preferential trading arrangements as strategic positioning abstract we analyze a three country model of trade negotiations in which countries can form bilateral free trade areas bilateral customs unions or a trilateral preferential trading arrangement and can continue negotiating after reaching an agreement in contrast to the literature on multilateral bargaining the set of agreements can form a nonpartitional network while in contrast to the network literature players can reach multilateral agreements patient enough countries only reach bilateral agreements if insiders gain more than outsiders which allows them to manipulate the status quo in subsequent negotiations however a hub and spoke pattern may then emerge and insiders then dissipate the advantages of strategic positioning we also use variants on the model to explain why a us commitment not to bargain bilaterally sustained progress at gatt negotiations and the rarity of open access preferential trading arrangements

the relationship between international trade and capital flow a network perspective abstract the relationship between international trade and capital flow has been extensively discussed using bilateral data from 2001 to 2016 we construct international trade and capital flow networks defined as a weighted graph in which nodes are countries and edges represent trade and capital flow linkages centrality is employed as the main variable in this study to represent the importance of a country in the networks to gain further insight into the network characteristics we adopt a turning parameter centrality to combine both the original degree and strength measurements within the weighted network moreover we develop a new indicator called partner quality centrality to identify the quality of neighbors within the panel cointegration framework we argue that a positive long run equilibrium exists between the trade and capital flow networks as constructed in addition we employ a panel causality test to investigate the short run dynamics indicating that the international capital flow network has predictive power on the trade network from the short run perspective but not vice versa

the spatial and temporal diffusion of house prices in the uk abstract this paper provides a method for the analysis of the spatial and temporal diffusion of shocks in a dynamic system we use changes in real house prices within the uk economy at the level of regions to illustrate its use adjustment to shocks involves both a region specific and a spatial effect shocks to a dominant region london are propagated contemporaneously and spatially to other regions they in turn impact on other regions with a delay we allow for lagged effects to echo back to the dominant region london in turn is influenced by international developments through its link to new york and other financial centers it is shown that new york house prices have a direct effect on london house prices we analyse the effect of shocks using generalised spatio temporal impulse responses these highlight the diffusion of shocks both over time as with the conventional impulse responses and over space

partial identification of amenity demand functions this paper presents a new hedonic framework for reduced form estimation of the demand for spatially delineated nonmarket amenities we begin from a conventional model of market equilibrium where an amenity is conveyed to homeowners by virtue of their residential location choices different housing markets may have different hedonic price functions due to variation across markets in the joint distribution of preferences income regulations and technology in this setting taste based sorting within and across markets confounds point identification of reduced form descriptions for amenity demand curves however we demonstrate that basic knowledge of the sorting process is sufficient to construct instruments that identify bounds on demand curves bounds on demand curves can be translated into ranges of welfare measures for non marginal changes in amenities we find these ranges to be potentially informative in a demonstrative application to evaluating the benefits of improved lake water clarity in the northeast

house prices and female labor force participation abstract is there a causal connection between house prices and labor force participation of married women the simple correlation between house prices and married women s labor force participation across u s metro areas is positive plausible informal arguments have been advanced to support causation in either direction prices raising participation negative income effects of higher house prices lead more married women to work or participation raising prices richer two earner households bid up the price of scarce housing i construct an equilibrium model of location labor supply and real estate land prices within a metro area which predicts that 1 metro areas with exogenously less buildable land will have higher house prices and more labor force participation of married women while 2 metro areas with married women exogenously more prone to work will have higher house prices using geographic instruments for housing supply i find little evidence of a positive effect of house prices on married women s labor force participation but a somewhat greater possibility that house prices raise their earnings likewise an instrument for married women s labor supply reveals no consistent significant causal effect of two earner households on housing prices although the possibility of a positive effect cannot be ruled out

mobility behavior of the elderly mobility patterns of the elderly provide a particularly interesting theoretical subcase of a more general migration model which interacts individual specific traits e g health and retirement status and location specific traits e g amenities rents and wages the spatially invariant incomes pensions dividends etc of the retired are shown to lead to migration toward areas where the wage and rent compensation for amenities necessary for spatial equilibrium occurs primarily in the labor market rather than in the land market empirical evidence appears to be consistent with theoretical expectations more investigation however is clearly desirable

examining the role of economic opportunity and amenities in explaining population redistribution abstract this paper develops a model of migration integrating equilibrium and disequilibrium components in which individuals and firms form rational expectations about future opportunities levels of migration are derived as functions of variations in factors influencing migrant labor demand economic opportunity and migrant labor supply residential amenities the model is used to estimate the extent to which migration in the united states over the period 1950 1980 is determined by these two classes of exogenous factors

tax reform and automatic stabilization an income tax provides implicit insurance by dampening the variability of disposable income and consumption using an empirical framework derived from the consumption insurance literature and data from the panel study of income dynamics we examine the effect of federal income tax reforms of the 1980 s on automatic stabilization of consumption overall erta and tra86 reduced consumption stability by about 50 percent recently increased eitc generosity restored or enhanced consumption insurance the welfare cost of moving to the post tra86 system is sizable for relatively risk averse households facing large income risk but is much more modest for the typical household jel h21

migration regional equilibrium and the estimation of compensating differentials in this study we have developed an improved model of net migration that encompasses both equilibrium and disequilibrium components instrumental variables fixed effects estimates of the model with time series data for 51 areas in the united states over the period 1971 1988 support the importance of both equilibrium and disequilibrium factors in migration excerpt

earnings functions when wages and prices vary by location economists generally assume implicitly that the return to schooling is invariant across local labor markets we demonstrate that this outcome pertains if and only if preferences are homothetic a special case that seems unlikely our theory predicts that returns to education will instead be relatively low in expensive high amenity locations our analysis of u s data provides support for this contention returns to college are especially low in such cities as san francisco and seattle our findings call into question standard empirical exercises in labor economics that treat the returns to education as a single parameter

bilateralism and free trade we study a setting with many countries in each country there are firms that can sell in the domestic as well as foreign markets countries can sign bilateral free trade agreements that lower import tariffs and thereby facilitate trade we allow a country to sign any number of bilateral free trade agreements a profile of free trade agreements defines the trading regime our principal finding is that in symmetric settings bilateralism is consistent with global free trade we also explore the effects of asymmetries across countries and political economy considerations on the incentives to form trade agreements

quality of life firm productivity and the value of amenities across canadian cities we estimate quality of life and productivity differences across canada s metropolitan areas in a hedonic general equilibrium framework these are based on the estimated willingness to pay of heterogeneous households and firms to locate in various cities which differ in their wage levels housing costs and land values using 2006 canadian census data our metropolitan quality of life estimates are somewhat consistent with popular rankings yet find canadians care more about climate and culture quality of life is highest in victoria for anglophones montreal for francophones and vancouver for allophones and lowest in more remote cities toronto is canada s most productive city vancouver is the overall most valuable city qualite de vie productivite des entreprises et la valeur des avantages dans les diverses villes canadiennes on evalue les differences entre la qualite de vie et la productivite des entreprises entre les zones metropolitaines au canada a l aide d un cadre d analyse d equilibre general hedonique ces metriques sont basees sur l estimation de la volonte de payer de menages et d entreprises heterogenes pour se localiser dans diverses villes qui different tant pour ce qui est des niveaux de salaires des couts de l habitation et des prix des terrains a l aide des donnees du recensement canadien de 2006 on construit des evaluations de la qualite de vie des diverses zones metropolitaines qui s arriment convenablement aux ordonnancements en vogue mais on decouvre que les canadiens portent une attention particuliere au climat et a la culture la qualite de vie est la plus elevee a victoria pour les anglophones a montreal pour les francophones et a vancouver pour les allophones et la plus faible pour les villes eloignees des grands centres toronto est la ville la plus productive vancouver est generalement la plus appreciee

why are power couples increasingly concentrated in large metropolitan areas using the panel study of income dynamics psid we test costa and kahn s colocation hypothesis which predicts that power couples couples in which both spouses have college degrees are more likely to migrate to the largest cities than part power couples or power singles we find no support for this hypothesis instead regression analyses suggest that only the education of the husband and not the joint education profile of the couple affects the propensity to migrate to large metropolitan areas the observed location trends are better explained by higher rates of power couple formation in larger metropolitan areas

internal migration and human capital theory to what extent is it selective empirical studies of internal labor migration modeling average outcomes suggest migrants move to enhance returns to their labor in contrast major international surveys show less than a third of internal migrants as motivated by employment reasons using swedish panel data for the years 2001 2009 this paper addresses this disconnect by examining the full distribution of migrant income changes results from initial cem matching and quantile regression suggest that large returns to internal migration are mostly captured by the higher educated those initially low in the income distribution and those heading into the largest metropolitan regions much if not most of migration outcomes are however a wash and indeed often negative in terms of pay off this suggests models of average outcomes as insufficient in addressing human capital motivated migration

government intervention as a bequest substitute abstract a subsequent generations model is used in order to characterize consumption allocation under the future generation s income uncertainty altruistic concerns towards future generations give rise to precautionary bequests which act as a hedge on risk it is shown that given a first order correlation between mean future income and the present generation s income government can provide a pareto improvement through a tax transfer policy with universal participation this policy acts as a substitute for precautionary bequests distributional aspects of government tax transfer policy are also discussed

what are cities worth land rents local productivity and the total value of amenities abstract this paper models how to use widely available data on wages and housing costs to infer land rents local productivity and the total value of local amenities in the presence of federal taxes and locally produced nontraded goods i apply the model to u s metropolitan areas with the aid of visually intuitive graphs the results improve measures of productivity and feature large differences in land rents wage and housing cost differences across metropolitan areas are accounted for more by productivity than quality of life differences regressions using individual amenities reveal that the most productive and valuable cities are typically coastal sunny mild educated and large

migration housing market and labor market responses to employment shocks abstract one reason for the united states economic success is the willingness of its residents to follow jobs households decisions to move depend not only on job prospects but also on the relative cost of housing i investigate how the housing market affects the flow of workers across cities this occurs through at least two channels the relative mobility of homeowners versus renters and the relative cost of housing across markets i use homeownership rates to measure the former and use an index that measures house prices across metropolitan statistical areas msas and the price elasticity of housing supply to capture the latter to show how variation in the these housing market factors not only affects cross city migration but also the housing and labor markets i estimate a var model of migration employment wages house prices and new housing supply using annual data from 277 us msas for 1990 2006 the response functions based on labor supply and demand shocks show substantial variation when evaluated at different values of the homeownership rate the price elasticity of housing supply and relative housing prices i also allow for spillover effects in the model that reflect the impact of a labor demand shock in the nearest city

post mortem examination of the international financial network abstract as the recent crisis has forcefully suggested understanding financial market interconnectedness is of a paramount importance to explain systemic risk stability and economic dynamics in this paper we address these issues along two related perspectives first we explore the statistical properties of the international financial network ifn defined as a weighted directed graph where nodes are countries and links represent debtor creditor relationships in equities and short long run debt we investigate whether the 2008 financial crisis has resulted in a significant change in the topological properties of the ifn our findings suggest that the crisis caused not only a reduction in the amount of securities traded but also induced changes in the topology of the network and in the time evolution of its statistical properties this has happened however without changing the disassortative core periphery structure of the ifn architecture second we perform an econometric study to examine the ability of network based measures to explain cross country differences in crisis intensity we investigate whether the conclusion of previous studies showing that international connectedness is not a relevant predictor of crisis intensity may be reversed once one explicitly accounts for the position of each country within the ifn we show that higher interconnectedness reduces the severity of the crisis as it allows adverse shocks to dissipate quicker however being central in the network may make countries that are not members of a rich club more vulnerable in times of crisis finally we find strong evidence of nonlinear effects once the high degree of heterogeneity that characterizes the ifn is taken into account

driving to opportunity local rents wages commuting costs and sub metropolitan quality of life we examine variation in local rents wage levels commuting costs household characteristics and amenities within metropolitan areas for 2071 areas covering the united states by density and central city status we demonstrate the sensibility of estimating wage levels by workplace not residence and recover decentralized rent gradients that fall with commuting costs we construct and map a willingness to pay index which indicates the quality of life typical households receive from local amenities when households are similar mobile and informed this index varies considerably within metros and is typically high in areas that are dense suburban sunny mild safe entertaining and have elevated school funding

free trade agreements as dynamic farsighted networks in the presence of multilateral negotiations are free trade agreements ftas necessary for or will they prevent global free trade i answer this question using a dynamic farsighted model of network formation among asymmetric countries ultimately ftas prevent global free trade when there are two larger countries and one smaller country but ftas can be necessary for global free trade when there are two smaller countries and one larger country the model provides insights into the dynamics of recent real world negotiations and recent results in the literature on the empirical determinants of trade agreements jel c71 f12 f13

optimal linear and two bracket income taxes with idiosyncratic earnings risk abstract this paper quantitatively characterizes optimal linear and two bracket income taxes we consider a dynamic stochastic general equilibrium model in which tax design involves redistributing income for both equity and social insurance substantive findings include i a significant fraction of agents supply zero labor or hold zero assets at the optimum ii neglecting tax distortion imposed on either of labor leisure and consumption saving decisions will lead to the prescription of tax codes that deviate substantially from the optimum and iii the optimal two bracket tax schedule will turn from regressivity to progressivity in the marginal tax rate once the volatility of idiosyncratic shocks becomes sufficiently large the last finding is consistent with the results in apps et al forthcoming and it also reconciles the contradictory results regarding the optimal two bracket tax schedule between slemrod et al 1994 and strawczynski 1998

compensating differentials in emerging labor and housing markets estimates of quality of life in russian cities abstract the purpose of this paper is to see if an equilibrium model of compensating differences for amenities can be applied to a major transition economy russia we analyze russian labor and housing markets using data from the russian longitudinal monitoring survey rlms augmented by city and regional specific characteristics from other sources our estimated wage and housing value equations suggest that workers are compensated for differences in climate environmental conditions ethnic conflicts crime rates and health conditions after controlling for worker characteristics occupation industry and economic conditions and various housing characteristics we find evidence that these compensating differentials exist even after controlling for the regional pay differences regional coefficients used by the russian government to compensate public sector workers for living in regions that are designated as less desirable quality of life as measured by a group of eleven amenities varies substantially the highest ranked cities tend to be in relatively warm areas and areas in the western european part of the country our quality of life index is positively correlated with net migration into a region suggesting workers are attracted to amenity rich locations overall we find that a model of compensating differentials with controls for disequilibrium yields useful information about compensation for location specific amenities and quality of life in this large transition economy

the role of site and job characteristics in hedonic wage models recent economic analyses of wage rate differentials have generally used some form of hedonic framework in explaining the observed wage structure while these studies have adopted this common theoretical justification the models have been used to serve two distinct objectives the first of these is an empirical test of the theory of equalizing differences originally introduced by adam smith in such applications see brown 7 lucas 26 olson 28 thaler and rosen 36 and viscusi 40 as examples specific job characteristics measured with technical information or with worker perceptions have been used to explain differences in wage rates across individuals and jobs while there are a number of these studies there has not been a consistent pattern of support for the theory indeed with the exception of job risks many characteristics that a priori would be expected to lead to equalizing differences have often exhibited incorrect and or statistically insignificant measured effects on wages the second use for wage models has been as the basis for an index of the quality of life in urban areas in this framework households are assumed to select residential locations so as to maximize their individual welfare migration between cities provides the mechanism for an equilibrium household assignment under ideal conditions the pattern of equilibrium wage rates reflects the attributes of the cities involved see hoch 20 izraeli 23 cropper lo cropper and arriaga salinas 111 and rosen 31 as examples the purpose of this paper is to develop a model for wage rate differentials that includes both job and site characteristics and to estimate the model with a large micro data set our wage models provide estimates of a market clearing envelope which includes each of two types of past analyses as a

winners and losers from the gradual formation of trading blocs although global free trade is efficient each country s benefit from free trade depends on the path that leads to the global free trade agreement using a dynamic model of trading bloc formation we show that when global free trade is reached gradually the countries that are initially excluded gain less than the rest and may be even made worse off by the final free trade agreement than they were in the initial state of no trading blocs

social insurance and the optimum piecewise linear income tax abstract this paper calculates optimal linear income taxes when differences in income are caused by random factors luck rather than by unobserved individual skills as assumed in the classical theory of income taxation as first shown by varian 1980 varian h r 1980 redistributive taxation as social insurance journal of public economics 14 49 68 in the former case income taxation acts as social insurance by introducing life uncertainty and precautionary behavior we find higher optimal marginal tax rates than those found by varian we also find that in the context of a piecewise two bracket linear tax schedule the second marginal tax is higher than the first a finding that contrasts with results recently obtained in the framework of classical income taxation theory which show a lower second marginal tax

demand substitution across us cities observable similarity and home price correlation abstract this paper studies demand substitution in the context of us cities demand substitution occurs when individuals on the margin between certain city pairs affect demand patterns in the aggregate causing certain cities to be better substitutes than others using a discrete model of city choice i derive two predictions for migration flows and test them empirically using city to city migration data from the us census i show that cities which are similar on a variety of observable measures have higher levels of gross migration flows in the steady state and higher net migration flows in response to labor demand shocks finally i propose pairwise correlation in metropolitan home prices as a price based measure of substitutability and show that it contains substantial predictive power for migration flows relative to observable similarity

clusters of entrepreneurship employment growth is strongly predicted by smaller average establishment size both across cities and across industries within cities but there is little consensus on why this relationship exists traditional economic explanations emphasize factors that reduce entry costs or raise entrepreneurial returns thereby increasing net returns and attracting entrepreneurs a second class of theories hypothesizes that some places are endowed with a greater supply of entrepreneurship evidence on sales per worker does not support the higher returns for entrepreneurship rationale our evidence suggests that entrepreneurship is higher when fixed costs are lower and when there are more entrepreneurial people

what drives migration moves to urban areas in spain evidence from the great recession during the great recession international emigration skyrocketed while internal migration strongly declined however when the focus is on migration to the larger urban areas in spain an increase i

note on the shape of the optimum income tax schedule abstract we consider the class of two bracket piecewise linear tax schedules sheshinski 1971 1972 and provide sufficient conditions for the optimum income tax schedule to have positive marginal rates and to be strictly convex calculations yield optimum tax rates between 20 and 35 percent and moderate rate progression the max min optimum has higher tax rates but not necessarily more rate progression than the utilitarian optimum the conditions are quite general postulating nondecreasing income effects as the level of income increases

is there a compensating wage differential for high crime levels first evidence from europe abstract this paper investigates whether high regional crime levels lead to a compensating wage differential paid by firms in the respective region using data from german social security records official police statistics and official statistics for 2003 2006 i consider both violent and non violent crimes and use three way error components estimators to control for individual and regional heterogeneity the findings suggest that wages are practically unrelated to changes in crime rates this result is robust over a wide range of subgroups there is however some evidence that crime rates influence land prices

stability of the world trade web over time an extinction analysis abstract the world trade web wtw is a weighted network whose nodes correspond to countries while edge weights reflecting the value of imports and or exports between countries in this paper we introduce to this macroeconomic system the notion of extinction analysis a technique often used in the analysis of ecosystems for the purpose of investigating the robustness of this network in particular we subject the wtw to a principled set of in silico knockout experiments akin to those carried out in the investigation of food webs but suitably adapted to this macroeconomic network informed by results in network theory as well as studies of contagion in economic networks we seek to understand the role of connectance in the robustness of the system we interpret increasing connectance as one aspect of a move towards globalization and liberalized trade policy broadly our experiments confirm two conjectures first that the wtws are robust yet fragile networks robust to random failures but fragile under targeted attack second that growing connectance has both positive and negative impacts on robustness more specifically we find that increasing connectance corresponds to increasing robustness for small shocks but to decreasing robustness in the face of large cascading shocks up to the system this yields evidence in support of the view that globalization as witnessed by increasing connectance increases the ability of a system to absorb shock up until a certain size whereupon the shock overwhelms the system and sparks a broader contagion we anticipate that experiments and measures like these can play an important role in the evaluation of the stability of economic systems

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

understanding the effects of homeownership and regional unemployment levels on internal migration during the economic crisis in spain the spanish labour market is characterised by high levels of unemployment which have increased during the global economic crisis spain is also a country which is characterised by a very high percentage of homeownership with more than 83 of households being owner occupiers both regional levels of unemployment and homeownership are known to be important factors influencing the spatial mobility decisions of households but little is known about how these factors influenced mobility during the recent economic crisis this paper uses rich individual level microdata from the last two spanish censuses 2001 and 2011 to study the effect of homeownership and regional unemployment levels on both short and long distance mobility our finding suggest that the role influence and interconnection of unemployment and homeownership in mobility decision have changed in the last decade

a network analysis of the italian overnight money market the objective of this paper is to analyse the network topology of the italian segment of the european overnight money market through methods of statistical mechanics applied to complex networks we investigate differences in the activities of banks of different sizes and the evolution of their connectivity structure over the maintenance period the main purpose of the analysis is to establish the potential implications of the current institutional arrangements on the stability of the banking system and to assess the efficiency of the interbank market in terms of absence of speculative and preferential trading relationships

the optimal two bracket linear income tax abstract we investigate two bracket piecewise linear income tax structures in a two class economy pareto efficient tax schedules of this type feature at least one marginal tax rate equal to zero and that the marginal tax rate may be increasing and declining we then investigate the optimal structure of taxation when the social welfare function utility function and distribution of abilities are characterized as in the standard optimal linear income tax problem in all cases the second marginal tax rate is less than the first rate but progressivity in the sense of a uniformly rising average tax rate generally obtains

housing and location choices of retiring households evidence from france in this paper a study is made of the mobility and housing choices of the elderly when retiring using household data collected in france from a theoretical viewpoint individuals are likely to decrease their housing quantity because of an income loss when retiring but they may also increase it to benefit from more housing comfort for leisure using the 1992 trois generations survey it is first shown that housing mobility at retirement is substantial in france with a variety of self reported motives then using the 1994 2001 french europanel survey evidence is found of both upsizing and downsizing for mobile recent retirees in many cases housing adjustments lead to a correction of the initial disequilibrium between the number of rooms and the number of occupants however a significant proportion of mobile recent retirees improve the quality of their dwelling

congestion agglomeration and the structure of cities abstract congestion costs in urban areas are significant and clearly represent a negative externality nonetheless economists also recognize the production advantages of urban density in the form of positive agglomeration externalities the long run equilibrium outcomes in economies with multiple correlated but offsetting externalities have yet to be fully explored in the literature therefore i develop a spatial equilibrium model of urban structure that includes both congestion costs and agglomeration externalities i then estimate the structural parameters of the model using a computational algorithm to match the spatial distribution of employment population land use land rents and commute times in the data policy simulations based on the estimates suggest that congestion pricing may have ambiguous consequences for economic welfare

coalitional stochastic stability in games networks and markets abstract this paper examines a dynamic process of unilateral and joint deviations of agents and the resulting stochastic evolution of social conventions our model unifies stochastic stability analysis in static settings including normal form games network formation games and simple exchange economies as stochastic stability analysis in a class of interactions in which agents unilaterally and jointly choose their strategies we embed a static setting in a dynamic process over time agents revise their strategies based on the improvements that the new strategy profile offers them in addition to the optimization process there are persistent random shocks on agents utility that potentially lead to switching to suboptimal strategies under a logit specification of choice probabilities we characterize the set of states that will be observed in the long run as noise vanishes we apply these results to examples of certain potential games

optimal income taxation an example with a u shaped pattern of optimal marginal tax rates comment using the mirrlees optimal income tax model with quasi linear preferences the paper examines conditions for marginal tax rates to be rising at high income levels and declining in an interval containing the modal skill it examines conditions for the marginal tax rate to be higher at a low skill level than at the high skill level with the same density an argument only holding for skill levels above a cutoff where resources of a worker are marginally of the same value as resources of the government data on earnings rates are presented copyright 1998 by american economic association

optimal linear income tax with random revenue abstract this paper introduces the concept of risk attitudes a government may take toward random revenue in the design of a linear income tax it shows that the familiar trade off formula between equity and efficiency can be derived either by assuming a risk neutral government attitude toward random revenue or by assuming no randomness of revenue we provide numerical analysis to demonstrate that optimum tax schedules for a non risk neutral government can significantly deviate from those for a risk neutral government

new estimates of quality of life in urban areas implicit markets capture compensation for intraurban and interregional differe nces in amenities and yield differences in housing prices and wages these pecuniary differences become preference based weights in a qual ity of life index hedonic equations are estimated using microdata fr om the 1980 census and assembled county based amenity data on climati c environmental and urban conditions ranking of 253 urban counties reveals substantial variation within as well as among the 185 urba n areas the quality of life differences across counties within one s msa is almost one half of the difference between the top and bottom ranked counties in the nation copyright 1988 by american economic association

optimal degree of progressivity under income uncertainty the insurance effect is introduced into the design of the optimal income tax policy when individual income is uncertain one of the most noteworthy aspects of this analysis is that now it is even more difficult to derive analytically useful results for income tax policy purposes than it was in earlier analyses using numerical methods it is shown that under quite reasonable assumptions regarding utility function and income distribution we obtain a progressive marginal tax rate structure which is rather similar to the structures actually observed in many countries

wages rents and the quality of life this study focuses on the role of wages and rents in allocating workers to locations with various quantities of amenities the theory demonstrates that if the amenity is also productive then the sign of the wage gradient is unclear while the rent gradient is positive the theory is extended to include the housing market and nontraded goods these extensions require little modification of the conclusion the empirical work on wages shows that the regional wage differences can be explained largely by these local attributes with the use of site price data implicit prices are estimated and quality of life rankings for the cities are computed

power couples changes in the locational choice of the college educated 1940 1990 college educated couples are increasingly located in large metropolitan areas these areas were home to 32 percent of all college educated couples in 1940 39 percent in 1970 and 50 percent in 1990 we investigate whether this trend can be explained by increasing urbanization of the college educated or the growth of dual career households and the resulting severity of the colocation problem we argue that the latter explanation is the primary one smaller cities may therefore experience reduced inflows of human capital relative to the past and thus become poorer

multimarket amenity compensation and the behavior of the elderly recent studies have argued that compensation for amenities occurs in general in both labor and land markets see glenn c blomquist mark c berger and john p hoehn 1988 hereafter bbh as well as sherwin rosen 1979 donald r haurin 1980 and jennifer roback 1982 1988 if this is true desirable locations would be characterized ceteris paribus by some mix of higher rents and lower wages due to the influx of people demanding the consumption amenities this seemingly obvious point has important implications household valuations of location fixed amenities are systematically understated by studies that consider only the wage or rent compensation separately for example access to the central business district is valued in urban economics through the rent gradient yet highaccess cities will have lower overall wages than low access cities similarly wage studies valuing such amenities across labor markets understate the value of amenities by ignoring any rent compensation those authoring such single market studies have at least implicitly justified the approach with the notion that one first selects a labor market area finds a job then at a second stage chooses a location in that labor market finds a house such behavior is only rational under quite restrictive assumptions since one would not generally select a labor market independently of residence traits and housing costs and vice versa the multimarket amenity compensation hypothesis that amenities are priced in both land and labor markets has been assumed on theoretical grounds by various researchers interested in constructing quality of life indexes notably bbh and roback 1982 here we offer a test of the hypothesis relying on much of bbh s county data and results the test is of considerable interest in its own right as it yields several implications about the behavior and wellbeing of the retired these implications stem directly from the exit of the retired from the labor force the data employed and the nature of an appropriate test are discussed in section i which also presents the empirical results these results strongly support the contention that amenities are capitalized in both land and labor markets section ii concludes the note and presents some policy implications

labour income uncertainty taxation and public good provision this article examines optimal nonlinear income taxation commodity taxation and public good provision under income uncertainty in a moral hazard framework uniform commodity taxation and the samuelson rule for public good provision are desirable under similar conditions as in the conventional tax model deviations from these rules is warranted if one can encourage effort by subsidising certain goods and overproviding public goods we also determine a rule for the optimal marginal income tax rate and provide some numerical simulations conditions for the validity of the solution procedure used in this class of models the first order approach are also explored uncertainty is a key component of many important real world decision making processes consider for example an individual s decision to acquire specific skills through education educational investments must be made well before the resolution of uncertainty related to the returns to skill thus the tax system which affects the net returns of different skill levels has a potentially large impact on educational decisions skill attainment and productivity a progressive tax system offers insurance to workers by redistributing income from the lucky to the unlucky other forms of social insurance such as unemployment and health insurance work in a similar manner a well known problem in the design of optimal income tax under uncertainty or any insurance mechanism is asymmetric information between the government and individuals income is partly due to individual effort and partly due to luck but the planner can only observe realised income not effort the optimal redistribution scheme is a balance between providing the workers with adequate incentives to acquire skills and sufficient insurance mirrlees 1974 was the first to examine the design of optimal redistributive income tax under income uncertainty this moral hazard model later used among others by varian 1980 tuomala 1984 and low and maldoom 2004 is an alternative to the more well known adverse selection model of mirrlees 1971 where income dispersion arises from differences in innate skill levels the moral hazard model is perhaps most appealing in the tax context when effort is interpreted as an ex ante decision on educational investment alternatively one can interpret the discussion as a general analysis of social insurance 1 income tax is only one element albeit an important one in the design of optimal government redistributive policy indeed recent optimal tax literature has devoted a lot of attention to the use of other instruments such as commodity taxation minimum

moral hazard income taxation and prospect theory the standard theory of optimal income taxation under uncertainty has been developed under the assumption that individuals maximise expected utility however prospect theory has now been established as an alternative model of individual behaviour with empirical support this paper explores the theory of optimal income taxation under uncertainty when individuals behave according to the tenets of prospect theory it is seen that many of the standard results are modified in interesting ways the first order approach for solving the optimisation prob lem is not valid over the domain of losses and the marginal tax schedule offers full insurance around the reference consumption level the implications of non welfarist objectives under income uncertainty are also examined

capital accumulation and uncertain lifetimes with adverse selection this paper examines the implications of adverse selection in the private annuity market for the pricing of private annuities and the consequent effects on constrption and bequest behavior with privately known heterogeneous mortality probabilities adverse selection causes the rate of return on private annuities to be less than the actuarially fair rate based on population average mortality however a fully funded social security system with compulsory participation can offer an implied rate of return equal to the actuarially fair rate based on population average mortality thus since social security offers a higher rate of return than private annuities consumers cannot completely offset the effects of social security by transacting in the private annuity market using an overlapping generations model with uncertain lifetimes we demonstrate that the introduction of actuarially fair social security reduces the steady state rate of return on annuities and raises the steady state levels of average bequests and average consumption of the young the steady state national capital stock rises or falls according to the strength of the bequest motive this abstract was borrowed from another version of this item

explaining spatial patterns of foreign employment in germany this paper investigates the main determinants of the representation of foreign employees across german regions since migration determinants are not necessarily the same for workers of different na

the evolution of free trade networks abstract this paper considers the evolutionary dynamics of a free trade agreement fta network formation game among n countries we first explore the static model introduced by goyal and joshi 2006 and precisely characterize the set of pairwise stable fta networks then we develop a dynamic model under random perturbations and identify long run outcomes to remove prediction uncertainty inherited from static analysis the results show that both partial free trade and global free trade will result when there are only three countries however when more countries are involved only the complete fta network emerges

quality of the business environment versus quality of life do firms and households like the same cities this paper develops a new measure of the quality of business environment that complements existing measures of the quality of life an annual panel of these measures is constructed and analyzed for 37 cities from 1977 to 1995 findings indicate that many cities attractive to firms are unattractive to households and vice versa in addition the size of a city s workforce increases with improvements in the quality of the business environment in contrast cities most likely to be dominated by retirees are those that are less attractive to firms additional specifications support theoretical arguments that retirees are drawn to cities in which local attributes are capitalized into lower wages rather than higher rents

optimal taxation prudence and risk sharing abstract this paper analyses optimal income taxation as a trade off between the incentive effects of increased uncertainty and the welfare benefits of social insurance greater prudence increases labour supply because of precautionary incentive effects which reduce the progressivity of the optimal income tax schedule increased uncertainty increases progressivity of the income tax schedule because of a greater value of social insurance optimal tax progressivity depends on the ratio of prudence to risk aversion when this ratio is high incentive effects dominate the social insurance effect leading to declining optimal income tax rates

breakthrough inventions and migrating clusters of innovation abstract we investigate the speed at which clusters of invention for a technology migrate spatially following breakthrough inventions we identify breakthrough inventions as the top 1 of us inventions for a technology during 1975 1984 in terms of subsequent citations patenting growth is significantly higher in cities and technologies where breakthrough inventions occur after 1984 relative to peer locations that do not experience breakthrough inventions this growth differential in turn depends on the mobility of the technology s labor force which we model through the extent that technologies depend upon immigrant scientists and engineers spatial adjustments are faster for technologies that depend heavily on immigrant inventors the results qualitatively confirm the mechanism of industry migration proposed in models like duranton duranton g 2007 urban evolutions the fast the slow and the still american economic review 97 197 221

the migration of technical workers using panel data on the danish population we estimated the revealed preferences of scientists and engineers for the places in which they choose to work our results indicate that these technical workers exhibit substantial sensitivity to differences in wages but that they have even stronger preferences for living close to family and friends the magnitude of these preferences moreover suggests that the greater geographic mobility of scientists and engineers relative to the population as a whole stems from more pronounced variation across regions in the wages that they can expect these results remain robust to estimation on a sample of individuals who must select new places of work for reasons unrelated to their preferences those who had been employed at establishments that discontinued operations

why are population flows so persistent abstract a neoclassical model of local growth is developed by integrating the static equilibrium underlying compensating differential theory as the steady state of a neoclassical growth model numerical results show that even very small frictions to labor and capital mobility along with small changes in local productivity or local quality of life suffice to cause highly persistent population flows wages and house prices in contrast jump most of the way to their new steady state the model suggests that cross sectional regressions of local population growth can help to identify past and present changes in the determinants of representative agent welfare more generally it provides a framework for interpreting observed local growth rates

inherent inequality and the optimal graduation of marginal tax rates in most countries marginal tax rates increase with income this is at variance with the results of the optimal income taxation literature whose numerical calculations have established the presumption that optimal marginal tax rates should decline with income have the existing results of optimal income tax literature therefore established a presumption that the observed pattern is suboptimal the object of this paper is to attempt to answer this question the numerical calculations that followed mirrlees s 1971 pioneering contribution tried many variations on his basic parametrisation including different preference structures and different functional forms however so far as we are aware most of the reported results maintain his basic assumption of a log normal distribution of abilities or wages with a standard deviation of logs of 0 39 mirrlees 1971 himself appealed the work of lydall 1969 for this figure but it has become the industry standard we show in this paper that departures from this assumption in particular increases in inherent inequality can alter the qualitative pattern of optimal marginal tax rates dramatically contrary to the currently available calculations we show that the optimal graduation can indeed be such that marginal tax rates increase for the majority of the population which is consistent with the observed pattern but that there continues to exist a significant income range at the top where marginal tax rates decline which of course is counter to the observed pattern

what makes cities attractive the determinants of urban labour migration in germany striking disparities characterise the population growth of cities in industrialised countries some cities suffer from ongoing population decline whereas other cities have experienced increasing numbers of inhabitants in recent years whether labour market conditions or amenities via their impact on migration primarily account for differences in cities demographic development is an important issue this paper investigates the determinants of the migration balance of german cities between 2000 and 2007 the focus is on the mobility of workers because labour migration in particular affects the future prospects of cities the findings suggest that not only labour market conditions but also amenities have an impact on the net migration rate moreover large cities seem to be ceteris paribus more attractive than small cities this finding possibly points to the importance of amenities such as cultural infrastructure and matching externalities in urban labour markets that are linked to city size urban policy aimed at enhancing the attractiveness of cities should thus consider both boosting the local economy and improving the quality of life

a strategic model of social and economic networks we study the stability and efficiency of social and economic networks when self interested individuals can form or sever links first for two stylized models we characterize the stable and efficient networks there does not always exist a stable network that is efficient next we show that this tension persists generally to assure that there exists a stable network that is efficient one is forced to allocate resources to nodes that are not responsible for any of the production we characterize one such allocation rule the equal split rule and another rule that arises naturally from bargaining of the players

wage growth ability sorting and location choice at labor force entry new evidence from u s census data abstract using a sample of college graduates from the 2000u s census this paper estimates the relationship between the location of labor force entry and wage growth the results show faster wage growth among workers who spend their early working years in larger more densely populated cities with more highly educated populations the estimates suggest that for an average ability worker entering the labor force in a large city the initial wage premium upon labor force entry is 15 7 percent and the wage growth premium after 5 years is 7 2 percent individual ability boosts wage growth in large cities but not in small cities or rural areas as a result higher ability college graduates sort themselves into larger cities when they enter the labor force leading to an additional urban wage growth gap of 3 2 percent after 5 years

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

farsighted network formation this paper studies a model of dynamic network formation when individuals are farsighted players evaluate the desirability of a current move in terms of its consequences on the entire discounted stream of payoffs we define a concept of equilibrium which takes into account farsighted behavior of agents and allows for limited cooperation amongst agents we show that an equilibrium process of network formation exists we also show that there are valuation structures in which no equilibrium strategy profile can sustain efficient networks we then provide sufficient conditions under which the equilibrium process will yield efficient outcomes

the kuznets process and the inequality development relationship abstract in his classic paper on economic growth and income inequality kuznets discussed the process of population shift from traditional to modern activities as the basis for a theory of distributional change during the course of development in this paper we present a formalization of the kuznets process conduct a general analysis of distributional change under this process and derive the functional forms of and conditions for a turning point in the inequality development relationship for six commonly used indices of inequality the functional form appropriate to each index is then estimated using cross section data on 60 developing and developed countries finally some extensions to the initial formalization of the kuznets process are considered

are children normal abstract we examine becker s 1960 contention that children are normal for the cross section of non hispanic white married couples in the united states we show that when we restrict comparisons to similarly educated women living in similarly expensive locations completed fertility is positively correlated with the husband s income the empirical evidence is consistent with children being normal in an effort to show causal effects we analyze the localized impact on fertility of the mid 1970s increase in world energy prices an exogenous shock that substantially increased men s incomes in the appalachian coal mining region empirical evidence for that population indicates that fertility increases with men s income

rising top incomes and increased borrowing in the rest of the distribution one potential consequence of rising top income concentration is borrowing by less affluent households attempting to maintain relative living standards this paper evaluates the keeping up with the joneses phenomenon examining the responsiveness of payment to income ratios for different debt types across the income distribution to changes in income among affluent households the analysis provides evidence for the responsiveness of debt to rising top incomes middle and upper middle income households take on more housing related debt and have higher payments in places with higher top income levels among lower income households non mortgage borrowing and debt payments decline consistent with restrictions in the supply of credit jel d63 d14

free trade networks abstract the paper examines the formation of free trade agreements ftas as a network formation game we consider an n country model in which possibly asymmetric countries trade differentiated industrial commodities we show that if all countries are symmetric the complete fta network is pairwise stable and it is the unique stable network if industrial commodities are not highly substitutable we also compare ftas and customs unions cus as to which of these two regimes facilitates global trade liberalization noticing that unlike cus each signatory of an fta can have another fta without consent of other member countries

negotiating free trade we develop a dynamic bargaining model in which a leading country endogenously decides whether to sequentially negotiate free trade agreements with subsets of countries or engage in simultaneous multilateral bargaining with all countries at once we show how the structure of coalition externalities shapes the choice between sequential and multilateral bargaining and we identify circumstances in which the grand coalition is the equilibrium outcome leading to worldwide free trade a model of international trade is then used to illustrate equilibrium outcomes and how they depend on the structure of trade and protection global free trade is not achieved when the political economy motive for protection is sufficiently large furthermore the model generates both building bloc and stumbling bloc effects of preferential trade agreements in particular we describe an equilibrium in which global free trade is attained only when preferential trade agreements are permitted to form a building bloc effect and an equilibrium in which global free trade is attained only when preferential trade agreements are forbidden a stumbling bloc effect the analysis identifies conditions under which each of these outcomes emerges

consumption taxes and economic efficiency with idiosyncratic wage shocks fundamental tax reform is examined in an overlapping generations model in which heterogeneous agents face idiosyncratic wage shocks and longevity uncertainty a progressive income tax is replaced with a flat consumption tax if idiosyncratic wage shocks are insurable i e no risk this reform improves interim efficiency a result consistent with the previous literature but if more realistically wage shocks are uninsurable this reform reduces efficiency even though national wealth and output increase over the entire transition path this efficiency loss in large part stems from reduced intragenerational risk sharing that was previously provided by the progressive tax system

selection in initial and return migration evidence from moves across spanish cities this paper investigates the sorting of more productive workers into denser cities using administrative data for spain that fol low individuals continuously throughout their working lives migrants who move to denser cities are positively selected in terms of educa tion occupational skills and individual productivity as proxied by pre migration position in the local earnings distribution however not everyone is able to benefit equally from denser cities and this leads to a second round of sorting returnees are not only ex ante less productive than permanent migrants but are also those who following the first move have least boosted up their earnings in denser cities

unaffordable housing and local employment growth evidence from california municipalities it is widely believed that unaffordable housing could drive businesses away and thus impede job growth however there is little evidence to support this view this paper presents a simple model to clarify how housing affordability is linked to employment growth and why unaffordable housing could negatively affect employment growth the paper then investigates this effect empirically using data on california municipalities for various reasons a simple correlation between unaffordable housing and employment growth cannot be interpreted as causal several empirical strategies are employed to identify the causal effect of unaffordable housing on employment growth the estimation results provide consistent evidence that unaffordable housing indeed slows local employment growth

local amenities and life cycle migration do people move for jobs or fun abstract do households move for jobs or fun and where do they go when they move we address these questions using the 1970 2000 us census based on a panel of quality of life and business environment measures households prefer msas in warm coastal areas and non metropolitan locations while firms prefer large growing cities in addition cities with improving business environments acquire increasing shares of workers especially workers with high levels of human capital cities with improving consumer amenities become relatively more populated by retirees further analysis of individual level migration decisions indicates that regardless of marital status young highly educated households tend to move towards places with higher quality business environments this tendency is especially pronounced among highly educated couples who are more subject to job market co location problems in contrast regardless of education couples near retirement tend to move away from places with favorable business environments and towards places with highly valued consumer amenities these patterns help explain why areas unattractive to both households and business have struggled as with upstate new york while the sun belt and other regions are thriving