analyzing u s output and the great moderation by simultaneous unobserved components this paper seeks to determine the causal interaction between structural trend and cycle innovations in an unobserved components framework of aggregate output for the purpose of identification i propose allowing for shifts in volatility this strategy provides good estimation precision when applied to u s industrial production in the early 1980s predominance of cycle shocks gives way to strong negative spillovers of trend impulses consistent with real business cycle theories the coincident reduction of macroeconomic volatility was mainly caused by pronounced dampening of transitory disturbances this is in accordance with an important role of macroeconomic policy in explaining the great moderation

investment specific technological changes the source of long run tfp fluctuations abstract technological innovations originating in the capital producing sector may spillover to the rest of the economy and enhance aggregate tfp in the long run this paper assesses the quantitative importance of investment specific technological changes in long run movements in aggregate tfp to this end we construct a two sector business cycle model where an ist diffusion process influences long run movements in aggregate tfp via spillover we then establish the linkage between the primitive shocks of the model and two shocks that can be identified from a var approach one shock accounting for the long run movement in aggregate tfp and the other accounting for the long run movement in the inverse of the relative price of investment we show analytically that the correlation of these two long run shocks can be fruitful in distinguishing the quantitative importance of ist innovations in long run movements in aggregate tfp using post war u s data we find that these two long run shocks identified by the mfev approach are almost perfectly collinear moreover these two shocks can explain a significant and surprisingly similar fraction of the business cycle fluctuations in other important macro variables our findings suggest that embodied technological changes are an important driver of long run movements in aggregate tfp

taking versus taxing an analysis of conscription in a private information economy most countries currently man their militaries through conscription i e a draft conventional wisdom suggests that by lowering the budgetary cost of the military a draft reduces distortionary taxation especially when military needs are large we find that this intuition is misguided when income taxes are set optimally voluntary enlistments lead to less distortionary taxation than a draft because the tax base left behind by a volunteer army tends to be more productive than that after a draft for reasonable parameter values drafts are more distortionary and less socially desirable when military needs are large

diffusion of technical change and the decomposition of output into trend and cycle in this paper we argue that modelling the trend component in real gnp as a random walk is inconsistent with its interpretation as productivity growth as an alternative we specify the trend as an arima whose impulse response function follows an s shaped pattern reflecting the process of diffusion of technical change such an arima is employed to build and estimate an ucarima using usa postwar quarterly data we find that our model although more parsimonious fits the data equally well than the standard random walk plus ar 2 cycle moreover our model has a very low cycle trend variance ratio

on the sign of the optimum marginal income tax this paper studies a central aspect of optimal income taxation as modelled in mirrlees original paper on the topic identical leisure consumption preferences qualitatively homogeneous skills in production namely whether given concave utilitarianism alone the optimal marginal income tax will be non negative a well known positive answer to this question in weak inequality form was given in the said paper which however we show requires additive separability of individual utility in the ordinal and cardinal senses our main result here is to derive the required strict positivity of the marginal tax under weak conditions slightly wider than noninferiority of consumption and leisure with preferences otherwise arbitrary

common and uncommon trends and cycles abstract the paper discusses the concepts of co movements of macro variables in the short run and the long run when different trend cycle decompositions are considered moreover it specifies a model for the trend where identification is achieved by imposing restrictions on the shape of the impulse response function to the permanent shock this is a multivariate generalization of lippi and reichlin 1994 where the trend and the cyclical components are easily derived from the estimation of a var model an empirical section illustrates differences in implications between our suggested decomposition and other decompositions widely used in the literature for a bivariate case of cointegrated variables

a contribution to the theory of optimal utilitarian income taxation abstract the paper provides a new formulation of the mirrlees seade theorem on the positivity of the optimal marginal income tax under weaker assumptions and in a more general model the formulation of the theorem is independent of whether the model involves finitely many types or a continuous type distribution the formal argument makes the underlying logic transparent relating the mathematics to the economics and showing precisely how each assumption enters the analysis

on the optimal income taxation and educational decisions abstract in this paper we consider three different ways of incorporating individuals educational choices into the design of optimal income tax policy in one variant of the model case 2 where an individual chooses his education before knowing his ability and after that education makes his labour supply decisions on the basis of known ability it is shown that qualitative features of the optimal income tax schedule are not similar to those of the standard optimal income tax model the marginal tax rate is generally not zero at the endpoints of distribution but is most likely negative using numerical methods some interesting features quite different from earlier numerical results are revealed especially in the second case for example the marginal tax rate is non decreasing in income for a substantial income range in addition our calculations support neither the traditional views on the egalitarian nature of equal education nor its disadvantageous consequences in the perfect utilitarian society

the optimal linear income tax revisited abstract this paper shows that the mirrlees seade conditions of agent monotonicity and noninferiority of leisure imply the positivity of the optimal marginal income tax rate in sheshinski s model of linear income taxation as well as in the general model the optimal marginal tax rate is bounded above by the rawlsian rate which in turn is bounded by the revenue maximizing rate the optimal marginal tax rate may be arbitrarily close to the rawlsian rate however the optimal marginal tax rate is bounded away from the revenue maximizing rate whenever the individual with the lowest ability works

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

altruism jealousy and the theory of optimal non linear taxation abstract this paper studies optimal non linear taxes in a world in which there is altruism and jealousy a formula for optimal marginal tax rates is derived which turns out to be a simple and intuitively appealing extension of a result due to mirrlees the paper shows that in this sort of economy all of optimal tax theory s general results either no longer hold or need not hold and it sets out appropriate modifications to standard tax rules

the undesirability of randomized income taxation under decreasing risk aversion abstract for the standard specification of the utilitarian optimal income tax problem with hidden characteristics the paper shows that randomized tax schemes are undesirable if preferences exhibit a property of weakly decreasing risk aversion according to the multidimensional risk aversion concept of hellwig hellwig m f 2004 risk aversion in the small and the large with multidimensional outcomes max planck institute for research on collective goods bonn preprint 2004 6 http www mpp rdg mpg de pdf dat 2005 23online pdf this property of decreasing risk aversion also implies that the optimal income tax schedule is unique and depends continuously on the data of the problem

measuring business cycles with business cycle models abstract business cycles may be defined or measured by parametrizing detrending filters to maximize the ability of a business cycle model to match the moments of the remaining cycles thus a theory can be used to guide cycle measurement we present two applications to u s postwar data in the first application the cycles are measured with a standard real business cycle model in the second they are measured using information on capacity utilization and unemployment rates simulation methods are used to describe the properties of the gmm estimators and to allow exact inference

estimating potential output for new zealand one of the main indicators of inflationary pressures used by the reserve bank of new zealand is the output gap an alternative to the reserve bank s incumbent measure of potential output is obtained using a structural vector autoregression svar methodology with long run restrictions the reserve bank s official measure of the output gap and the estimate obtained from the svar model tend to agree about the state of the cycle especially during the 1970s and 1990s however during the 1980s the period of economic reforms they are more dissimilar

an unobserved components model that yields business and medium run cycles we generalize the unobserved components uc model to allow the permanent component to have different dynamics than the transitory components when decomposing u s economic activity using a multivariate uc model of log output consumption and investment we find that these proposed dynamics in the permanent component are statistically significant and distinct from those of the transitory components our approach provides an alternative explanation for the growth cycles identified by comin and gertler 2006 that is related to the cyclical movements in technology in a framework consistent with the beveridge and nelson 1981 decomposition

survival look ahead bias and the persistence in hedge fund performance we analyze the performance persistence in hedge funds taking into account look ahead bias multi period sampling bias we model liquidation of hedge funds by analyzing how it depends upon historical performance next we use a weighting procedure that eliminates look ahead bias in measures for performance persistence in contrast to earlier results for mutual funds the impact of look ahead bias is exacerbated for hedge funds due to their greater level of total risk at the four quarter horizon look ahead bias can be as much as 3 8 depending upon the decile of the distribution we find positive persistence in hedge fund quarterly returns after correcting for investment style the empirical pattern at the annual level is also consistent with positive persistence but its statistical significance is weak

a comparison of var and cvar constraints on portfolio selection with the mean variance model in this paper we analyze the portfolio selection implications arising from imposing a value at risk var constraint on the mean variance model and compare them with those arising from the imposition of a conditional value at risk cvar constraint we show that for a given confidence level a cvar constraint is tighter than a var constraint if the cvar and var bounds coincide consequently a cvar constraint is more effective than a var constraint as a tool to control slightly risk averse agents but in the absence of a risk free security has a perverse effect in that it is more likely to force highly risk averse agents to select portfolios with larger standard deviations however when the cvar bound is appropriately larger than the var bound or when a risk free security is present a cvar constraint dominates a var constraint as a risk management tool

innovation diversity and diffusion a self organisation model a number of features of innovation diffusion are identified appropriability diversity expectations selection learning and spillover externalities a dynamic model is formul ated to embed the diffusion question into a more general framework of disequilibrium competition the model incorporates distinct vintage structures reflecting a change in technological trajectory learning by using a nd expectations driven investment rules of thumb simulation studies reveal robust quasi logistic curves but a complicated pattern of net market share gains and losses uncertainty regarding the rationality of early or late adoption it is argued ensures that the requisite behavioral variety is present to generate these diffusion patterns copyright 1988 by royal economic society

screening with convex menus and optimal flow taxation abstract this paper considers a family of screening problems in which the principal is constrained to offer only convex menus applications include i optimal flow taxation when individuals can substitute consumption and leisure inter temporally ii optimal product design for a linear pricing monopolist iii non exclusive cum linearly priced annuity markets a modified version of a myerson 1979 mirrlees 1971 direct mechanism in which standard incentive compatibility constraints are replaced by no convexification constraints can be used to compute optimal allocations in this family of problems in the flow taxation application the optimal tax schedule necessarily features progressive marginal tax rates typically features distortions at the top and can be analyzed by adapting standard ironing techniques

public goods self selection and optimal income taxation using the self selection approach to tax analysis this paper derives a modified samuelson rule for the provision of public goods when the government deploys an optimal nonlinear income tax this approach gives a straightforward interpretation of the central result in this area generalises it and provides a simple characterisation of optimal policy in a wide range of circumstances the analysis also emphasises and clarifies the significance of the choice of numeraire for the optimality of decentralising public spending decisions it is well known that the famous samuelson rule for the provision of public goods may not be applicable when the tax revenues used to finance the public goods come from distorting taxes the principle was recognized as long ago as pigou 1947 long before the samuelson rule was devised pigou saw that in addition to the resource cost involved in transferring funds from the private to the public sector there was a deadweight loss involved from this insight he suggested that the criterion for providing public goods should be more stringent than the samuelson rule would later suggest in particular one might expect that the inclusion of the deadweight loss of taxes as part of the cost of providing a public good would lead to a reduction in its optimal provision relative to a situation in which lump sum taxes were available the problem was investigated more systematically by atkinson and stern 1974 who considered the case in which a public good is financed by a set of optimal commodity taxes all individuals were assumed to be identical so efficiency alone dictated the objective they found that no prima facie case could be made for the pigou position that the use of distortionary taxes called for a reduction in the supply of the public good their analysis clearly showed that there were two influences at work when the financing of a public good was by distorting taxes on the one hand

a new approach to decomposition of economic time series into permanent and transitory components with particular attention to measurement of the business cycle abstract this paper introduces a general procedure for decomposition of non stationary time series into a permanent and transitory component allowing both components to be stochastic the permanent component is shown to be a random walk with drift and the transitory or cyclical component is a stationary process with mean zero the decomposition methodology which depends only on past data and therefore is computable in real time is applied to the problem of measuring and dating business cycles in the portwar u s economy we find that measured expansions and contractions are of roughly equivalent duration and that our dating of cyclical episodes tends to lead the traditional nber dating and to a lesser extent the growth cycle chronology of zarnowitz and boschan 1977

predicting hedge fund failure a comparison of risk measures this paper compares downside risk measures that incorporate higher return moments with traditional risk measures such as standard deviation in predicting hedge fund failure when controlling for investment strategies performance fund age size lockup high water mark and leverage we find that funds with larger downside risk have a higher hazard rate how ever standard deviation loses the explanatory power once the other explanatory variables are included in the hazard model further we find that liquidation does not necessarily mean failure in the hedge fund industry by reexamining the attrition rate we show that the real failure rate of 3 1 is lower than the attrition rate of 8 7 on an annual basis during the period of 1995 2004

hedge funds risk and return from a database that is relatively free of bias this article provides measures of the returns of hedge funds and of the distinctly nonnormal characteristics of the data the results include risk adjusted measures of performance and tests of the degree to which hedge funds live up to their claim of market neutrality the substantial attrition of hedge funds is examined the determinants of hedge fund demise are analyzed and results of tests of return persistence are presented the conclusion is that hedge funds are riskier and provide lower returns than is commonly supposed

the dynamic effects of aggregate demand and supply disturbances we interpret fluctuations in gnp and unemployment as due to two types of disturbances disturbances that have a permanent effect on output and disturbances that do not we interpret the first as supply disturbances the second as demand disturbances demand disturbances have a hump shaped mirror image effect on output and unemployment the effect of supply disturbances on output increases steadily over time peaking after two years and reaching a plateau after five years

a note on the optimum income tax abstract this paper analyzes the optimum utilitarian income tax with special attention given to the characterization of the lower end of the optimum tax function in the case when the least qualified individuals do not work moreover the positivity of the marginal tax rate throughout is shown to be a consequence of the desirability of redistribution of income or leisure given the self selection constraints and preferences fulfilling agent monotonicity and non inferiority of leisure

which commodity taxes should supplement the income tax the analysis takes as its point of departure a continuum of consumers economy in which an optimum income tax exists and is the only tax instrument in operation the welfare effects of introducing small excise taxes to supplement the income tax are then explored essential in this context are changes in the tax distortions of work incentives it is shown that a commodity should be taxed or subsidized depending on whether it is positively or negatively related to leisure in a sense which is precisely defined the results are related to earlier contributions to the literature on direct versus indirect taxation the history of debates on the proper roles of direct and indirect taxation goes back at least to the days of gladstone as well described by atkinson 1977 the prevailing political opinion of the balance between the two types of taxes has varied over time at present the swing in a number of european countries seems to be in favour of reforms towards tax systems which rely more heavily on indirect taxation and less on income taxation in view of this long economic political record it is not surprising that the choice between income tax and commodity taxes has also become an important subject in tax theory an early contribution to the understanding of this issue was corlett and hague 1953 54 their main model considers a three good economy containing leisure and two taxed commodities there is only one consumer or a population of identical consumers labour is the only source of income producer prices are fixed the government s revenue requirement is given the starting point of the analysis is a situation in which the two commodities are taxed at uniform rates the question which is analyzed is then how the government can raise welfare by slightly differentiating the tax rates the answer which is derived is that the consumer good which is the stronger substitute for labour complement with leisure should be taxed at

an econometric model of serial correlation and illiquidity in hedge fund returns the returns to hedge funds and other alternative investments are often highly serially correlated in sharp contrast to the returns of more traditional investment vehicles such as long only equity portfolios and mutual funds in this paper we explore several sources of such serial correlation and show that the most likely explanation is illiquidity exposure i e investments in securities that are not actively traded and for which market prices are not always readily available for portfolios of illiquid securities reported returns will tend to be smoother than true economic returns which will understate volatility and increase risk adjusted performance measures such as the sharpe ratio we propose an econometric model of illiquidity exposure and develop estimators for the smoothing prole as well as a smoothing adjusted sharpe ratio for a sample of 908 hedge funds drawn from the tass database we show that our estimated smoothing coecien ts vary considerably across hedge fund style categories and may be a useful proxy for quantifying illiquidity exposure

stochastic trends and economic fluctuations are business cycles mainly the result of permanent shocks to productivity this paper uses a long run restriction implied by a large class of real business cycle models identifying permanent productivity shocks as shocks to the common stochastic trend in output consumption and investment to provide new evidence on this question econometric tests indicate that this common stochastic trend cointegration implication is consistent with postwar u s data however in systems with nominal variables the estimates of this common stochastic trend indicate that permanent productivity shocks typically explain less than half of the business cycle variability in output consumption and investment copyright 1991 by american economic association

non welfarist optimal taxation and behavioral public economics research in behavioral economics has uncovered the widespread phenomenon of people making decisions against their own good intentions in these situations the government might want to intervene indeed individuals might want the government to intervene to induce behavior that is closer to what individuals wish they were doing the analysis of such corrective interventions through taxes and subsidies might be called behavioral public economics however such analysis where the government has an objective function that is different from that of individuals is not new in public economics in these cases the government is said to be non welfarist in its objectives and there is a long tradition of nonwelfarist welfare economics especially the analysis of optimal taxation and subsidy policy where the outcomes of individual behavior are evaluated using a preference function different from the one that generated the outcomes the object of this paper is to first of all present a unified view of the non welfarist optimal taxation literature and secondly to present behavioral public economics as a natural special case of this general framework

on the optimal income taxation some further numerical results abstract using numerical calculations we show in the optimal income tax model that a realistic value for the elasticity of substitution between consumption and leisure 0 5 leads to conclusions different from some of those drawn by mirrlees 1971 and atkinson 1973 the marginal tax rates are not so low and the shape of the tax schedule is for a great majority of the population substantially nonlinear a new feature in our calculations is that both results come out without going to maximin as done by atkinson 1973 we study in special cases the locality of the zero limit of the marginal tax rate at the upper end of the ability distribution and we achieve a very definite conclusion this result is really very local we also present an interesting approximation result concerning the relationship between the level of the government revenue and the marginal tax rate for individuals with high ability an important methodological remark analogous to sen s critique on the ethical measures of inequality is made on the interpretation of optimal income tax calculations

let s get real a factor analytical approach to disaggregated business cycle dynamics this paper develops a method for analysing the dynamics of large cross sections based on a factor analytic model we use law of large numbers arguments to show that the number of common factors can be determined by a principal components method the economy wide shocks can be identified by means of simple structural var techniques and that the parameters of the unobserved factor model can be estimated consistently by applying ols equation by equation we distinguish between a technological and a non technological shock identification is obtained by minimizing the negative realizations of the technology shock empirical results on 4 digit industrial output and productivity for the u s economy from 1958 to 1986 show that 1 at least two economy wide shocks both having a long run effect on sectoral output are needed to explain the common dynamics 2 although the technological shock accounts for at least 50 of the aggregate dynamics of output it cannot by itself explain dynamics at business cycle frequencies 3 sector specific shocks explain the main bulk of total variance but generate mainly high frequency dynamics 4 both the technological and the non technological component of output show a peak for positive sectoral comovements of output at business cycle frequencies 5 technological shocks are strongly correlated with the growth rates of the investment in machinery and equipment sectors and their inputs many interesting questions about cyclical fluctuations and economic growth can be answered only by studying the dynamic behaviour of sectoral variables when data contain information on time for a large cross section of sectors traditional econometric techniques used in the macroeconomic literature such as vector autoregressive var and vector autoregressive moving average varma models are not appropriate since they require the estimation of too many parameters this is why new methods which allow for the reduction of the parameter space need to be developed the objective of this paper is both methodological and descriptive at the methodological level we develop a simple framework for the dynamic analysis of large cross sections the basic model is a dynamic factor analytic model as in sargent and sims 1977 the sectoral variables are decomposed into two unobservable components a common component driven by macroeconomic shocks and a purely sectoral component when

fair income tax fairness is a key concept in redistribution issues in this paper we study how particular requirements of fairness can shed light on the design of the optimal income tax schedule we consider a population of heterogeneous individuals or households who differ in two respects first they have unequal skills and therefore unequal earning abilities second they differ in terms of their preferences about consumption and leisure and as a consequence typically make different labour time choices both kinds of differences generate income inequalities we study how to justify and compute a redistribution income tax in this context redistribution through an income tax usually entails distortions of incentives but the resulting efficiency loss has to be weighed against potential improvements in the fairness of the distribution of resources we address this efficiency equity trade off here by constructing social preferences which obey the standard pareto principle in addition to fairness conditions

optimal non linear income taxation for the alleviation of income poverty there has been much discussion recently of structuring tax and transfer programs to ensure that resources go to the poor with minimal leaks to the nonpoor the poor have no incentive to earn income with 100 percent marginal tax rates but how high or low the marginal rate of taxation should be and how they should vary with income is a complex issue and opinions vary social security schemes that withdraw benefits represent an extremely high effective marginal tax rate other schemes call for relatively low marginal tax rates at the bottom of the income distribution which tax transfer schedule does most to reduce poverty the issue is one of optimal nonlinear income taxation the authors show that one of the key theoretical results of the welfarist literature is overturned if it is desirable for everybody to work the optimal marginal tax rate on the very poorest individuals is strictly negative they argue that the nonwelfarist perspective points toward lower marginal tax rates in the lower part of the income distribution than does the welfarist perspective but numerical simulations suggest that the effect is of limited quantitative significance using conventional functional forms and parameter values optimal marginal tax rates on the poor are in the 60 70 percent range

stochastic technical progress smooth trends and nearly distinct business cycles this paper studies a model of random technical progress where technology diffuses at realistically slow rates it fits smooth trends to the sum of gdp series generated by this model and series representing transitory or cyclical fluctuations detrended gdp is then largely unrelated to technical progress the detrending method proposed by rotemberg 1999 reconstructs cyclical variations somewhat more accurately than the hp filter with sufficiently slow diffusion it is also more accurate than a method based on vars fitted to hours and gdp growth consistent with the model s predictions permanent shocks initially depress both hours and output in these vars

trends and cycles in macroeconomic time series two structural time series models for annual observations are constructed in terms of trend cycle and irregular components the models are then estimated via the kalman filter using data on five u s macroeconomic time series the results provide some interesting insights into the dynamic structure of the series particularly with respect to cyclical behavior at the same time they illustrate the development of a model selection strategy for structural time series models

a note on the marginal tax rate in a finite economy abstract the marginal tax rate is shown to be non negative in guesnerie and seade s model of nonlinear pricing in a finite economy under assumptions that are as mild as those customarily adopted in nonlinear tax models with a one dimensional continuum population

a reduced form optimal nonlinear income tax problem abstract for a finite population with quasilinear preferences it is shown how mirrlees optimal nonlinear income tax problem can be simplified to a reduced form problem involving only the allocation of the consumption good this result is a finite version of a proposition established in the continuum by s lollivier and j c rochet

zero r 2hedge funds and market neutrality factor models yield an r 2 insignificantly different from 0 for one third of hedge funds in a broad sample these funds illustrate the concept of market neutrality and feature lower volatilities higher sharpe ratios and higher alphas than other funds indicating that they provide a successful alternative investment however large portfolios of zero r 2 funds contain fully half the volatility of portfolios of other funds suggesting that they feature substantial systematic risk furthermore these funds display an increased probability of failure even after controlling for idiosyncratic volatility these results indicate the presence of an omitted factor that exposes investors to significant downside risk

equal sacrifice and incentive compatible income taxation abstract the concepts of equal sacrifice and incentive compatibility in income taxation have been of interest to economists for some time here we attempt to integrate the two literatures in a model that offers a labor leisure choice to consumers while imposing an equal relative or absolute sacrifice tax system the main result is that equal sacrifice incentive compatible income tax systems generally exist and are locally unique examples are presented where this tax system is easy to compute comparative statics are calculated finally some remarks about the welfare properties of these tax systems are made

are output fluctuations transitory according to the conventional view of the business cycle fluctuations in output represent temporary deviations from trend the purpose of this paper is to question this conventional view if fluctuations in output are dominated by temporary deviations from the natural rate of output then an unexpected change in output today should not substantially change one s forecast of output in say five or ten years our examination of quarterly postwar united states data leads us to be skeptical about this implication the data suggest that an unexpected change in real gnp of 1 percent should change one s forecast by over 1 percent over a long horizon

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

optimal income tax under the threat of migration by top income earners we examine how allowing individuals to emigrate to pay lower taxes changes the optimal nonlinear income tax scheme in a mirrleesian economy an individual emigrates if his domestic utility is less than his utility abroad net of migration costs utilities and costs both depending on productivity a simple formula that complements saez s formula obtained in closed economy is derived for the marginal tax rates faced by top income earners it depends on the labour elasticity the tax rate abroad and the migration costs expressed as a fraction of the utility obtained abroad the rawlsian marginal tax rates obtained for the whole population illustrate a curse of the middle skilled simulations are provided for the french economy

transition from a pay as you go to a fully funded pension system the case of differing individuals and intragenerational fairness abstract in recent contributions to the theory of public pension systems it was argued that a pareto improving transition from an established unfunded pension system to a funded one is possible this result is derived in an overlapping generations model with identical individuals in the present study an extended model with differing individuals of an intragenerationally fair unfunded pension scheme is introduced within this more realistic framework it is shown that in general a pareto improving transition to a funded system is not possible because any instrument applied to the financing of pensions in the transition phase involves intragenerational redistribution

on income taxation and the core abstract the core of an optimal income tax economy is examined in such economies optima are usually second best because the identities of the agents are not known to the government although it is generally unclear how to handle information problems in cooperative games such as the one examined here two core concepts are explored for the first concept incentive compatibility is imposed only within potential blocking coalitions and the core consists only of head taxes or is empty if there are no increasing returns to coalition size for the second concept incentive compatibility is also imposed for potential entrants into blocking coalitions and the core is shown to be empty for a simple reasonable and interesting class of models

a reexamination of the optimal nonlinear income tax abstract this paper investigates mirrlees model of optimal income taxation it provides a concrete example of utility and density functions for which the solution to the usual first order model is not implementable i e and example where the first order approach does not work adding second order conditions leads to an extended model and to implementable solutions if these conditions are binding one gets a kink in the optimal net income schedule and bunching of individuals occurs the properties of an optimal nonlinear income tax are reexamined within the extended model

optimal taxation of bequests in a model with initial wealth we formulate an optimal taxation model where parents leave bequests to their descendants for altruistic reasons in contrast to the standard model individuals differ not only in earning abilities but also in initial inherited wealth in this model a redistributive motive for an inheritance tax which is equivalent to a uniform tax on all expenditures arises given that initial wealth increases with earning abilities the introduction of the inheritance tax either increases intertemporal social welfare or has an ambiguous effect depending on whether the external effect related to altruism is accounted for in the social objective

dynamic prediction of hedge fund survival in crisis prone financial markets abstract this study focuses on dynamic changes in survival probabilities over the lifetimes of hedge funds to model such probabilities a mixed cox proportional hazards cph model specifically a survival hazard model with time varying covariates and fixed covariates is employed resulting dynamic survival probabilities show that the mixed cph model provides significantly higher accuracy in predicting hedge fund failure than other models in the literature including fixed covariate cph models and discrete logit models our results are useful to investors and regulators of hedge funds in crisis prone financial markets

an examination of business cycle features in uk sectoral output this article examines business cycle features of uk gross domestic product gdp sectors with regard to trends cycles and growth the empirical study adopts the kalman filter to decompose these gdp sectors into trend and cycle components the general model of this study encompasses a number of alternative specifications about trend growth therefore accommodating diverse views on growth there is reasonable support in the results for a mean reverting stochastic growth model for the uk economy the characteristics in trends and cycles of uk gdp sectors are discussed focusing on their similarities and differences around business cycles

the optimal income tax when poverty is a public bad abstract poverty is considered as an aggregate negative externality that may affect people differently depending on their aversion to poverty if society is on average averse to poverty then the optimal income tax schedule displays negative marginal tax rates at least for the less skilled individuals negative marginal tax rates play the role of a pigouvian earnings subsidy and foster the supply of labor of poor individuals the no distortion at the endpoints result which is therefore violated can be restored once the focus is shifted from individual to social distortions

a pareto improving commodity tax reform under a smooth nonlinear income tax abstract this paper analyzes the welfare effects of commodity tax reform in an economy with a nonlinear income tax and linear commodity taxes the main result is that we can find a tax reform program that improves every consumer s utility in the pareto sense unless efficiency loss in the economy is minimized under incentive compatibility the tax reform rule proposed here applies to a broad class of economies with arbitrary smooth income taxes the expenditure function approach makes our analyses clear and simple some intuition is presented on the role of commodity taxation in a mixed tax economy the relationship with previous work in optimal tax and tax reform theory is also discussed we extend our result to the case where the government spends tax revenue to provide a public good

does growing wealth influence hedge funds development an empirical analysis abstractalternative investments such as hedge funds have in last years become an integral part of the investment portfolios of the wealthy the article s goal is also to answer the following research question does the global wealth of the world have impact on the global value of the hedge funds assets we also try to forecast the value of the hedge funds assets for the next years 2015 2017 the results from this study would also be valuable to investors and other stakeholders such as the regulators and the creditors of the hedge funds

news driven business cycles insights and challenges there is a widespread belief that changes in expectations may be an important independent driver of economic fluctuations the news view of business cycles offers a formalization of this perspective in this paper we discuss mechanisms by which changes in agents information due to the arrival of news can cause business cycle fluctuations driven by expectational change and we review the empirical evidence aimed at evaluating their relevance in particular we highlight how the literature on news and business cycles offers a coherent way of thinking about aggregate fluctuations while at the same time we emphasize the many challenges that must be addressed before a proper assessment of the role of news in business cycles can be established jel d83 d84 e13 e32 o33

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

premium subsidies and social health insurance substitutes or complements premium subsidies have been advocated as an alternative to social health insurance these subsidies are paid if expenditure on health insurance exceeds a given share of income in this paper we examine whether this approach is superior to social health insurance from a welfare perspective we show that the results crucially depend on the correlation of health and productivity for a positive correlation we find that combining premium subsidies with social health insurance is the optimal policy

progressive estate taxation we present a model with altruistic parents and heterogeneous productivity we derive two key properties for optimal estate taxation first the estate tax should be progressive so that parents leaving a higher bequest face a lower net return on bequests second marginal estate taxes should be negative so that all parents face a marginal subsidy on bequests both properties can be implemented with a simple nonlinear tax on bequests levied separately from the income tax these results apply to other intergenerational transfers such as educational investments and are robust to endogenous fertility choices both estate or inheritance taxes can implement the optimal allocation but we show that the inheritance tax has some advantages finally when we impose an ad hoc constraint requiring marginal estate taxes to be nonnegative the optimum features a zero tax up to an exemption level and a progressive tax thereafter

performance characteristics of hedge funds and commodity funds natural vs spurious biases it is well known that the pro forma performance of a sample of investment funds contains biases these biases are documented in brown goetzmann ibbotson and ross 1992 using mutual funds as subjects the organization structure of hedge funds as private and often offshore vehicles makes data collection a much more onerous task amplifying the impact of performance measurement biases theis paper reviews these biases in hedge funds we also propose using funds of hedge funds to measure aggregate hedge fund performance based on the idea that the investment experience of hedge fund investors can be used to estimate the performance of hedge funds

taxing externalities under financing constraints we consider an economy where production generates externalities which can be reduced by additional firm level expenditures this requires firms to raise outside financing leading to deadweight loss due to a standard agency problem vis a vis outside investors policy is constrained as firms are privately informed about their marginal cost of avoiding externalities we first derive the optimal linear pollution tax which is strictly lower than the pigouvian tax for two reasons first higher firm outside financing creates additional deadweight loss second through redistributing resources in the economy a higher tax reduces average productive efficiency we analyze various instruments that achieve a more efficient allocation in particular nonlinear pollution taxes which can no longer be implemented through a tradable permit scheme alone and grants tied to loans which are frequently observed in practice

national income and marginal taxes a simple model of linear taxation is used to single out different types of tax equilibria sufficient conditions for national income to be a decreasing function of the marginal tax rate are given for each case equilibria are classified according to whether i aggregate labor supply is forward bending ii aggregate labor supply is backward bending iii the equilibrium is a welfare maximum and iv the equilibrium is a political equilibrium

entry exit and diffusion with learning by doing early entry has the advantage of higher revenues per unit of output early on late entry has the benefit of learning from the experience of earlier entrants and hence lower production costs the advantages are balanced off in a continuous time perfect foresight equilibrium competition generates s shaped diffusion and staggered entry and exit a monopolist will innovate less than a competitive industry but the innovation that he does do he will do sooner copyright 1989 by american economic association

the optimal linear income tax a diagrammatic analysis abstract this paper clarifies the role of the tax possibility frontier and the social indifference curve in the comparative statics analysis of the optimal linear income tax by a mostly diagrammatic derivation of the results we confirm the conventional conjecture that the optimal marginal tax rate increases with the government s inequality aversion on the other hand we cannot always confirm analytically the conventional conjecture that the optimal marginal tax rate increases with the government s budgetary needs

negative marginal tax rates and heterogeneity the bulk of the theory of optimal taxation recommends that the marginal tax rate be everywhere positive labor supply is distorted downwards compared with laissez faire the conditions under which the result holds continuous labor supply or intensive margin unobserved productivity constant opportunity cost of work utilitarian planner with a redistributive motive towards lower incomes have been thoroughly investigated jesus seade 1977 1982 ivan werning 2000 martin f hellwig 2007 the purpose of the present paper is to describe how negative marginal tax rates can be optimal keeping with the intensive set up largely studied in the literature when there are multiple dimensions of heterogeneity indeed james a mirrlees 1976 in its section iv indicates along a line that will be pursued further here that the sign of the marginal tax rate cannot be predicted when the agents in the economy differ along several dimensions of heterogeneity workers differ in both their productivities and opportunity costs of work under utilitarianism heterogeneity comes into play through its impact on cardinal utilities how social weights or marginal utilities of income vary with income determines the shape of the optimal tax scheme conditionally on income utility and more importantly its derivative with respect to income may either decrease or increase with work opportunity costs this may vary according to circumstances depending on whether the cost is associated with poor living conditions i e a handicap or reflects a taste for leisure or opportunities outside the labor market such as gardening at home or black market activities for a given income the social weight is proportional to the expected marginal utilities where the expectation is taken over the distribution of work opportunity costs at this income level therefore the social weight curve depends on both the specification of the cardinal utility function and on how the distribution of work opportunity costs changes with income the fact that heterogeneity can blur the redistribution motive through the possible correlation between ability and onerousness of work has been discussed in models where agents have a finite number of types a pioneer work is that of joseph e stiglitz 1982 who shows that the high skilled individual should face a negative marginal tax rate if the low skilled individual s upward incentive constraint binds which is the case if social weights are increasing in type the importance of this observation for policy was pointed out in katherine cuff 2000 who is the first to explicitly link social weights to the opportunity cost of work using alternative choices of cardinal utilities in a model with four types combining two values for productivity and two values for the cost of work robin boadway et al 2002 showed how it can be optimal to have binding upward incentive constraints when high opportunity costs are associated with small social weights

optimal non linear income taxation for reduction of envy abstract this paper examines the optimal non linear income taxation problem based on equitability an allocation is equitable if no agent envies a proportion of the bundle of any other agent we examine the properties of pareto undominated allocations for various equitability requirements when there is one output the marginal income tax rate can increase only if leisure is a luxury in a multi commodity model with commodity taxes the goods preferred by the low skilled agent and or those with high hicksian elasticities are taxed more heavily when preferences exhibit quasi linearity we can show that the introduction of the equitability constraint increases the marginal income tax rates of the entire population

the cyclical component of u s economic activity quarterly data on industrial production and deflated gross national product in the united states from 1947 through 1985 are decomposed into independent nonstationary trend and stationary cycle components using kalman filtering and smoothing techniques estimates of the model parameters imply that at least half of the quarterly innovation in u s economic activity can be attributed to a stationary cyclical component that persists over periods of time as long as five years this finding is inconsistent with the hypothesis that most of the apparent variation in u s economic activity can be attributed to a nonstationary trend component

are efficient linear taxes inequitable abstract i explore the household weights in the bergson samuelson social welfare functions which have a turning point at an efficient linear tax structure the inverse optima a tax structure is defined to be inequitable if every inverse optimum has weights that increase with household productivity over part of the productivity range i find that the inequity of an efficient tax structure depends on the normality of leisure on the number of households and on the natureof household demands an efficient indirect tax structure is not inequitable if the expenditure share of each taxed commodity is constant across households this has welfare implications for the choice of tax instrument to finance a project accepted under benefit cost analysis

information forecasts and measurement of the business cycle the beveridge nelson bn technique provides a forecast based method of decomposing a variable such as output into trend and cycle when the variable is integrated of order one i 1 this paper considers the multivariate generalization of the bn decomposition when the information set includes other i 1 and or stationary variables we show how the relative importance of the cyclical component depends on the size of the information set and is necessarily higher with multivariate bn decompositions the results are illustrated using post wwii united states data an explanation is also provided for the empirical finding of a positive association of the multivariate bn cycle with output growth

the relationships between permanent and transitory movements in u s output and the unemployment rate this paper estimates the permanent and transitory movements in u s output and the unemployment rate and the relationships between them the results suggest that permanent movements in u s output and the unemployment rate are important for explaining overall fluctuations further the correlation between changes in these series arises in large part due to the relationship between their permanent components

when more is less using multiple constraints to reduce tail risk abstract financial institutions suffered large trading losses during the 2007 2009 global financial crisis these losses cast doubt on the effectiveness of regulations and risk management systems based on a single value at risk var constraint while some researchers have recommended using conditional value at risk cvar to control tail risk var remains popular among practitioners and regulators accordingly our paper examines the effectiveness of multiple var constraints in controlling cvar under certain conditions we theoretically show that they are more effective than a single var constraint furthermore we numerically find that the maximum cvar permitted by the constraints is notably smaller than with a single constraint these results suggest that regulations and risk management systems based on multiple var constraints are more effective in reducing tail risk than those based on a single var constraint

a note on the continuity of incentive schedules abstract this note develops a simple geometric argument suggesting that for every tax schedule in mirrlees 1971 seminal model of optimal income taxation there exists a continuous and nondecreasing schedule that achieves the same welfare distribution granted the original schedule leaves every agent with at least one optimal choice if the original schedule is also upper semi continuous then continuity of the schedule can be obtained without affecting any agent s set of optimal choices alternatively these results can be interpreted in terms of a principal s incentive schedule for a single agent with unknown ability and preferences the results are derived under more general conditions than those in mirrlees 1971

is the optimal income tax regressive abstract a class of solutions that violates the standard results on the sign and shape of optimal tax rates is shown to be less exceptional than what might be expected thus casting doubt on the general necessity of qualitative features of income tax schedules accepted heretofore

real business cycles in this paper we demonstrate how certain very ordinary economic principles lead maximizing individuals to choose consumption production plans that display many of the characteristics commonly associated with business cycles our explanation is entirely consistent with i rational expectations ii complete current information iii stable preferences iv no technological change v no long lived commodities vi no frictions or adjustment costs vii no government viii no money and ix no serial dependence in the stochastic elements of the environment we also provide a completely worked out example of the type of artificial economy we have in mind the time series properties of the example exhibit some major features of observed business cycles although this type of model may not be capable of explaining all of the regularities in actual business cycles we believe that it provides a useful well defined benchmark for assessing the relative importance of factors e g monetary disturbances

estimating permanent and transitory components of gnp using consumption information this paper estimates permanent and transitory components of gnp using an unobserved components model that incorporates consumption information agents that discriminate between permanent and transitory as well as anticipated and unanticipated changes in gnp signal the persistence of a change in gnp by the size of their consumption response consumption data have previously been employed to discern permanent and transitory properties of gnp using a vector autoregressive var model the unobserved components approach used in this paper has several advantages over the var approach and provides new evidence concerning the two components

progressive taxation redistribution and labor supply the analysis of the effect of progression on labor supply is extended to a model with many consumers the condition for progression to increase labor supply given constant aggregate tax revenue is derived and shown to depend on the income effects resulting from redistribution it is then shown that the optimal linear income tax schedule involves a degree of progression which on the margin does reduce labor supply