risk taking and taxation an alternative perspective abstract the analysis of risk taking and taxation has almost invariably been in a portfolio choice framework this paper presents the alternative perspective of an occupational choice framework where risk taking involves the additional element of discrete choice between safe and risky activities it is shown that the specification of equilibrium must of necessity have a general equilibrium character in this setting the paper develops rules for government intervention in the market equilibrium and analyses the effects of taxation on risk taking

a general equilibrium theory of firm formation based on individual unobservable skills abstract a model of firm formation is built along the lines of knight 1921 contrary to kihlstrom and laffont 1979 the individuals are risk neutral but have different productive efficiencies we suppose that the individuals who are the more efficient workers are also the more efficient entrepreneurs each agent chooses the activity which gives her the larger expected income in equilibrium the more efficient people become entrepreneurs and under a special kind of increasing returns to scale assumption this is also what is implied by efficiency considerations however we show that the equilibrium number of entrepreneurs is always larger than the pareto optimal one a simple uniform lump sum tax on firms together with redistribution of the tax revenue to workers is nevertheless sufficient to restore efficiency

everyone may benefit from subsidising entry to risky occupations this paper shows that in the presence of costly state verification directly or indirectly subsidising entry to risky occupations may benefit everyone the result holds even in the presence of private insurance indeed it may be desirable to prohibit private insurance in favour of subsidies to hazardous activities these findings do not depend on the government having an advantage over the private sector in observing outcomes the explanation is that through its influence on equilibrium price feasible fiscal policy can shift the return distribution so as to create collective insurance more cheaply than is possible through private contracting with its requirement of costly auditing amongst applications is a case for a loss making state bank offering high interest rate loans

rationing by waiting and the value of time results from a natural experiment the authors analyze data from a natural experiment with rationing by waiting in the situation motorists were confronted with a choice between waiting in line for low priced gasoline or purchasing at a higher price without waiting they view this as a revealed preference experiment and use their choices to estimate the value of time spent waiting as a function of individual characteristics in most cases the estimates of the value of time are quite similar to individuals after tax wages 13 references 7 tables

tax evasion and occupational choice this paper is concerned with the combined effect of tax compliance and tax audit policy on the occupational choice of individuals and on public policy objectives such as tax revenue total production and social welfare individuals are assumed to have a choice between riskless work and a risky entrepreneurial occupation they are only differentiated according to their attitudes towards risk more risk averse individuals go into the safe occupation and less risk averse people become entrepreneurs tax evasion is only accessible to the latter and therefore its control tends to discourage risk taking whether control of tax evasion is desirable for the economy as a whole depends on the objective function of the government it is shown that tax audit policy has conflicting effects on tax revenue per capita income and social welfare these conflicts are illustrated through a numerical example in this paper the emphasis is placed on the clarity and the simplicity of the presentation so as to argue that even though the tax schedule can hardly be differentiated across individuals tax evasion and its control can be used by policymakers to introduce variability in the individual s tax treatment

optimal taxation and firm formation abstract this paper analyzes non linear optimal taxation under asymmetric information in a general equilibrium model with endogenous firm formation it first shows under a weak separability assumption on technologies that output and input taxes are not necessary if profits are optimally taxed it then examines the progressivity or lack of it of the optimal profit tax and describes the corresponding effects on the structure of the production sector relative to the first best solution finally the paper investigates conditions under which the provision of public goods can be decentralized

inequality and inefficiency in a model of occupational choice with asymmetric information abstract this paper presents a model of an economy with two occupations in which one occupation has access to some private information it is shown that even if all individuals are identical equality of ability and there is free entry into occupations equality of opportunity this may not be sufficient to equalize the rewards to occupations in equilibrium the only equilibrium may be one where one occupation earns more than the other and entry to the lucrative occupation is rationed we extend the analysis to the case of heterogenous individuals where we show that under reasonable assumptions asymmetric information worsens the distribution of income we also look at inefficiencies and show that with asymmetric information it may be the least productive individuals who become managers

capital controls and balance of payments crises abstract the theory of balance of payments crises shows that under perfect foresight a system of fixed exchange rate is not sustainable in the presence of diverging economic policies in this paper it is shown how and why capital controls succeed in maintaining the principle of a fixed but adjustable parity both cases of a devaluation and a revaluation are considered and a condition for a parity change to be credible is presented

balance of payments crises under inflation targeting abstract this paper analyzes a small open economy model under inflation targeting it shows why such a monetary regime is vulnerable to speculative attacks that take place over a short period rather than instantaneously the speed at which the regime collapses and the extent of reserve losses are increasing in the central bank s explicit or implicit commitment to intervene in the foreign exchange market attacks are therefore ranked from most to least severe as follows exchange rate targeting cpi inflation targeting domestic nontradables inflation targeting and money targeting under inflation targeting the size of the attack is increasing in the tradables consumption share

speculative currency attacks and balance of payments crises abstract this paper reviews the recent theoretical literature on collapsing exchange rate regimes using a combination of technique intuition and realworld observation we discuss the literature s main insights point out some unresolved questions and offer suggestions for future research the survey should be of interest to both specialists and non specialists in the field of international macroeconomics

equity and efficiency in rationed labor markets the social welfare implications of income tax policy are shown to critically depend on whether or not labor markets are rationed i e on the existence of involuntary unemployment with rationed labor markets raising taxes on the employed and transfers to the unemployed might improve both equity and efficiency it improves equity by redistributing income from the employed to the unemployed it improves efficiency as it encourages people with a small utility surplus of employment to exit the labor market leaving their jobs for people with a higher utility surplus i derive conditions under which this result continues to hold when only part of the labor market is rationed when there is both frictional and rationing unemployment and when rationing endogenously follows from trade unions monopoly power

asymmetric information occupational choice and government policy a model of credit markets under asymmetric information is proposed in which individuals differ in abilities that are valued in both entrepreneurship and paid employment unlike the heterogeneous ability model of de meza and webb 1987 over investment is not inevitable under investment and credit rationing can occur instead this result depends on the novel possibility of there being greater separation of types in paid employment than in entrepreneurship the model allows individuals to be monitored in both occupations and permits derivation of the conditions under which the novel possibility holds the role of corrective government policies is also discussed

taxation of mobile factors as insurance under uncertainty this paper considers the effects of the taxation of mobile factors i e capital under uncertainty the wages earned by residents of a jurisdiction are uncertain due to random shocks since the uncertain wages in a jurisdiction depend on the amount of mobile capital employed in the jurisdiction and since taxation alters the quantity of capital employed taxation affects the riskiness of uncertain wages in particular the taxation of capital moderates the fluctuation of uncertain wages thereby providing insurance for this reason jurisdictions use distortionary capital taxation even if lump sum taxation is available in addition this insurance effect counteracts the tendency toward too low tax rates on capital arising from tax competition and possibly improves the efficiency of tax competition

optimal linear income taxation in models with occupational choice the purpose of this paper is to investigate the implication of occupational choice for linear income taxation occupational choice is restricted to entrepreneurship versus wage earning different settings are considered concerning the introduction of uncertainty and that of individuals heterogeneity in ability or risk aversion for each setting an optimal tax formula is derived and shown to be made up of various components pertaining to insurance redistribution and efficiency

are bond financed deficits inflationary a ricardian analysis this paper considers the possible theoretical validity of the following monetarist hypothesis that a constant positive government budget deficit can be maintained permanently and without inflation if it is financed by the issue of bonds rather than money the question is studied in a discrete time perfect foresight version of the competitive equilibrium model of sidrauski modified by the inclusion of government bonds as a third asset it is shown that the monetarist hypothesis is invalid if the deficit is defined exclusive of interest payments but that it is valid under the conventional definition it is also shown that the stock of bonds can grow indefinitely at a rate in excess of the rate of output growth provided that the difference is less than the rate of time preference these formal conclusions do not take account of possible limitations on taxing capacity arising from default incentives that tend to grow with the stock of bonds

modeling productive entrepreneurship in developing countries this paper develops a model of entrepreneurial start ups in an economy with costly firm creation costly entry to the skilled labor market and a mismatch between skilled workers and available jobs as prevailing in many developing countries it examines several mitigating policies such as improving the business environment reducing tax rates and cost of starting business and subsidizing entrepreneurial search and skilled employment to be effective policies need to target the most binding constraints to productive entrepreneurship when the constraints are on the side of firms search subsidies would be more effective in encouraging productive start ups than subsidies to skilled employment although fewer entrepreneurs may choose to operate in the formal sector than under the latter both types of subsidies should be phased out with reforms of the business environment and improved labor markets

the welfare cost of rationing by queuing across markets theory and estimates from the u s gasoline crises governments sometimes impose price controls and nonprice rationing by queuing profit seeking firms occasionally ration by putting their customers on allocation following barzel 1974 and deacon and sonstelie 1985 we take the decision to ration as a given and analyze it employing standard microeconomics and applied welfare economics this paper adds to the literature by focusing on optimally rationing a good across markets further we estimate the actual welfare cost of improper allocation across markets in the u s gasoline crises of 1973 1974 and 1979

is a minimum wage an appropriate instrument for redistribution textabstractwe analyze the redistributional dis advantages of a minimum wage over income taxation in competitive labor markets without imposing assumptions on the in efficiency of labor rationing compared to a distributionally equivalent tax change a minimum wage increase raises involuntary unemployment but also raises skill formation as some individuals avoid unemployment a minimum wage is an appropriate instrument for redistribution if and only if the public revenue gains from additional skill formation outweigh both the public revenue losses from additional unemployment and the utility losses of inefficient labor rationing we show that this critically depends on how labor rationing is distributed among workers a necessary condition for the desirability of a minimum wage increase is that the public revenue gains from higher skill formation outweigh the revenue losses from higher unemployment we write this condition in terms of measurable sufficient statistics our empirical analysis suggests that a minimum wage increase is undesirable in nearly all oecd countries a reduction in the minimum wage along with tax adjustments that keep net incomes constant would yield a pareto improvement

the allocative cost of price ceilings in the u s residential market for natural gas a direct consequence of restricting the price of a good for which secondary markets do not exist is that in the presence of excess demand the good will not be allocated to the buyers who value it the most we demonstrate the empirical importance of this allocative cost for the u s residential market for natural gas which was subject to price ceilings during 1954 89 using a household level discrete continuous model of natural gas demand we estimate that the allocative cost in this market averaged 3 6 billion annually nearly tripling previous estimates of the net welfare loss to u s consumers

tight money and inflation abstract in a recent paper sargent and wallace present an example where tightening of monetary policy over a specified time interval in conjunction with a constant deficit leads to an increase in the rate of inflation not only beyond this interval but even from the outset in the present paper i show how the latter result can be derived from a standard monetary growth model of the sidrauski brock type this enables a relatively simple interpretation of the apparent paradox

what drives compliance an application of the theory of planned behaviour to urban water restrictions using structural equation modelling abstractthis article presents analysis of households intentions to comply with government constraints on the use of urban water or so called water restrictions the data are drawn from australian cities and was collected during a severe drought structural equation modelling is employed to operationalize constructs taken from the theory of planned behaviour and to answer important policy questions related to compliance the modelled data support the view that attitudes social norms and perceived behavioural control pbc have a positive and significant influence on intentions to comply pbc has the strongest influence on intentions suggesting policy directed at assisting households to meet regulatory criteria might be at least as effective as advertising expenditures aimed at shaping attitudes and norms importantly intentions to comply are also shown to have a positive and significant influence on reported compliance behaviour

the capital inflows problem revisited a stylized model of southern cone disinflation in the late 1970s countries in latin america s southern cone initiated attempts to lower domestic inflation rates through the progressive reduction of a preannounced rate of exchange rate devaluation the stabilization programs gave rise to massive capital inflows real exchange rate appreciation and current account deficits this paper develops a stylized intertemporal framework in which the effects of a credible preannounced disinflation scheme can be studied it is shown that even when agents have perfect foresight and markets clear continuously the capital inflows phenomenon and the associated real appreciation may result while unanticipated permanent inflation changes are neutral in the paper anticipated inflation is neutral only in exceptional circumstances a preannounced disinflation operates by altering the path of an expenditure based real domestic interest rate that depends on expected changes in the prices of liquidity services and nontradable consumption goods

a comparison between economic systems with an application to transition abstract this paper develops a general equilibrium theory of endogenous firm and class formation under non contractibility with heterogeneous individuals a collectivist economy a private ownership economy and a mixed economy are compared on the basis of identical economic fundamentals methodological symmetry each economic system generates specific inefficiencies so that none dominates the others in general the main trade off is between the welfare loss associated with risk taking in the private ownership economy and the informational problems in the collectivist economy we then use this framework to study the political economy of transition between economic systems and provide detailed welfare results

the emperor has no clothes the limits of opec in the global oil market most scholars and policymakers believe opec can and does influence the price of oil by acting as a cartel this paper argues that most of the conventional wisdom about opec is wrong opec rarely if ever influences the oil production rate in its member states further opec has almost no lasting impact on world prices except under rare conditions there was one occasion on which opec did have a significant impact on world oil prices namely the 1973 oil crisis but opec s role in the event has been greatly misunderstood the circumstances of the crisis were highly exceptional making it unlikely that the organization could ever have a similar impact on world oil prices again this paper seeks to correct the misunderstanding about opec s role and replace it with a better understanding of the organization i argue that opec is dysfunctional as a cartel as it has little or no causal impact on its members choices about production levels or investment in production capacity opec s role is obscured in part by the complexity of the world oil market and in part by misdirection by policymakers especially within opec many scholars especially economists have argued that opec should be understood as a cartel designed to solve a prisoner s dilemma pd coordination game yet opec s persistence is better understood as a widespread failure to update beliefs about the organization a failure that is driven by information asymmetry and politics the fact that such a widespread belief about the world s most important commodity market could be wrong can help us better understand international regimes

currency crises and contingent liabilities a contingent liability is a future spending commitment that is realized with some probability international organizations emphasize the dangers of contingent liabilities when providing advice why one answer is obvious if significant contingent liabilities are realized they commit governments to substantial fiscal costs there is a further reason by taking on a contingent liability the government can increase the probability of the underlying shock taking place this paper describes how the issuance of government guarantees and the methods by which they are financed affect the probability of crises taking place it also discusses the determinants of post crisis inflation and depreciation

balance of payments crises in a perfect foresight optimizing model abstract the paper extends the literature on balance of payments crises by treating the issue in a generalized equilibrium framework investors maximize a non separble utility function defined over consumption and real money balances under the threat of a future collapse of the fixed exchange rate regime the paper obtains real effects in the form of current account adjustments when agents realize that the fixed regime is not indefinitely viable new information regarding official foreign lending can cause attacks at the central bank in the form of sudden shifts by investors out of domestic money into foreign bonds

fuel price increases and the timing of changes in household driving decisions abstract using the oil price increase of 1979 as a natural experiment and several event study specifications this paper finds evidence that the oil spike induced significant decreases in carbon emissions on both the intensive miles driven and extensive auto fuel efficiency margins further it appears that substitution on the intensive margin occurred instantaneously whereas extensive margin substitution occurred with a significant lag given the timing of the changes the results appear robust to the implementation of corporate average fuel economy cafe standards over the same time period these findings have important implications for estimating demand elasticities for durable goods with respect to energy prices and the price elasticity of fuels themselves

taxation and labour supply with risky activities consider the following three phenomena a in recent years dramatic shifts in the types of contract between london cabbies and the taxi owners have been observed b if one tries to hire a housepainter in the uk one is often quoted two rates one for official work during regular hours and for unofficial weekend and evening work c in two unrelated discussions with economics professors about the textbook model of taxation and labour supply each revealed to me that marginal hours released from his regular employment were spent not in the form of leisure but in participating in stock market speculation

housing market spillovers evidence from the end of rent control in cambridge massachusetts we measure the capitalization of housing market externalities into residential housing values by studying the unanticipated elimination of stringent rent controls in cambridge massachusetts in 1995 pooling data on the universe of assessed values and transacted prices of cambridge residential properties between 1988 and 2005 we find that rent decontrol generated substantial robust price appreciation at decontrolled units and nearby never controlled units accounting for a quarter of the 7 8 billion in cambridge residential property appreciation during this period the majority of this contribution stems from induced appreciation of never controlled properties residential investment explains only a small fraction of the total

a reexamination of the neoclassical trade model under uncertainty abstract this paper presents a model that pinpoints the exact places and reasons that the propositions of the heckscher ohlin samuelson model break down under uncertainty within the model if preferences exhibit decreasing absolute risk aversion i a capital poor country tends to obtain lower revenues from its resources than the same resources would yield in capital rich countries ii if there is one riskless and one risky sector a capital abundant country tends to have a comparative advantage in the risky sector and iii the pattern of trade depends on the intra national as well as the inter national distribution of endowments

collapsing exchange rate regimes abstract the paper develops models of speculative runs and collapse of fixed exchange rate regimes which result from credit policies that are ultimately inconsistent with a fixed exchange rate while no substantially new results are offered the formulation itself is of interest in highlighting the important ideas that have emerged in this area we modify the flood garber model to make the analysis more comparable with the deterministic case specifically we assume that the money growth process is specified in terms of growth rates rather than absolute increments and as a uniform rather than exponential distribution the modified analysis lends itself to a simple geometric interpretation of the krugman and flood garber models highlighting the important difference between the deterministic and stochastic models in the former the speculative attack run is concentrated in the latter the transition to floating is diffuse reserve losses exceed increases in domestic credit because of a rising probability of transition and reserve depletion accelerates on the way to the regime change

the vulnerability of price stabilization schemes to speculative attack this paper examines the effects of government attempts to stabilize the prices of commodities by use of buffer stocks agricultural goods subject to supply uncertainty as well as depletable resources are considered in each case it is shown that the resulting rational expectations competitive equilibrium contains a speculative attack a situation where the entire government stock is suddenly purchased by previously inactive speculators the analysis is applied to the historical attempt to peg the gold price which caused the attack of 1968 the insights gained and the methodology developed also apply to the various international agreements to impose bans on commodity prices which have been proposed by the united nations conference on trade and development

speculative attack and the external constraint in a maximizing model of the balance of payments balance of payments models of speculative attack differ from non renewable resource models in that foreign exchange reserves may be borrowed from abroad this paper shows that in an idealized world where all private income is subject to lump sum taxation central bank reserves can become infinitely negative without violating the government s intertemporal budget constraint none the less a growth rate of domestic credit exceeding the world interest rate if maintained indefinitely leads to violation of the constraint in the paper s model given an assumed limit to official external borrowing the paper next analyses inevitable transitions between fixed and floating exchange rate regimes when individual preferences are explicitly specified in a discrete time deterministic model the collapse of a fixed rate may be characterized by two successive speculative attacks

predictive analytics and the targeting of audits the literature on audit strategies has focused on random audits or on audits conditioned only on income declaration in contrast tax authorities employ the tools of predictive analytics to identify taxpayers for audit with a range of variables used for conditioning the paper explores the compliance and revenue consequences of the use of predictive analytics in an agent based model that draws upon a behavioral approach to tax compliance the taxpayers in the model form subjective beliefs about the probability of audit from social interaction and are guided by a social custom that is developed from meeting other taxpayers the belief and social custom feed into the occupational choice between employment and two forms of self employment it is shown that the use of predictive analytics yields a significant increase in revenue over a random audit strategy

monetary independence under bretton woods perspectives from a stochastic maximizing model research based on the kouri porter 1974 model of international capital flows suggests that the central banks of nonreserve countries enjoyed considerable monetary independence during the bretton woods era this paper is a theoretical and empirical reassessment of this conclusion using a stochastic maximizing model it is shown that the existence of imperfect asset substitutability does not guarantee monetary control at the empirical level the estimated offset coefficients for four industrialized countries are consistent with zero monetary independence

collapsing exchange rate regimes some linear examples abstract we construct a pair of linear examples to study the collapse time of a fixed exchange rate regime the first example is a perfect foresight continuous time model which allows calculation of the exact collapse time and the tracking of reserves the second example is a discrete time stochastic model which yields an endogenous probability distribution over the collapse time and produces a forward discount of the exchange rate

fiscal imbalances and the dynamics of currency crises abstract this paper analyzes links between the fiscal theory of the price level ftpl and the first generation models after krugman journal of money credit and banking 11 1979 311 325 exploring the idea that a synthesis between the two can become a new framework to analyze the fiscal dimension of currency crises working in a simple synthetic framework we show how external nominal shocks can cause a fiscal imbalance and undermine currency stability resolve two well known paradoxes of the first generation model discuss the role of seigniorage revenues and illustrate how fiscal and interest rate policies interact to determine the magnitude and the timing of speculative attacks and devaluations

the timing of exchange rate collapse abstract recent episodes of exchange rate collapse have renewed interest in models of speculative attacks these episodes have been considered by some observers to be inconsistent with fundamentals models of attack since there was no prolonged period of policy misalignment and declining reserves as required by such models this paper develops a fundamentals model in which collapse is instantaneous at the time of unexpected policy change and or a change in the expectations of future policy even for a reserve abundant country

managing water supply shortage interruption vs pricing abstract supply shortage is a common problem faced by a consumer solutions for allocating the limited supply include rationing queuing interruption and pricing while previous research has examined the welfare losses generated by each solution there is little evidence on their relative magnitudes within a common framework the objective of this paper is tospecify a model of consumer behaviour under service interruption to estimate the exact welfare loss of service interruption the same model is used to estimate the loss of a price increase intended to resolve a supply shortage using water consumption data collected for hong kong we find that relative to pricing service interruption is inefficient for water shortage management

the welfare costs of rationing by waiting with price controls and rationing by waiting rational consumers increase the quantity boughtperpurchase this individually rational response is socially wasteful and the cost of making it is a deadweight loss this cost plus the value of time spent in queues may exceed the total rent transferred from suppliers to consumers by price controls i e the value of resources spent competing for the rent may exceed the rent itself this point is illustrated by an empirical application to gasoline price controls rent seeking exhausts an estimated 116 percent of the rent trangerred the efficiency of the price system is often illustrated lby pointing to the obvious wastes associated with alternative allocation mechanisms for example the queues that accompany price controls and first come first served allocations although rationing by waiting wastes resources in a dramatically visible fashion the magnitude of the waste and the factors that determine it seldom have been examined empirically moreover existing theory on the subject is incomplete unless the first come first served rule is precisely specified consumers will compete for available supplies in ways other than waiting in the model developed below queues cause consumers to compete by increasing amounts bought per trip to the market the analysis demonstrates that such individually rational adjustments only increase the welfare cost of rationing by waiting and thus are socially self defeating the theoretical model is illustrated empirically by estimating the welfare costs of a market wide ceiling on gasoline prices this application was motivated by the availability of two key pieces of information the value of time spent in gasoline queues and the effect of waiting lines on amounts bought per purchase this information was obtained from a survey of motorists conducted during the era of federal gasoline price regulations to focus on competition among consumers one of the inefficiencies that results from price controls is ignored the supply reduction leading to the

macroeconomic policy exchange rate dynamics and optimal asset accumulation the paper develops a model of exchange rate and current account determination for a small economy peopled by infinitely lived utility maximizing households in this setting a central bank purchase of foreign exchange has no real effects when central bank foreign reserves earn interest at the world rate and proceeds are returned to the public in contrast an increase in the monetary growth rate does have real effects even in the long run the model developed here implies that an increase in government spending may lead to a surplus on current account the external adjustment process predicted by the model is one in which consumption real balances and external assets all rise or fall simultaneously

taxation risk and returns to scale abstract this paper examines the effect of a profit tax with full loss offset on the equilibrium number of firms equilibrium size of firms and the equilibrium wage rate the effect of such a tax depends on economies of scale in particular if stochastic increasing returns to scale prevail at equilibrium then the imposition of such a tax raises the equilibrium wage rate this has implications for optimal taxation and tax incidence

the optimal linear taxation of employment and self employment incomes abstract this paper models optimal linear taxation when occupational choice and labour supply are endogenous workers choose between paid employment self employment and unemployment self employment incomes are risky and employees may be involuntarily laid off calibrating the model to the uk economy the optimal tax solution involves relatively high taxation with substantial redistribution and a higher nominal but not effective marginal tax rate imposed on the self employed than on employees the implications of making unemployment benefits as well as tax rates endogenous are also analysed and robustness checks are performed