defending the articles of confederation a reply to dougherty this reply addresses the issues raised bydougherty in response to my 1999 article in this journal ialso develop a new graphical model of the optimal collectionrate under the articles where states made contributions andcontrast it to the revenue potential from direct taxation ibelieve that despite dougherty s criticisms my argumentremains valid while the articles were not perfect in anabsolute sense that when more properly viewed in acomparative manner that the system of state contributions forraising revenue under the articles was and still is superiorto a system of direct federal taxation

reverse revenue sharing a modest proposal while no claim is made that reverse revenue sharing is even from a private interest perspective the best fiscal arrangement it has been argued that it represents an improvement over current arrangements in important ways still reverse revenue sharing surely will be seen by most as a rather extreme proposal for some this will come from the fact that it is the public interest model of government that remains dominant in structuring their view of the political process but even those who accept the private interest model of government will see the proposal as extreme in terms of its political infeasibility the very considerations that make the decentralization of the reverse revenue proposal desirable i e reducing the power of political interest groups make it unlikely that it will generate enthusiastic political support indeed few things would provide more compelling evidence that reverse revenue sharing is a badly flawed proposal than the formation of an effective coalition of political interests in favor of it i conclude this paper with confidence that the case for reverse revenue sharing is completely safe from this damaging prospect

demographic change and income inequality in the united states 1976 1989 the u s economy experienced significant increases in the degree of income inequality over the past two decades in this paper we consider the effects of race age female headship and college education on the distribution of family income by developing a multivariate methodology that allows us to gauge the influence of one factor while holding other determinants of family incomes constant over the period studied we find that race had only a minor effect on the overall size distribution of income age had a somewhat greater effect than race in contrast the impact of female heads and college education were quite substantial the multivariate estimates reveal that the effects of female heads and college education both increase the gini to a much greater extent than the progressivity of federal income taxes decreases it the effects of college education and female headed families on inequality have grown larger across time while the influence of age has declined we find that the effects of race on inequality have changed little over the 1976 to 1989 period excerpt

the measurement and trend of inequality comment in the september 1975 issue of this review morton paglin posits a new summary statistic the paglin gini which he uses to measure and analyze the level and trend of income inequality in the united states this measure intends to recognize only income differences among families unrelated to the observed age income profile as contributing to meaningful income inequality this is to be contrasted with the standard lorenz gini in which all differences in income among living units contribute to inequality paglin s measure indicates substantially less inequality in the united states than is indicated by the lorenz gini moreover paglin inequality falls considerably in the post world war ii period while other measures indicate very little change in inequality over this period paglin is addressing an important problem for the postwar period when the age distribution the length of time spent in school and the propensity of the young and the old to form their own households have all changed rapidly the trend in the conventional gini coefficient has no obvious normative interpretation however it is often given one unfortunately paglin s proposed index of inequality does not meet its objective and even if it did its normative content would be no clearer than that of the standard measure indeed no single indicator is sufficient to capture trends in normatively relevant inequality without further analysis like any other time series a time series of inequality must be approached with a well specified multivariate model after describing paglin s procedure in the next section we challenge his measure in section ii in section iii paglin s interpretation of policy relevant inequality is questioned and in section iv the implications of the paglin gini for the equity of the transfer system are analyzed section v is a summary of our critique

political decentralization and corruption evidence from around the world abstract how does political decentralization affect the frequency and costliness of bribe extraction by corrupt officials previous empirical studies using subjective indexes of perceived corruption and mostly fiscal indicators of decentralization have suggested conflicting conclusions in search of more precise findings we combine and explore two new data sources an original cross national data set on particular types of decentralization and the results of a firm level survey conducted in 80 countries about firms concrete experiences with bribery in countries with a larger number of government or administrative tiers and given local revenues a larger number of local public employees reported bribery was more frequent when local or central governments received a larger share of gdp in revenue bribery was less frequent overall the results suggest the danger of uncoordinated rent seeking as government structures become more complex

stability and competitive equilibrium in trading networks we introduce a model in which agents in a network can trade via bilateral contracts we find that when continuous transfers are allowed and utilities are quasi linear the full substitutability of preferences is sufficient to guarantee the existence of stable outcomes for any underlying network structure furthermore the set of stable outcomes is essentially equivalent to the set of competitive equilibria and all stable outcomes are in the core and are efficient by contrast for any domain of preferences strictly larger than that of full substitutability the existence of stable outcomes and competitive equilibria cannot be guaranteed

rights equity and economic efficiency the adelman morris premise that economic development and equity are incompatible is not supported by the evidence of a strong relationship between equality of rights and the income distribution the premise that equity requires the denial of individual rights and the affirmation of state control is an oxymoron what has been overlooked in the literature on growth and equity is the effect of the rights structure on both economic efficiency and on the income distribution the evidence is that free societies have much larger shares of income going to the middle 60 percent of the distribution than is observed in societies where men are not free to choose in politically open societies compared to politically closed regimes the share of income to the middle three quintiles is q2 10 7 vs 8 0 q3 16 0 vs 11 5 and q4 22 9 vs 17 9 in the aggregate the shares to the middle quintiles are 49 6 vs 37 4 in nations that obey the rule of law compared to regimes in which the rights of the state relative to the individual are paramount the comparisons are q2 11 2 vs 7 4 q3 16 3 vs 10 6 q4 23 0 vs 17 3 summing the three quintiles yields a comparison of 50 5 vs 35 3 in countries that have private property market allocation of resources and minimum intervention by the state compared to command economies the shares of income to the middle quintiles are q2 10 8 vs 8 0 q3 16 0 vs 11 1 and q4 22 8 vs 17 7 aggregated the shares of the middle class in regimes with high levels of economic liberty are 49 6 vs 36 8 for regimes with restricted private economic rights

dollars and dreams a reduced middle class alternative explanations we decompose annual earnings into hours of work and hourly earnings and analyze male female differences in earnings inequality using canadian data our results indicate that the larger female inequality in earnings is due to a greater inequality in the

leviathan in a dual economy this paper studies the policies of a leviathan state with an ambition to make money and to stay in power the economic framework is a developing country characterized by dual markets government revenue is raised by taxing the agricultural sector part of this revenue is offered to the politically influential urban population in the form of low productive but well paid public sector employment i calculate the optimal level of rural taxation from the point of view of the leviathan and investigate its effects on migration industrialization public sector employment and urban unemployment in different political scenarios

the power to tax analytical foundations of a fiscal constitution preface 1 taxation in constitutional perspective 2 natural government a model of leviathan 3 constraints on base and rate structure 4 the taxation of commodities 5 taxation through time income taxes capital taxes and public debt 6 money creation and taxation 7 the disposition of public revenues 8 the domain of politics 9 open economy federalism and taxing authority 10 toward authentic tax reform prospects and prescriptions epilogue notes selected bibliography index

the trend behavior of alternative income inequality measures in the united states from 1947 1990 and the structural break this article tests the hypothesis that the time series process of income inequality has experienced a structural break the timing of the structural break is treated as an unknown parameter to be estimated from the data because it is not possible to associate a single episodic policy event with the break year and to avoid bias in favor of a unit root hypothesis if the break was near the selected year for several measures of income inequality a segmented trend model is more appropriate to account for the fundamentals affecting the behavior of income inequality as opposed to a stochastic trend model

lorenz dominance and welfare changes in the u s distribution of income 1967 1986 this paper examines income inequality in the untied states over the period 1967 86 using recently developed tests for differences in lorenz curves the authors are able to rank eighteen of nineteen annual comparisons in contrast standard techniques are able to rank only twelve these results suggest that the lorenz dominance principle is more empirically relevant than previously thought the tests reveal a sharp rise in u s inequality between 1978 and 1982 as well as a shift toward greater inequality over the entire period the authors also examine changes in economic welfare using the joint mean lorenz dominance principle copyright 1991 by mit press

reviving leviathan fiscal federalism and the growth of government this article revisits the influential leviathan hypothesis which pos its that tax competition limits the growth of government spending in decentralized countries i use panel data to examine the effect of fiscal decentralization over time within countries attempting to distinguish between decentralization that is funded by intergovernmental transfers and local taxation first i explore the logic whereby decentralization should restrict government spending if state and local governments have wide ranging authority to set the tax base and rate especially on mobile assets in countries where this is most clearly the case decentralization is associated with smaller government second consistent with theoretical arguments drawn from wel fare economics and positive political economy i show that governments grow faster as they fund a greater portion of public expenditures through intergovernmental transfers

marginal cost sharing and the articles of confederation between 1781 and 1789 the american states attempted to share the costs of national public goods through a system of requisitions this paper uses a simple public goods analysis to show why rational states would not share costs as intended by the articles of confederation this normative argument illustrates a potential flaw in the constitutional design of the articles and provides insight into the decline of the american confederation

basel iii capital surcharges for g sibs are far less effective in managing systemic risk in comparison to network based systemic risk dependent financial transaction taxes in addition to constraining bilateral exposures of financial institutions there exist essentially two options for future financial regulation of systemic risk first regulation could attempt to reduce the financial fragility of global or domestic systemically important financial institutions g sibs or d sibs as for instance proposed by basel iii second it could focus on strengthening the financial system as a whole by reducing the probability of large scale cascading events this can be achieved by re shaping the topology of financial networks we use an agent based model of a financial system and the real economy to study and compare the consequences of these two options by conducting three computer experiments with the agent based model we find that re shaping financial networks is more effective and efficient than reducing financial fragility capital surcharges for g sibs could reduce systemic risk but they would have to be substantially larger than those specified in the current basel iii proposal in order to have a measurable impact this would cause a loss of efficiency

municipal annexation and local monopoly power we have found that the fiscal power of a city can be increased by extension of its borders within a land area that is homogeneous with respect to earning opportunities even when numerous rival jurisdictions exist in the area we hypothesized that extending municipal boundaries will have a positive effect on discretionary outlays and on expenditures per capita the evidence presented supports these hypotheses furthermore municipal wages appear to be significantly increased in cities experiencing annexation growth therefore we would expect to find that municipal employees are more inclined to favor annexation than the rest of the electorate from a policy standpoint this study suggests that significant perverse effects on fiscal efficiency may follow adoption of legal reforms that facilitate the ability of municipalities to extend their borders or that restrict the formation of new municipalities

population ageing and inequality evidence from china population ageing has significant economic and social costs and this paper studies its impacts on inequality both theoretically and empirically first we build a two period overlapping generation model with uncertain lifetime and find that population ageing has the overall effect of increasing income and consumption inequality within the society for empirical analysis we use household data from china health and nutrition survey to assess the age effect on income and consumption inequality in china and confirm the results predicted by the theoretical model

optimal taxation and optimal tax systems the theory of optimal taxation has for the pas two decades been the reigning normative approach of taxation this paper argues that in its current state optimal tax theory is incomplete as a guide to action concerning many critical issues in tax policy it is incomplete because it has not yet come to terms with taxation as a system of coercively collecting revenues from individuals who will tend to resist the coercive nature of collection taxes implies that the resource cost of implementing a tax system have been and will continue to be a critical determinant of appropriate tax policy the paper first presents the three cornerstone propositions of optimal tax theory and then it discusses the influence of these propositions on recent tax policy developments it concludes by sketching an alternative to optimal taxation called the theory of optimal tax systems which embraces the insights of optimal taxation but also considers the technology of raising taxes and the constraints placed upon tax policy by that technology the optimal tax systems perspective is shown to shed light on the choice of tax instruments the problem of tax evasion and the appropriate tax treatment of capital income this abstract was borrowed from another version of this item

what is the minimal systemic risk in financial exposure networks abstract we quantify how much systemic risk can be eliminated in financial contract networks by rearranging their network topology by using mixed integer linear programming financial linkages are optimally organized whereas the overall economic conditions of banks such as capital buffers total interbank assets and liabilities and average risk weighted exposure remain unchanged we apply the new optimization procedure to 10 snapshots of the austrian interbank market where we focus on the largest 70 banks covering 71 of the market volume the optimization reduces systemic risk measured in debtrank by about 70 showing the huge potential that changing the network structure has on the mitigation of financial contagion existing capital levels would need to be scaled up by a factor of 3 3 to obtain similar levels of debtrank these findings underline the importance of macro prudential rules that focus on the structure of financial networks the new optimization procedure allows us to benchmark actual networks to networks with minimal systemic risk we find that simple topological measures like link density degree assortativity or clustering coefficient fail to explain the large differences in systemic risk between actual and optimal networks we find that if the most systemically relevant banks are tightly connected overall systemic risk is higher than if they are unconnected

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

financial networks and contagion we study cascades of failures in a network of interdependent financial organizations how discontinuous changes in asset values e g defaults and shutdowns trigger further failures and how this depends on network structure integration greater dependence on counterparties and diversification more counterparties per organization have different nonmonotonic effects on the extent of cascades diversification connects the network initially permitting cascades to travel but as it increases further organizations are better insured against one another s failures integration also faces trade offs increased dependence on other organizations versus less sensitivity to own investments finally we illustrate the model with data on european debt cross holdings jel d85 f15 f34 f36 f65 g15 g32 g33 g38 globalization brings with it increased financial interdependencies among many kinds of organizations governments central banks investment banks firms etc that hold each other s shares debts and other obligations such interdependencies can lead to cascading defaults and failures which are often avoided through massive bailouts of institutions deemed too big to fail recent examples include the us government s interventions in aig fannie mae freddie mac and general motors and the european commission s interventions in greece and spain although such bailouts circumvent the widespread failures that were more prevalent in the nineteenth and early twentieth centuries they emphasize the need to study the risks created by a network of interdependencies understanding these risks is crucial to designing incentives and regulatory responses which defuse cascades before they are imminent in this paper we develop a general model that produces new insights regarding financial contagions and cascades of failures among organizations linked through a network of financial interdependencies organizations values depend on each other e g through cross holdings of shares debt or other liabilities if an

systemic risk in financial systems we consider default by firms that are part of a single clearing mechanism the obligations of all firms within the system are determined simultaneously in a fashion consistent with the priority of debt claims and the limited liability of equity we first show via a fixed point argument that there always exists a clearing payment vector that clears the obligations of the members of the clearing system under mild regularity conditions this clearing vector is unique next we develop an algorithm that both clears the financial system in a computationally efficient fashion and provides information on the systemic risk faced by the individual system firms finally we produce qualitative comparative statics for financial systems these comparative statics imply that in contrast to single firm results even unsystematic nondissipative shocks to the system will lower the total value of the system and may lower the value of the equity of some of the individual system firms

incentivizing resilience in financial networks when banks extend loans to each other they generate a negative externality in the form of systemic risk they create a network of interbank exposures by which they expose other banks to potential insolvency cascades in this paper we show how a regulator can use information about the financial network to devise a transaction specific tax based on a network centrality measure that captures systemic importance since different transactions have different impact on creating systemic risk they are taxed differently we call this tax a systemic risk tax srt we use an equilibrium concept inspired by the matching markets literature to show analytically that this srt induces a unique equilibrium matching of lenders and borrowers that is systemic risk efficient i e it minimizes systemic risk given a certain transaction volume on the other hand we show that without this srt multiple equilibrium matchings exist which are generally inefficient this allows the regulator to effectively stimulate a rewiring of the equilibrium interbank network so as to make it more resilient to insolvency cascades without sacrificing transaction volume moreover we show that a standard financial transaction tax e g a tobin like tax has no impact on reshaping the equilibrium financial network because it taxes all transactions indiscriminately a tobin like tax is indeed shown to have a limited effect on reducing systemic risk while it decreases transaction volume

political economy of mechanisms we study the optimal mirrlees taxation problem in a dynamic economy in contrast to the standard approach where the taxation mechanism is operated by a benevolent planner with full commitment power we focus on economies in which policy decisions are made by self interested politicians who cannot commit to policies the society controls politicians using elections we show that the provision of incentives to politicians can be partly separated from redistribution across agents and that political economy constraints can be modeled as introducing additional aggregate distortions in the dynamic mirrlees problem we provide conditions under which the political economy distortions persist or disappear in the long run if the politicians are as patient as the agents the best sustainable mechanism leads to an asymptotic allocation where the aggregate distortions arising from political economy disappear in contrast when politicians are less patient than the citizens positive aggregate labor and capital taxes remain even asymptotically we conclude by providing a brief comparison of centralized

truncation bias and the ordinal evaiuation of income inequality lorenz dominance analysis is used to examine the effect of top coding on the ordinal evaluation of u s income inequality across time current population survey microdata are adjusted for truncation bias and statistical inference procedures are used to examine biennial changes in unadjusted and adjusted lorenz curves beginning in 1985 the truncation bias has a significant effect on ordinal rankings of income inequality

the formation of financial networks modern banking systems are highly interconnected despite various benefits linkages between banks carry the risk of contagion in this article i investigate whether banks can commit ex ante to mutually insure each other when there is contagion risk in the financial system i model banks decisions to share this risk through bilateral agreements a financial network that allows losses to be shared among various counterparties arises endogenously i characterize the probability of systemic risk defined as the event that contagion occurs conditional on one bank failing in equilibrium interbank networks i show that there exist equilibria in which contagion does not occur

in defense of the articles of confederation and the contribution mechanism as a means of government finance a general comment on the literature i attempt to dispel several widely held myths regarding government finance under the articles of confederation some of which were reiterated in dougherty and cain 1997 i defend the contribution mechanism as a method of government finance that is superior to direct taxation by the federal government and present evidence contradicting the belief that revenue collections under the articles were poor a proper comparison is with alternatives at that time such as state tax collections and the federal governments own tax collections under the new u s constitution both of which were lower than the collection rate from states under the articles