990 the results indicate that cigarette producers do price discriminate by state though the effect is not large relative to the final retail price there are two further results 1 state taxes are more than passed on a 1 cent state tax increase results in a price increase of 1 11 cents and 2 sellers offset state and local anti smoking laws with lower prices thereby blunting effects of the regulations

taxing consumption and other sins taxes as their primary tools to collect revenue in the rest of the world governments also use income and payroll taxes but rely much more heavily than does the united states on taxing consumption consumption taxes take many forms including general sales taxes value added taxes and excise taxes on the consumption of specific items including gasoline alcohol tobacco products firearms air travel telephone communication and others the u s government does not use a value added tax making the united states unique among high income countries and a rarity in the larger world as of 2004 at least 134 countries rely on value added taxes as a substantial source of funding value added taxes are sophisticated forms of sales taxes in which taxes are withheld by businesses according to value added at every stage of production american states do impose sales taxes on broad categories of consumer purchases but state governments are considerably smaller than national governments and their sales tax rates are very low compared to the value added tax rates used in the rest of the world the united states also imposes unusually low excise taxes even after controlling for total tax collections which are lower in the united states than they are in most high income countries the deliberate social engineering that underlies the selection of certain commodities for unusually high rates of taxation appeals less to americans than to residents of other countries moreover the sin taxes on

lp modeling for asset liability management a survey of choices and simplifications dynamic linear programming lp models for asset liability management alm are quite powerful and flexible but face two challenges 1 many modeling choices not all consistent with one another or with finance theory and 2 solution difficulties due to the large number of scenarios obtained from standard interest rate models we first survey these modeling choices with a view to help researchers make self consistent choices next we review how the dynamic lp model for alm and the representation of uncertainty therein have been simplified in the past to motivate new or hybrid models emphasizing tractability to this end we review existing static lp models as extreme modeling simplifications and aggregation as a simplification of uncertainty

estimating dynamic demand for cigarettes using panel data the effects of bootlegging taxation and advertising reconsidered abstracct a dynamic demand for cigarette consumption is estimated using pooled data of 46 states over the period 1963 to 1980 a price elasticity of 0 2 and an insignificant income elasticity is found using pooled estimation techniques the bootlegging effect is modeled explicitly using neighboring price the effect is found to be significant two major policy issues are analyzed in light of these new estimates 1 cigarette taxation is found to be an effective tool for generating revenues even though there may be spillover effects to neighboring states where bootlegging is significant 2 the effects of the fairness doctrine act and the advertising ban on cigarette consumption are re examined we find mild support for the effectiveness of subsidized anti smoking messages in reducing cigarette consumption and no support for the thesis that the ban on advertising helps to increase per capita consumption

multi period mean variance portfolio selection with stochastic interest rate and uncontrollable liability abstract while the literature on dynamic portfolio selection with stochastic interest rates only confines its investigation to the continuous time setting up to now this paper studies a multi period mean variance portfolio selection problem with a stochastic interest rate where the movement of the interest rate is governed by the discrete time vasicek model invoking dynamic programming approach and the lagrange duality theory we derive the analytical expressions for both the efficient investment strategy and the efficient mean variance frontier of the model formulation we then extend our model to the situation with an uncontrollable liability

optimal portfolio policies with borrowing and shortsale constraints abstract we characterize optimal intertemporal portfolio policies for investors with crra utility facing either a borrowing constraint or shortsale restrictions or both the optimal constrained portfolios are identified as optimal unconstrained portfolios for a higher riskless rate or for a subset of the risky assets or for a combination of the two settings our characterization is based on duality results in cvitanic and karatzas 1992 annals of applied probability 2 767 818 for optimal portfolio investment when portfolio values are more generally constrained to a closed convex nonempty subset of r n

the demand for cigarette smuggling introduction an enduring issue in economic analysis involves accounting for the behavior of agents when illegal or quasi legal activity is rewarded smuggling retrading under regulations or restrictions bribery and bootlegging are all aspects of the general phenomenon common contemporary forms of such activity are the smuggling of prohibited substances such as drugs or medicines prohibited arms or weapons or highly taxed commodities between countries 1 but smuggling or bootlegging of highly taxed or otherwise regulated legal commodities such as alcohol cigarettes or gasoline also takes place within countries in the united states such illegal activity both casual and organized may have significant effects on state tax revenues it may also alter the expected consumption effects of specific tax changes in a competitive environment the existence of different tax structures between states may mean that a given state s tax enactments will not have their desired revenue or consumption effects this paper offers a new econometric methodology for estimating the economic effect of border crossing between u s states our technique in contrast to previous models of cross border effects allows accommodation of the dichotomy between variations in state level sales due to state specific characteristics such as prices tastes incomes and other demographic factors the presence of organized smuggling tourism and so on and demand variations due to casual border crossing beginning with a simple theoretical model of a representative consumer s border crossing decision we develop a nonlinear econometric model which produces estimates of the representative consumer s demand in each state it allows estimation of the degree and direction of sales to border crossing consumers for each state and facilitates explicit testing of the statistical significance of border crossing in explaining variations in cigarette sales between jurisdictions the data set is comprised of state level cigarette sales for the forty eight contiguous states and the district of columbia over the period 1960 to 1986 we obtain strong evidence that border crossing is a significant factor in explaining cigarette sales differentials and we identify states which have important border crossing sales further we note the consequences of border crossing for demand elasticity estimation and tax policy in general the evidence indicates that the ability of states to raise revenue via cigarette taxation is more constrained than conventional analysis suggests the paper is divided into five sections section ii discusses bootlegging and previous literature on cigarette demands and smuggling section iii presents our theoretical and empirical models while section iv discusses the data and our statistical results section v concludes the paper and examines some of the policy implications of our findings ii the economic literature on smuggling smuggling bootlegging or arbitrage takes place when full prices net of all costs differ for legal or illegal goods between specific economic units when net returns to smuggling or bootlegging all production and consumption opportunity costs being considered are positive arbitrage will occur in an organized and or casual fashion a primary though not an exclusive reason for smuggling has been the often significant divergence between full prices in different locales caused by differences in tax treatment a variety of models starting with wales 1968 have been employed to analyze problems related to smuggling and bootlegging jensen thursby and thursby 1988 and bhagwati and hansen 1973 study camouflaging systems the mixture of legal and illegal sales from the firm s perspective with contrasting welfare results smith 1976 integrates illegal markets into the traditional theory of taxation but explicitly ignores casual smuggling earlier studies considering cross border effects have not specified a theoretical foundation and in this respect our approach is fundamentally different

optimal dynamic trading with leverage constraints we solve for the optimal dynamic trading strategy of an investor who faces a leverage constraint i e a limitation on his ability to borrow for the purpose of investing in a risky asset we assume that the investor has constant relative risk aversion and that the value of the risky asset follows a geometric brownian motion in the absence of the leverage constraint the optimal strategy involves investing a fixed proportion of wealth in the risky asset we prove that in the presence of the leverage constraint the optimal investment also involves investing a fixed proportion of wealth in the risky asset when the leverage constraint is not binding however the two proportions are different reflecting the extent to which the investor alters his strategy even when the leverage constraint is not binding because of the possibility that the leverage constraint will become binding in the future

studying optimal paternalism illustrated by a model of sin taxes the classical economic approach to policy analysis assumes that people always respond optimally to the costs and benefits of their available choices a great deal of evidence suggests however that in some contexts people make errors that lead them not to behave in their own best interests economic policy prescriptions might change once we recognize that humans are humanly rational rather than superhumanly rational and in particular it may be fruitful for economists to study the possible advantages of paternalistic policies that help people make better choices we propose an approach for studying optimal paternalism that follows naturally from standard assumptions and methods of economic theory write down assumptions about the distribution of rational and irrational types of agents about the available policy instruments and about the government s information about agents and then investigate which policies achieve the most efficient outcomes in other words economists ought to treat the analysis of optimal paternalism as a mechanism design problem when some agents might be boundedly rational this approach has many advantages first and foremost by explicitly addressing when and how people do and don t pursue their own best interests economists will be better able to contribute to policy debates to contribute to debates over regulating private financial decisions we must study whether financial decisions are based on fallacious statistical reasoning and whether self control problems lead people to borrow too heavily to contribute to debates over teenage smoking we must study whether teenagers become smokers against their long run best interest economists will and should be ignored if we continue to insist that it is axiomatic that constantly trading stocks or accumulating consumer debt or becoming a heroin addict must be optimal for the people doing these things merely because they have chosen to do it a second advantage of our approach is that it forces us to look for the best feasible policy our

continuous time mean variance asset allocation a time consistent strategy abstract we develop a numerical scheme for determining the optimal asset allocation strategy for time consistent continuous time mean variance optimization any type of constraint can be applied to the investment policy the optimal policies for time consistent and pre commitment strategies are compared when realistic constraints are applied the efficient frontiers for the pre commitment and time consistent strategies are similar but the optimal investment strategies are quite different

tax incidence when individuals are time inconsistent the case of cigarette excise taxes abstract one of the most cogent criticisms of excise taxes is their regressivity with lower income groups spending a much larger share of their income on goods such as cigarettes than do higher income groups we argue that traditional quantity based measures of incidence are only appropriate under a very restrictive time consistent model of consumption of sin goods a model that is much more consistent with existing evidence on smoking decisions is a time inconsistent formulation where excise taxes on cigarettes serve a self control function that is valued by smokers who would like to quit but cannot this self control function benefits lower income groups more since they have a significantly higher price sensitivity of smoking calibrations show that as a result cigarette taxes are much less regressive than previously assumed and are even progressive for a wide variety of parameter values

is addiction rational theory and evidence this paper makes two contributions to the modeling of addiction first we provide new and convincing evidence that smokers are forward looking in their smoking decisions using state excise tax increases that have been legislatively enacted but are not yet effective and monthly data on consumption second we recognize the strong evidence that preferences with respect to smoking are time inconsistent with individuals both not recognizing the true dife culty of quitting and searching for self control devices to help them quit we develop a new model of addictive behavior that takes as its starting point the standard rational addiction model but incorporates time inconsistent preferences this model also exhibits forward looking behavior but it has strikingly different normative implications in this case optimal government policy should depend not only on the externalities that smokers impose on others but also on the internalities imposed by smokers on themselves we estimate that the optimal tax per pack of cigarettes should be at least one dollar higher under our formulation than in the rational addiction case

an alternative way to model merit good arguments abstract besley j public econ 35 1988 371 uses a scaling approach to model merit good arguments in commodity tax policy in this paper i question this approach on the grounds that it produces wrong recommendations taxation subsidisation of merit demerit goods whenever the demand for the de merit good is inelastic i propose an alternative approach that does not suffer from this deficiency and that allows for a straightforward interpretation

demand and distance evidence on cross border shopping while many studies have documented deviations from the law of one price in international settings evidence is scarce on the extent to which consumers take advantage of price differentials and engage in cross border shopping we use data from 287 swedish municipalities to estimate how responsive alcohol sales are to foreign prices and relate the sensitivity to the location s distance to the border typical results suggest that the elasticity with respect to the foreign price is around 0 4 in the border region moving 200 400 kilometers inland reduces it to 0 2 0 1 given that cross country price differences for alcohol and other products are often caused by taxes our evidence has implications for the debate on tax competition harmonization

beliefs and private monitoring this paper develops new recursive set based methods for studying repeated games with private monitoring for any nite state strategy prole we nd necessary and sucient conditions for whether there exists a distribution over initial states such that the strategy together with this distribution form a correlated sequential equilibrium also for any given correlation device for determining initial states including degenerate cases where players initial states are common knowledge we provide necessary and sucient conditions for the correlation device and strategy to be a correlated sequential equilibrium or in the case of a degenerate correlation device for the strategy to be a sequential equilibrium we also consider several applications in these we show that the methods are computationally feasible show how to construct and verify equilibria in a secret price setting game

bayesian estimation of the global minimum variance portfolio in this paper we consider the estimation of the weights of optimal portfolios from the bayesian point of view under the assumption that the conditional distribution of the logarithmic returns is normal using the standard priors for the mean vector and the covariance matrix we derive the posterior distributions for the weights of the global minimum variance portfolio moreover we reparameterize the model to allow informative andnon informative priors directly for the weights of the global minimum variance portfolio the posterior distributions of the portfolio weights are derived in explicit form for almost all models the models are compared by using the coverage probabilities of credible intervals in an empirical study we analyze the posterior densities of the weights of an international portfolio

new estimates of the optimal tax on alcohol in this paper i use a new data set to estimate the optimal alcohol tax rate as a benchmark the empirical results imply that the optimal tax rate is over 100 percent of the net of tax price however alcohol taxation is a second best solution to the problems associated with alcohol abuse i conclude that the optimal alcohol tax rate would be much lower if punishment for drunk driving were more certain and severe government provision of information about the health consequences of heavy drinking would also remove part of the efficiency rationale for alcohol taxes

cigarette tax avoidance and evasion variation in state cigarette taxes provides incentives for tax avoidance through smuggling legal border crossing to low tax jurisdictions or internet purchasing when taxes rise tax paid sales of cigarettes will decline both because consumption will decrease and because tax avoidance will increase the key innovation of this paper is to compare cigarette sales data to cigarette consumption data from the behavioral risk factor surveillance system brfss i show that after subtracting percent changes in consumption residual percent changes in sales are associated with state cigarette tax changes implying the existence of tax avoidance i estimate that the tax avoidance response to tax changes is at least twice the consumption response and that tax avoidance accounted for up to 9 6 of sales between 1985 and 2001 because of the increase in tax avoidance tax paid sales data understate the level of smoking and overstate the drop in smoking i also find that the level of legal border crossing was very low relative to other forms of tax avoidance if states have strong preferences for smoking control they must pair high cigarette taxes with effective policies to curb smuggling and other forms of tax avoidance or employ alternative policies such as counter advertising and smoking restrictions

estimating tax incidence market power and market conduct the european cigarette industry abstract recent theoretical work has shown that the incidence of ad valorem and specific taxes may differ and each may be over or under shifted onto consumers in the presence of imperfect competition these results are used to derive a method of estimating market power and conduct an application is made to the european cigarette industry previous empirical comparison of the incidence of ad valorem and specific taxes is limited for a group of countries with broadly similar cigarette industries there is evidence of undershifting of both taxes with the specific tax having a significantly greater impact on price the extremes of both perfect competition and monopoly can be rejected behaviour is no less competitive than the equivalent of cournot

optimal credit limit management under different information regimes abstract credit limit management is of paramount importance for successful short term credit risk management even more so when the situation in credit and financial markets is tense we consider a continuous time model where the credit provider and the credit taker interact within a game theoretic framework under different information structures the model with complete information provides decision theoretic insights into the problem of optimal limit policies and motivates more complicated information structures moving to a partial information setup incentive distortions emerge that are not in the bank s interest we discuss how these distortions can effectively be reduced by an incentive compatible contract finally we provide some practical implications of our theoretical results

does britain or the united states have the right gasoline tax this paper develops an analytical framework to assess the second best optimal level of gasoline taxation taking into account unpriced pollution congestion and accident externalities as well as interactions with the broader fiscal system we provide calculations of the optimal taxes for the us and the uk under a variety of parameter scenarios under our central parameter values the second best optimal gasoline tax is 1 01 gal for the us and 1 34 gal for the uk current tax rates are much lower than this in the us and higher in the uk the calculations are moderately sensitive to alternative parameter assumptions the congestion externality is the largest component in both nations revenue raising needs also play a significant role as do accident externalities and local air pollution potential welfare gains from reducing the current uk tax rate are estimated at nearly one fourth the production cost of all gasoline used in the uk even larger gains could be achieved by switching to a tax on vehicle miles with equal revenue yield for the us the welfare gains from optimizing the gasoline tax are smaller but those from switching to an optimal tax on vehicle miles are very large

a simple model for merit good arguments abstract in this paper we examine a way of representing merit goods by allowing governments to apply a specific form of correction to consumers preferences the model builds upon an approach to the analysis of taste and quality change due to fisher and shell we look at the first best allocation of resources where this is done we also consider second best policies in which the government must charge the same price to all consumers of the merit good and when optimal lump sum transfers are not available

on failing to cooperate when monitoring is private abstract i consider a repeated prisoners dilemma where in each period each player receives an imperfect private signal about his opponent s current action i show that when players are patient enough any equilibrium where players use trigger strategies i e do not revert to cooperation once they have started defecting yields players a value arbitrarily close to the mutual minimax i also examine the robustness of the result to perturbations of the game journal of economic literature classification numbers c72

robustness of public equilibria in repeated games with private monitoring a repeated game with private monitoring is close to a repeated game with public monitoring or perfect monitoring when i the expected payoff structures are close and ii the informational structures are close in the sense that private signals in the private monitoring game can be aggregated by some public coordination device to generate a public signal whose distribution is close to the distribution of the public signal in the public monitoring game we provide a sufficient condition for the set of uniformly strict perfect public equilibria for a public monitoring game to be robust in nearby private monitoring games in the sense that they remain equilibria with respect to the public signal that is generated by such public coordination devices with truthful reporting our sufficient condition requires that every player is informationally small in a well defined sense

investment strategies and compensation of a mean variance optimizing fund manager this paper introduces a general continuous time mathematical framework for solution of dynamic mean variance control problems we obtain theoretical results for two classes of functionals the first one depends on the whole trajectory of the controlled process and the second one is based on its terminal time value these results enable the development of numerical methods for mean variance problems for a pre determined risk aversion coefficient we apply them to study optimal trading strategies pursued by fund managers in response to various types of compensation schemes in particular we examine the effects of continuous monitoring and scheme s symmetry on trading behavior and fund performance

the substantial bias from ignoring general equilibrium effects in estimating excess burden and a practical solution we show that under typical conditions the simple excess burden triangle formula substantially underestimates the excess burden of commodity taxes in some cases by a factor of 10 or more this formula performs poorly because it ignores general equilibrium interactions most important interactions between the taxed commodity and the labor market many prior studies have shown that general equilibrium interactions affect excess burden but have not appreciated the bias associated with ignoring these interactions or the quantitative importance of this bias we derive an implementable alternative to the simple formula this alternative formula captures interactions that the simple formula omits as a result it is both unbiased and usually more accurate

mean variance portfolio selection in presence of infrequently traded stocks abstract this paper deals with a mean variance optimal portfolio selection problem in presence of risky assets characterized by low frequency trading and therefore low liquidity to model the dynamics of illiquid assets we introduce pure jump processes this leads to the development of a portfolio selection model in a mixed discrete continuous time setting we pursue the twofold scope of analyzing and comparing either long term investment strategies as well as short term trading rules the theoretical model is analyzed by applying extensive monte carlo experiments in order to provide useful insights from a financial perspective

2 00 gas studying the effects of a gas tax moratorium there are surprisingly few estimates of the effects of sales taxes on retail prices especially at the firm level we consider the temporary suspension and subsequent reinstatement of the gasoline sales tax in illinois and indiana following a price spike in 2000 earlier laws set the timing of the reinstatements providing plausibly exogenous changes in the tax rates using a unique dataset of daily prices at the gas station level 70 of the tax suspension is passed on to consumers in the form of lower prices while 80 100 of the tax reinstatements are passed on to consumers some evidence suggests that these short run pass through estimates are smaller near the state borders with the tax reinstatements associated with relatively higher prices up to an hour s drive into neighboring states

estimating price elasticities when there is smuggling the sensitivity of smoking to price in canada a central parameter for evaluating tax policies is the price elasticity of demand for cigarettes but in many countries this parameter is difficult to estimate reliably due to widespread smuggling which significantly biases estimates using legal sales data an excellent example is canada where widespread smuggling in the early 1990s in response to large tax increases biases upwards the response of legal cigarette sales to price we surmount this problem through two approaches excluding the provinces and years where smuggling was greatest and using household level expenditure data on smoking these two approaches yield a tightly estimated elasticity in the range of 0 45 to 0 47 we also show that the sensitivity of smoking to price is much larger among lower income canadians in the context of recent behavioral models of smoking whereby higher taxes reduce unwanted smoking among price sensitive populations this finding suggests that cigarette taxes may not be as regressive as previously suggested finally we show that price increases on cigarettes do not increase and may actually decrease consumption of alcohol as a result smuggling of cigarettes may have raised consumption of alcohol as well

on the equivalence of quadratic optimization problems commonly used in portfolio theory abstract in the paper we consider three quadratic optimization problems which are frequently applied in portfolio theory i e the markowitz mean variance problem as well as the problems based on the mean variance utility function and the quadratic utility conditions are derived under which the solutions of these three optimization procedures coincide and are lying on the efficient frontier the set of mean variance optimal portfolios it is shown that the solutions of the markowitz optimization problem and the quadratic utility problem are not always mean variance efficient the conditions for the mean variance efficiency of the solutions depend on the unknown parameters of the asset returns we deal with the problem of parameter uncertainty in detail and derive the probabilities that the estimated solutions of the markowitz problem and the quadratic utility problem are mean variance efficient because these probabilities deviate from one the above mentioned quadratic optimization problems are not stochastically equivalent the obtained results are illustrated by an empirical study

optimal sin taxes abstract we investigate sin taxes on unhealthy items such as fatty foods that people may by their own reckoning consume too much of we employ a standard optimal taxation framework but replace the standard assumption that all consumers have 100 self control with an assumption that some consumers may have some degree of self control problems we show that imposing taxes on unhealthy items and returning the proceeds to consumers can generally improve total social surplus because such taxes counteract over consumption by consumers with self control problems while at the same time they naturally redistribute income to consumers with no self control problems who consume less such taxes can even create pareto improvements finally we demonstrate with some simple numerical examples that even if the population exhibits relatively few self control problems optimal taxes can still be large

restricted feedback in long term relationships abstract this paper studies long term relationships modeled as repeated games with restricted feedback players condition current play on summary statistics of past play rather than the entire history as may be the case in online markets our state strategy equilibrium framework allows for arbitrary restrictions on strategies we derive a recursive characterization for the set of equilibrium payoffs similar to that of abreu pearce and stacchetti 1986 1990 2 3 for perfect public equilibria and show that the set of equilibrium payoffs is the largest fixed point of a monotone operator we use our characterization to derive necessary and sufficient conditions for efficient trade in a repeated product choice game where costumers condition their purchase decisions only on the last performance signal

drunk driving after the passage of smoking bans in bars abstract using geographic variation in local and state smoke free bar laws in the us we observe an increase in fatal accidents involving alcohol following bans on smoking in bars that is not observed in places without bans although an increased accident risk might seem surprising at first two strands of literature on consumer behavior suggest potential explanations smokers driving longer distances to a bordering jurisdiction that allows smoking in bars and smokers driving longer distances within their jurisdiction to bars that still allow smoking perhaps through non compliance or outdoor seating we find evidence consistent with both explanations the increased miles driven by drivers wishing to smoke and drink offsets any reduction in driving from smokers choosing to stay home following a ban resulting in increased alcohol related accidents this result proves durable as we subject it to an extensive battery of robustness checks

a robust folk theorem for the prisoner s dilemma we prove the folk theorem for the prisoner s dilemma using strategies that are robust to private monitoring from this follows a limit folk theorem when players are patient and monitoring is sufficiently accurate but private and possibly independent any feasible individually rational payoff can be obtained in sequential equilibrium the strategies used can be implemented by finite randomizing automata journal of economic literature classification numbers c72 c73 d82

excise tax avoidance the case of state cigarette taxes we conduct an applied welfare economics analysis of cigarette tax avoidance we develop an extension of the standard formula for the optimal pigouvian corrective tax to incorporate the possibility that consumers avoid the tax by making purchases in nearby lower tax jurisdictions to provide a key parameter for our formula we estimate a structural endogenous switching regression model of border crossing and cigarette prices in illustrative calculations we find that for many states after taking into account tax avoidance the optimal tax is at least 20 smaller than the standard pigouvian tax that simply internalizes external costs our empirical estimate that tax avoidance strongly responds to the price differential is the main reason for this result we also use our results to examine the benefits of replacing avoidable state excise taxes with a harder to avoid federal excise tax on cigarettes

efficient excise taxation the evidence from cigarettes we develop a model in which optimizing policy makers in adjacent government jurisdictions levy excise taxes on a commodity that has a unique point of production from which all shipments emanate from this model we derive an unusually specific predicted geographical pattern of those excise taxes in which these taxes rise at a decreasing rate as one moves outward from the point of production we compare these predictions to the observed pattern of cigarette taxes imposed by state governments in the united states and find the data to be fully consistent with our model among these predictions is the existence of a ripple effect which reduces taxes in many other jurisdictions due to low taxes at the point of production we estimate that these induced tax reductions in other states save cigarette producers and consumers a minimum of 110 million per year

the effects of excise taxes and regulations on cigarette smoking abstract we estimate a generalized linear model to examine adult and teenage cigarette demand our analysis focuses on the extent to which exice taxes and regulations restricting smoking in public places affect cigarette consumption the adult results indicate that the price elasticity of demand is unstable over time ranging from 0 06 in 1970 to 0 23 in 1985 these estimates are lower than most found in previous studies the teenage price elasticity does not differ statistically from the estimates for adults additionally regulations restricting smoking in public places have a significant effect on both adult and teenage cigarette demand

cutting through the smoke separating the effect of price on smoking initiation relapse and cessation i employ a large national representative dataset current population survey tobacco use supplements to investigate how cigarette prices affect smoking decisions a standard econometric approach is to estimate the relationship between cigarette prices and smoking participation at a point in time i extend this approach to model past year decisions to start resume or quit smoking considering reverse causality i apply an instrumental variable excise taxes for cigarette prices i include an index of state level anti smoking sentiment to control for omitted variable bias after estimating separate models for smoking initiation relapse and cessation and for different age groups i find no evidence that increasing taxes on cigarettes can prevent the onset of youth smoking neither does it effectively induce young smokers to quit however cigarette prices do play an important role to prevent relapse and encourage quitting at older ages

gasoline demand and car choice estimating gasoline demand using household information in recent years calls for carbon taxes as a policy tool to combat global warming have kept a discussion of the price and income elasticities of gasoline demand alive to date gasoline demand elasticity estimates are almost exclusively based on aggregate data that are subject to aggregation problems and make distributional concerns impossible to address by using household level data from the panel study of income dynamics psid and imputed fuel efficiency measures and gasoline prices i estimate household demand for gasoline and the corresponding price and income demand elasticities an attempt is made to include data on the car stock in the estimation since car portfolio and gasoline demand decisions are closely related empirical results from a selection corrected gasoline demand regression suggest low short run price and income elasticities and clear differences in gasoline demand across the population these results suggest that a gasoline tax is not likely to result in large decreases in gasoline consumption while potentially imposing hardship on identifiable segments of the population

cheating ourselves the economics of tax evasion no government can announce a tax system and then rely on taxpayers sense of duty to remit what is owed some dutiful people will undoubtedly pay what they owe but many others will not over time the ranks of the dutiful will shrink as they see how they are being taken advantage of by the others thus paying taxes must be made a legal responsibility of citizens with penalties attendant on noncompliance but even in the face of those penalties substantial tax evasion exists and always has the history of taxation is replete with episodes of evasion often notable for their inventiveness during the third century many wealthy romans buried their jewelry or stocks of gold coin to evade the luxury tax and homeowners in eighteenth century england temporarily bricked up their fireplaces to escape notice of the hearth tax collector webber and wildavsky 1986 p 141 this essay reviews what is known about the magnitude nature and determinants of tax evasion with an emphasis on the u s income tax alm 1999 andreoni erard and feinstein 1998 and slemrod and yitzhaki 2002 offer more comprehensive recent reviews of the literature it then places this information into a conceptual and policy context

introduction to repeated games with private monitoring abstract we present a brief overview of recent developments in discounted repeated games with imperfect private monitoring the literature explores the possibility of cooperation in a long term relationship where each agent receives imperfect private information about the opponents actions although this class of games admits a wide range of applications such as collusion under secret price cutting exchange of goods with uncertain quality and observation errors it has fairly complex mathematical structure due to the lack of common information shared by players this is in sharp contrast to the well explored case of repeated games under public information with the celebrated folk theorems and until recently little had been known about the private monitoring case however rapid developments in the past few years have revealed the possibility of cooperation under private monitoring for some class of games journal of economic literature classification numbers c72 c73 d43 d82 l13 l41

uncovering the distribution of motorists preferences for travel time and reliability we apply recent econometric advances to study the distribution of commuters preferences for speedy and reliable highway travel our analysis applies mixed logit to combined revealed and stated preference data on commuter choices of whether to pay a toll for congestion free express travel we find that motorists exhibit high values of travel time and reliability and substantial heterogeneity in those values we suggest that road pricing policies designed to cater to such varying preferences can improve efficiency and reduce the disparity of welfare impacts compared with recent pricing experiments

how far for a buck tax differences and the location of retail gasoline activity in southeast chicagoland abstract we exploit variation in gasoline and cigarettes taxes in adjacent political jurisdictions for northern illinois and indiana to examine consumers trade off between prices and travel we develop a model that relates activity in the retail gasoline industry around the tax borders to consumer locations our results indicate that the willingness of a typical chicagoland consumer to travel an additional mile to buy gasoline corresponds to about 0 065 to 0 084 per gallon according to our estimates the observed area of chicago the jurisdiction with the highest taxes is missing approximately 40 of the capacity that would exist were taxes equalized

the simple analytics of tobacco taxation with illegal supply this paper examines the impact of tobacco excise taxes where legal and illegal supplies coexist the government s objective is to minimize cigarettes smoked in the economy or to maximize revenue or to minimize illegal activity it reacts to a competitive illegal supply in an adjoining jurisdiction a model of consumer choice is used to demonstrate how demand response to tax changes can yield counterintuitive results while the model mimics the canadian market similar situations characterize the us and european markets a novel element of the paper is the treatment of externalities on the supply side rather than the demand side resume analytique simple des taxes sur le tabac quand il y a offre illegale ce memoire examine l impact des taxes sur la vente de tabac quand des offres legale et illegale coexistent l objectif du gouvernement est de minimiser les cigarettes fumees dans l economie ou de maximiser le revenu fiscal ou de minimiser l activite illegale il doit prendre en compte l offre concurrentielle illegale dans une juridiction contigue on utilise un modele de choix du consommateur pour montrer comment la reaction de la demande aux changements dans les taxes peut engendrer des resultats contre intuitifs bien que le modele soit concu pour le marche canadien on trouve des situations avec des caracteristiques similaires dans les marches americain et europeens un element novateur du memoire est sa prise en compte des externalites du cote de l offre plutot que du cote de la demande

who pays cigarette taxes the impact of consumer price search abstract we conduct an empirical study of the impact of consumer price search on the shifting of cigarette excise taxes to consumer prices we use novel data on the prices that smokers report paying and document substantial price dispersion we find that cigarette taxes are shifted at lower rates to carton buyers and especially smokers who buy cartons of cigarettes in a state other than their state of residence we also find evidence that taxes are shifted at somewhat lower rates to the prices paid by heavier smokers and at somewhat higher rates to the prices paid by smokers of light cigarettes

tax avoidance and the deadweight loss of the income tax traditional analyses of the income tax greatly underestimate deadweight losses by ignoring its effect on forms of compensation and patterns of consumption the full deadweight loss is easily calculated using the compensated elasticity of taxable income to changes in tax rates because leisure excludable income and deductible consumption are a hicksian composite good microeconomic estimates imply a deadweight loss of as much as 30 of revenue or more than ten times harberger s classic 1964 estimate the relative deadweight loss caused by increasing existing tax rates is substantially greater and may exceed 2 per 1 of revenue

sustainable management of fossil fuels a dynamic stochastic optimization approach with jump diffusion abstract this paper deals with a relevant aspect of energy modeling i e fossil fuels management the issue is faced by using purely operational research techniques which are suitable in this context in particular a dynamic stochastic optimization model is developed to optimally determine use and stock of resources to be employed in consumption and investments in a wide economic sense human and physical capital r d etc it is assumed that a sustainability criterion drives the optimality rules i e decisions are also grounded on the well being of future generations the policymaker maximizes an aggregated intergenerational expected utility under the dilemma of present consumption conservation of natural resources for the future in reference to standard environmental economic theory jump diffusion dynamics for the stock of natural resources and infinite time horizon are assumed extensive numerical experiments complete the analysis and contribute to determine fossil fuels management policies showing that long term investments make the difference for the well being of present and future generations

smoke free air laws cigarette prices and adult cigarette demand i introduction according to the centers for disease control and prevention cdc 2002a cigarette smoking is responsible for more than 430 000 premature deaths each year in the united states as such it represents the single largest cause of preventable deaths in the united states the cdc 2002b estimates that more than 46 million adults in the united states were current smokers in 2000 representing nearly one quarter of the total u s adult population a goal of a major health initiative healthy people 2010 is to reduce smoking prevalence among adults to 12 by 2010 if that goal is to be met a better understanding of the impact public policy plays on adult cigarette demand is needed adult per capita consumption of cigarettes in the united states reached a peak of 4 345 in 1963 and began declining in 1964 the year in which the first surgeon general s report on the health consequences of cigarette smoking was published u s department of health and human services dhhs 1991 at the same time substantial progress was made in reducing the prevalence of adult smoking in the united states according to the national health interview surveys the prevalence of current smoking declined from 42 4 in 1964 to 23 5 in 1999 however the decline in prevalence was much more modest in the 1990s than it was in the previous two and a half decades between 1990 and 1999 the prevalence of cigarette smoking among adults declined by only 2 percentage points much of the progress in curtailing cigarette smoking in the united states can be attributed to the campaign to reduce tobacco use u s dhhs 1991 the public health campaign to reduce tobacco related death and disease in the united states began in the mid 1960s following the release of the first surgeon general s report which causally linked cigarette smoking to lung cancer and a host of other detrimental diseases although consumer education and information dissemination where the mainstay early in the campaign against tobacco the arena shifted to public policy interventions by the 1980s both state and federal governments began increasing cigarette excise taxes and imposing restrictions on smoking in public places and other worksites the implementation of higher excise taxes and stronger smoke free air restrictions continues at all levels of government into the mid 2000s since january 1 2002 37 states and the district of columbia have implemented or passed higher cigarette excise tax rates as of march 18 2005 state excise tax rates on cigarettes ranged from a low of 0 03 per pack in the state of kentucky to 2 46 in rhode island in addition since 1998 when california became the first state to ban smoking in all restaurants and bars numerous other states have followed suit new york massachusetts delaware and rhode island have banned smoking in workplaces restaurants and bars whereas connecticut and maine have banned smoking in all bars and restaurants this article examines the impact of enacting stronger smoke free air restrictions and increasing cigarette prices which will occur as a consequence of cigarette excise tax increases on adult smoking propensity and intensity in the united states unlike previous studies however this article employs a modified two part model of demand in which a generalized linear model glm is employed to yield unbiased elasticity estimates for conditional cigarette demand while controlling for the possibility that smoking sentiment at the state level influences both antismoking policy enactment and changes in smoking behavior as such it provides among the most accurate estimates of the impact of cigarette prices and smoke free air laws on the demand for cigarettes among adults in the united states ii brief review of previous studies numerous econometric studies on the determinants of adult cigarette demand have been published over the past three decades

cigarette taxes and illicit trade in europe cigarettes are highly taxed in europe but at higher prices some consumers substitute more toward illicit cigarettes the illicit retail trade in cigarettes irtc includes counterfeit untaxed and smuggled cigarettes some existing literature includes claims that taxes are not an important determinant of irtc using data from the european union we find the opposite raising prices leads to substantial increases in irtc a 1 increase in tax pack is expected to increase illicit market share by 5 to 12 percentage points and increase illicit cigarette sales by 29 to 95 the results are robust to alternative specifications and data jel i18 h26 k42

taxing to control social costs the case of alcohol whether taxation of alcoholic beverages is an appropriate means of reducing social costs of alcohol consumption is a continuing public policy issue some argue that the public health costs and other external costs associated with the consumption of alcoholic beverages are so significant as to justify substantial excise taxes on those beverages others counter that a tax on alcohol would reduce consumption indiscriminately and therefore reduce the satisfaction experienced by millions of sensible drinkers without necessarily reducing the harm caused by a few excessive drinkers 2 this paper presents and applies a framework for evaluating these two views of the efficiency welfare effects of alcohol taxes determining the efficiency implications of alcohol taxes is complicated by the question of whether and how much abusers especially alcoholics benefit from alcohol consumption standard welfare theory assumes that all consumers of alcohol enjoy positive net benefits consumer surplus however it is possible that alcoholics over consume in the sense that consumer surplus from their

federalism partial prohibition and cross border sales evidence from recreational marijuana abstract marijuana is partially prohibited though banned federally it is available to 1 in 4 u s adults under state statutes we measure the size of the interstate trade generated by state level differences in legal status with a natural experiment oregon allowed stores to sell marijuana for recreational use on october 1 2015 next to washington where stores had been selling recreational marijuana since july 2014 using administrative data covering the universe of washington s sales and a differences in discontinuities approach we find retailers along the oregon border experienced a 36 decline in sales immediately after oregon s market opened we investigate the home location of recent online reviewers of marijuana retailers and find similar cross border patterns by the end of washington s 2018 fiscal year our results imply that washington had earned between 44 million and 75 million in tax revenue from cross border shoppers these cross border incentives may create a race to legalize

automobile externalities and policies this paper discusses the nature and magnitude of externalities associated with automobile use including local and global pollution oil dependence traffic congestion and traffic accidents it then discusses current federal policies affecting these externalities including fuel taxes fuel economy and emissions standards and alternative fuel policies summarizing insofar as possible the welfare effects of those policies finally we discuss emerging pricing policies including congestion tolls and insurance reform and summarize the appropriate combination of policies to address automobile externalities

the repeated prisoner s dilemma with imperfect private monitoring abstract in this paper i study a repeated prisoner s dilemma game in which monitoring is private and imperfect a partial folk theorem is proved for the case of almost perfect monitoring

a geometric approach to multiperiod mean variance optimization of assets and liabilities we present a geometric approach to discrete time multiperiod mean variance portfolio optimization that largely simplifies the mathematical analysis and the economic interpretation of such model settings we show that multiperiod mean variance optimal policies can be decomposed in an orthogonal set of basis strategies each having a clear economic interpretation this implies that the corresponding multiperiod mean variance frontiers are spanned by an orthogonal basis of dynamic returns specifically in a k period model the optimal strategy is a linear combination of a single k period global minimum second moment strategy and a sequence of k local excess return strategies which expose the dynamic portfolio optimally to each single period asset excess return this decomposition is a multi period version of hansen and richard econometrica 1987 orthogonal representation of single period mean variance frontiers and naturally extends the basic economic intuition of the static markowitz model to the multiperiod context using the geometric approach to dynamic mean variance optimization we obtain closed form solutions in the i i d setting for portfolios consisting of both assets and liabilities al each modelled by a distinct state variable as a special case the solution of the mean variance problem for the asset only case in li and ng mathematical finance 10 2000 follows directly and can be represented in terms of simple products of some single period orthogonal returns we illustrate the usefulness of our geometric representation of multiperiods optimal policies and mean variance frontiers by discussing specific issues related to al portfolios the impact of taking liabilities into account on the implied mean variance frontiers the quantification of the impact of the rebalancing frequency and the determination of the optimal initial funding ratio

belief based equilibria in the repeated prisoners dilemma with private monitoring abstract we analyze repeated prisoners dilemma games with imperfect private monitoring and construct mixed trigger strategy equilibria such strategies have a simple representation where a player s action only depends upon her belief that her opponent s are continuing to cooperate when monitoring is almost perfect the symmetric efficient outcome can be approximated in any prisoners dilemma game while every individually rational feasible payoff can be approximated in a class of such games the efficiency result extends when there are more than two players it requires that monitoring be sufficiently accurate but does not require very low discounting when a public randomization device is available journal of economic literature classification numbers c73 d82

tax changes and cigarette prices the recurring question of the difference between specific and ad valorem taxes has recently been revived by barzel 1976 who argued p 1185 that when quality is not fully controlled the effects of the two types of taxes differ radically the excise tax induces a substitution of quality for quantity resulting in a greater increase in the price per unit than predicted by the constant quality model the ad valorem tax induces a reduction in quality and lower after tax price than predicted evidence consistent with these hypotheses is found in the response of cigarette prices to tax changes in the further tests reported by johnson 1978 prices rise significantly less than the tax in new hampshire where the state tax was ad valorem and significantly more in the remaining states which impose specific taxes the purpose of this note is to question not barzel s analysis but rather the interpretation of the evidence on the pedestrian grounds of implausibility as barzel himself observes p 1194 n 32 the size of new hampshire makes it unlikely that cigarettes would be tailormade for it the scope for removing characteristics is quite limited then the scope for adding characteristics in other states seems equally limited to avoid misunderstanding it should be emphasized that the hypothesized variations in quality are a supply side phenomenon not a demand side response to the relative cheapening of superior brands when a specific tax is increased johnson s estimates imply that the 90 increase in the new hampshire tax over the period 1954 76 should have reduced the net price by 3 6 ceteris paribus the slightly larger mean tax increase in the remaining 48 continental states should have raised net price by 0 90 what changes in the quality of the services sold with cigarettes could have justified such a differential what are the observable counterparts of the tax changes in the absence of a convincing answer to those questions the estimated response of cigarette prices to taxes represents a fact in search of a theory

a review of the stern review on the economics of climate change how much and how fast should we react to the threat of global warming the stern review argues that the damages from climate change are large and that nations should undertake sharp and immediate reductions in greenhouse gas emissions an examination of the review s radical revision of the economics of climate change finds however that it depends decisively on the assumption of a near zero time discount rate combined with a specific utility function the review s unambiguous conclusions about the need for extreme immediate action will not survive the substitution of assumptions that are consistent with today s marketplace real interest rates and savings rates

the optimal control of emissions and renewable resource harvesting under uncertainty a model of a renewable resource is developed where the growth and quality of the resource are reduced by pollution ambient pollution concentrations and the renewable resource stock are modeled as stochastic processes conditions for the optimal harvest plan and the optimal emissions rate are derived the effect of stochastic variations on the optimal management of the resource is analyzed the steady state joint probability distribution of the resource and pollution stocks is shown to exist under certain conditions

consumption and portfolio policies with incomplete markets and short sale constraints the infinite dimensional case abstract we employ a martingale approach to study a dynamic consumption portfolio problem in continuous time with incomplete markets and short sale constraints we introduce a notion of minimax local martingale and transform the dynamic problem into a static problem of maximizing expected utility over the consumption bundles that satisfy a single budget constraint formed using that measure we establish the existence of and characterize the minimax local measure provide sufficient conditions for the dynamic consumption portfolio problem to have a solution and relate the optimal policies to the solution of quasi linear partial differential equation

disappearing private reputations in long run relationships for games of public reputation with uncertainty over types and imperfect public monitoring cripps mailath and samuelson 2004 showed that an informed player facing short lived uninformed opponents cannot maintain a permanent reputation for playing a strategy that is not part of an equilibrium of the game without uncertainty over types this paper extends that result to games in which the uninformed player is long lived and has private beliefs so that the informed player s reputation is private journal of economic literature classi cation numbers c70 c78

the stochastic rotation problem a generalization of faustmann s formula to stochastic forest growth abstract in the present paper we study the optimal cutting strategy 1 2 for an ongoing forest by using stochastic impulse control we show how faustmann s formula can be generalized to stochastic growing forests the paper extends and clarifies previous studies by miller and voltaire 1983 clarke and reed 1989 and reed and clarke 1990

efficiency in repeated prisoner s dilemma with private monitoring abstract this paper analyzes repeated games with private monitoring where in each period each player receives a signal of the other player s action in the previous period and that signal is private information previous literature on discounted repeated games with private monitoring has not shown whether or not nearly efficient equilibria exist for a repeated prisoner s dilemma satisfying a certain assumption regarding stage game payoffs we show that there exists a nearly efficient sequential equilibrium provided that imperfectness of signals is small and players are patient journal of economic literature classification number c73

a theory of the politically optimal commodity tax a theory of the politically optimal tax is developed where tax rates are endogenous and determined by forces in the political market the theory is used to explain the levels of alcoholic beverage taxes between states in the united states it is shown that these rates are influenced by the ownership structure existing in the liquor industry the consumption externalities associated with drinking the minimum drinking age laws the earmarking of tax revenues the enforcement of regulations and real income