involuntary defection in two level games ratification failures are prevalent in international relations but due to the assumption of unitary actors in international relations theory theoretical analysis has been underdeveloped in formalizing putnam s metaphor of two level games this article shows that incomplete information about the preferences of domestic actors is crucial for understanding ratification failures furthermore institutional mechanisms affect bargaining outcomes through their impact on information revelation in particular it is found that two sided constraints lead to relatively equitable bargaining outcomes and that renegotiation and pre negotiation poll taking can induce strategic voting by domestic constituents thereby exacerbating domestic constraints

indirect effects of an aid program how do cash transfers affect ineligibles consumption cash transfers to eligible households indirectly increase the consumption of ineligible households living in the same villages this effect operates through insurance and credit markets ineligible households benefit from the transfers by receiving more gifts and loans and by reducing their savings thus the transfers benefit the local economy at large looking only at the effect on the treated underestimates the impact one should analyze the effects of this class of programs on the entire local economy rather than on the treated only and use a village level randomization rather than selecting treatment and control subjects from the same community

a generalization of the endogenous grid method abstract this paper extends carroll s 2005 the method of endogenous gridpoints for solving dynamic stochastic optimization problems national bureau of economic research technical working paper 309 endogenous grid method to perform value function iteration in models with more than one control variable we propose to mix the endogenous grid method with standard value function iteration to achieve higher efficiency we illustrate the method using the stochastic neoclassical growth model with and without labor leisure choice we report important gains in efficiency that make value function iteration an attractive computational method in terms of both computing time and accuracy

demand heterogeneity for index based insurance the case for flexible products abstract a substantial literature has analyzed the challenges around weather index insurance yet an important design issue has been generally overlooked most index insurance products have so far been characterized by a one size fits all payout structure intended for a representative farmer at the cost of ignoring considerable heterogeneity in risk profiles this paper provides unique evidence on the ways in which heterogeneity in farmers risk exposure affects their demand for insurance we analyze a set of flexible insurance products against excess rainfall and exploit the substantial variation in insurance portfolios demanded by farmers we explore the relevance of alternative sources of heterogeneity by extending a simple expected utility decision model and relying on structural estimation to test their significance we find important aspects of farmer heterogeneity directly affecting their demand for insurance we quantify the benefits of a flexible scheme by comparing farmer welfare to that achieved under alternative counterfactual insurance options

less filling tastes great the realist neoliberal debate this essay examines and reformulates the realist neoliberal debate focusing initially on the issue of the attribution of goals to states we argue that not only are goals merely the epiphenomena of other things but also that their specification constitutes but a re description of strategic environments that is although an attribution of goals may contribute to our characterization of outcomes a discussion of them is not central to the development of a theory that explains and predicts the outbreak of conflict and the patterns of cooperation instead we argue that the realist neoliberal debate should be recast so that our central research agenda is the development of substantively specific models that allow us to ascertain how the equilibrium to a game in which states structure international affairs influences the types of issue specific subgames states play how countries coordinate to equilibria of different types how we can characterize the coordination problems associated with different equilibria how states can enhance the attractiveness of an equilibrium and how states can signal commitments to the strategies that are part of that equilibrium

consumer demand and the life cycle allocation of household expenditures the purpose of this paper is to estimate the parameters of household preferences that determine the allocation of goods within the period and over the life cycle using micro data in doing so the authors are able to identify important effects of demographics labor market status and other household characteristics on the intertemporal allocation of expenditure they test the validity of the life cycle model using excess sensitivity tests and find that controlling for demographics and labor market status variables can largely explain the excess sensitivity of consumption to anticipated changes in income

the change of tide in political cooperation a limited information model of european integration european integration follows a puzzling stop and go pattern that traditional international reations theories cannot fully explain the predominating paradigms only account for either the achievements or the setbacks of the integration process an information based explanation makes it possible to move beyond structural accounts provided by realist and functionalist scholarship such an approach yields solid micro level foundations of international bargaining and focuses on leaders use of threats in negotiations about regional cooperation situations involving governments agreeing on the necessity of further integration but disagreeing about its level create room for strategic manipulation of information asymmetries this type of uncertainty stems from the manipulator s information and control advantages concerning domestic costs the analysis of different summit meetings demonstrates the empirical relevance of such maneuvers for the dynamics of european integration

in view of ratification governmental preferences and domestic constraints at the amsterdam intergovernmental conference the bargaining product of the amsterdam intergovernmental conference the amsterdam treaty dwindled down the draft proposal to a consensus set of all fifteen member states of the european union eu using the two level concept of international bargains we provide a thorough analysis of how this consensus set was reached by issue subtraction with respect to domestic ratification constraints drawing on data sets covering the positions of all negotiating actors and ratifying national political parties we first highlight the differences in the amsterdam ratification procedures in the fifteen member states of the eu this analysis allows us to compare the varying ratification difficulties in each country second our empirical analysis of the treaty negotiations shows that member states excluded half of the amsterdam bargaining issues to secure a smooth ratification because member states with higher domestic ratification constraints performed better in eliminating uncomfortable issues at the amsterdam intergovernmental conference issue subtraction can be explained by the extent to which the negotiators were constrained by domestic interests

entrepreneurship social mobility and income redistribution in south india development economists have been preoccupied with the problem of increasing the size of the gnp pie to the relative neglect of its distribution despite the recent disenchantment with the viewpoint that all classes share in the benefits of industrial growth empirical data on the distribution of income business opportunity and economic power are in short supply many of the studies on entrepreneurship and economic development when they are not apologetics for ruthless capitalist exploitation as paul baran suggests extol the achievements of the capitalist entrepreneur without examining class origins and monopoly advantage joseph schumpeter sees entrepreneurs irrespective of class origin as heroic figures with the dream and will to found a private kingdom to conquer adversity to achieve success for its own sake and to experience the joy of creation for gustav papanek 1967 the private entrepreneur who is frugal diligent far sighted remarkably able and willing to take political risks is in large part responsible for the success of pakistan in achieving rapid industrialization

managing domestic differences in international negotiations the strategic use of internal side payments when nations negotiate often the toughest bargaining is not between nations but within them the reason is simple proposed international agreements no matter how much in the national interest inevitably have differential effects on factional concerns threatening to make winners of some and losers of others potential losers often have the power to prevent agreements not to their liking thereby limiting what is possible in international negotiations this article uses a negotiation analytic framework to analyze the consequences of such limits it argues that limits need not be a liability for a divided country under some circumstances they may provide a bargaining advantage and demonstrates circumstances under which intracountry differences are desirable and undesirable from a national perspective more specifically the article shows that the effect of domestic differences on international negotiations depends on the configuration of domestic interests on the nature of domestic political processes and on characteristics of the international bargain it then explores a particular dimension of the domestic process the ability to link issues which allow factions to make internal side payments it demonstrates that internal issue linkage can have profound effects on the external bargain and explores the strategic implications of side payments for those who would manage domestic differences in international negotiations

female labour supply and on the job search an empirical model estimated using complementary data sets we develop an empirical model of labour supply that is consistent with on the job search and which is identified and estimated by combining two data sets the u k family expenditure survey which contains information on income and expenditure and the u k labour force survey which has data on hours and job search behaviour we provide statistical evidence on the compatibility of the two samples for the purposes of estimating our model we find that search has a direct negative effect on hours of work and we establish a strong positive effect of wages on hours

an application of a stated preference method to value urban amenities this is a case study analysis of how residents value the amenities of a small us city missoula montana a measure of a community s amenity values is needed in city planning so as to protect those

a life cycle consistent empirical model of family labour supply using cross section data this paper estimates a utility maximising model of the joint determination of male and female labour supplies using a sample of married couples from the u k family expenditure survey the emphasis is on the estimation of within period preferences that are consistent with intertemporal two stage budgeting under uncertainty however the approach we adopt provides an alternative method of estimating certain aspects of life cycle behaviour to the fixed effects constant approach of heckman and macurdy 1980 macurdy 1981 and browning deaton and irish 1985 moreover it relaxes some of the underlying restrictions that are implicit in these constant models under uncertainty

education choices in mexico using a structural model and a randomized experiment to evaluate progresa in this paper we evaluate the effect of a large welfare program in rural mexico for such a purpose we use an evaluation sample that includes a number of villages where the program was not implemented for evaluation purposes we estimate a structural model of education choices and argue that without such a framework it is impossible to evaluate the effect of the program and especially possible changes to its structure we also argue that the randomized component of the data allows us to identify a more flexible model that is better suited to evaluate the program we find that the program has a positive effect on the enrollment of children especially after primary school we also find that an approximately revenue neutral change in the program that would increase the grant for secondary school children while eliminating for the primary school children would have a substantially larger effect on enrollment of the latter while having minor effects on the former

estimating labour supply responses using tax reforms the 1980 s tax reforms and the changing dispersion of wages offer one of the best opportunities yet to estimate labor supply effects nevertheless changing sample composition aggregate shocks the changing composition of the tax paying population and discontinuities in the tax system create serious identification and estimation problems we develop grouping estimators that address these issues our results reveal positive and moderately sized wage elasticities we also find negative income effects for women with children

estimating the effect of unearned income on labor supply earnings savings and consumption evidence from a survey of lottery players this paper provides empirical evidence about the effect of unearned income on earnings consumption and savings using an original survey of people playing the lottery in massachusetts in the mid 1980 s the effects of the magnitude of lottery prizes on economic behavior are analyzed the critical assumption is that among lottery winners the magnitude of the prize is randomly assigned it is found that unearned income reduces labor earnings with a marginal propensity to consume leisure of approximately 11 percent with larger effects for individuals between 55 and 65 years old after receiving about half their prize individuals saved about 16 percent

bargaining power at europe s intergovernmental conferences testing institutional and intergovernmental theories this article examines how european union member states make choices about political institutions at intergovernmental conferences the grand negotiations where many key institutional changes are made using data on member state preferences from the intergovernmental conference leading to the treaty of amsterdam i test competing bargaining theories institutionalism and intergovernmentalism and present strong evidence that institutionalism better captures negotiations compared to intergovernmentalism i present a formal model to discern between these competing theories of bargaining power derive a statistical model directly from this formal model and then use data from the european union s treaty of amsterdam to test these theories and corresponding power sources veto power associated with institutional models better explains intergovernmental conference outcomes compared to power from size and economic might often associated with intergovernmental analyses i would like to thank kathy bawn julia gray tim groseclose james honaker joe jupille thomas konig jeff lewis sven oliver proksch george tsebelis and the participants in ucla s graduate student formal theory and statistical methods workshops for their insightful comments on various drafts of this article i am also grateful for the comments from several anonymous reviewers and the editors at international organization an earlier version of this article was presented at the annual meeting of the midwest political science association april 2006 data and replication material are available at http faculty unlv edu jslapin

patently misleading partial implementation and bargaining leverage in sino american negotiations on intellectual property rights we develop a model of international negotiation in which states antici pate that the agreements they sign will only be partly implemented the results dif fer significantly from theories of domestic ratification that have previously been applied to this problem negotiators do not try to satisfy the implementer and may even choose agreements that the implementer would explicitly reject in a ratification model par tial implementation also makes it possible for two negotiators to reach agreements outside their usual win set this situation may allow one country to make extra ordinary concessions knowing that some provisions will never be fully imple mented we apply these claims to sino american negotiations over intellectual property rights where implementation has been a recurrent issue the theory enriches the theory of two level games which has focused much too narrowly on formal rati fication without amendment as the canonical case of domestic influence over inter national bargaining

intertemporal nonseparability or borrowing restrictions a disaggregate analysis using a u s consumption panel we propose a method to test for liquidity constraints which relies on using the within period marginal rate of substitution condition as a benchmark to evaluate the intertemporal euler equation if spot markets for nondurable goods exist but financial markets either do not exist or are imperfect we show how the comparison of first order conditions involving the relevant spot and intertemporal prices can be used to detect the imperfection we apply our methodology to a large sample of u s households drawn from twelve years of the consumer expenditure survey allowing for a general nonseparable preference structure our estimates of first order conditions do not indicate the presence of liquidity constraints with the possible exception of young households

is consumption growth consistent with intertemporal optimization evidence from the consumer expenditure survey in this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in u s household level data we propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations we estimate preference parameters using the only u s micro data set with complete consumption information we show that previous rejections can be explained by the simplifying assumptions made in previous studies we also show that results obtained using good consumption or aggregate data can be misleading

yours mine and ours do divorce laws affect the intertemporal behavior of married couples divorce laws establish spouses individual property rights over household resources and determine when divorce is allowed this paper examines how such laws inuence the intertemporal behavior and the welfare of u s married couples i build a model of household choice about consumption labor supply and divorce under multiple divorce law regimes and i estimate it using exogenous variation in u s divorce laws from the 1970s to the 1990s couples responded to equal division of property and unilateral divorce by increasing tangible assets up to 19 which suggests the presence of a strong income eect for the primary earner and by reducing female employment by over 5 percentage points because the threat of divorce granted additional bargaining power to married woman the bargaining weight of women implied by these responses in the model corresponds to a third of the weight of men this indicates that equal division of assets beneted women when it was

incentives work getting teachers to come to school we use a randomized experiment and a structural model to test whether monitoring and financial incentives can reduce teacher absence and increase learning in india in treatment schools teachers attendance was monitored daily using cameras and their salaries were made a nonlinear function of attendance teacher absenteeism in the treatment group fell by 21 percentage points relative to the control group and the children s test scores increased by 0 17 standard deviations we estimate a structural dynamic labor supply model and find that teachers respond strongly to financial incentives our model is used to compute cost minimizing compensation policies jel i21 j31 j45 o15

rational deterrence theory and comparative case studies several recent books have argued that comparative case studies of crises demonstrate the failure of rational deterrence theory they have offered certain empirical generalizations as substitutes this paper shows that such contentions are unwarranted first the empirical generalizations are impressive as historical insights but they do not meet the standards for theory set out by the most sophisticated case study analysts themselves second the tests of rational deterrence used in the case studies violate standard principles of inference and the ensuing procedures are so biased as to be useless rational deterrence then is a more successful theory than portrayed in this literature and it remains the only intellectually powerful alternative available case studies are essential to theory building more efficiently than any other methods they find suitable variables suggest middle range generalizations for theory to explain and provide the prior knowledge that statistical tests require their loose constraints on admissible propositions and suitable evidence are appropriate and even necessary for these tasks these same characteristics however inevitably undermine all attempts to construe case study generalizations as bodies of theory or tests of hypotheses

school subsidies for the poor evaluating the mexican progresa poverty program abstract this paper evaluates how the progresa program which provides poor mothers in rural mexico with education grants has affected enrollment poor children who reside in communities randomly selected to participate in the initial phase of the progresa are compared to those who reside in other control communities pre program comparisons check the randomized design and double difference estimators of the program s effect on the treated are calculated by grade and sex probit models are also estimated for the probability that a child is enrolled controlling for additional characteristics of the child their parents local schools and community and for sample attrition to evaluate the sensitivity of the program estimates these estimates of program short run effects on enrollment are extrapolated to the lifetime schooling and the earnings of adults to approximate the internal rate of return on the public schooling subsidies as they increase expected private wages

the effect of marginal tax rates on taxable income a panel study of the 1986 tax reform act this paper uses a treasury department panel of more than 4 000 taxpayers to estimate the sensitivity of taxable income to changes in tax rates on the basis of a comparison of the tax returns of the same individual taxpayers before and after the 1986 tax reform the analysis emphasizes that the response of taxable income involves much more than a change in the traditional measures of labor supply the evidence shows an elasticity of taxable income with respect to the marginal net of tax rate that is at least one and could be substantially higher the implications for recent tax rate changes are discussed

using choice experiments to value the environment this paper we outline the choice experiment approach to environmental valuation this approach has its roots in lancaster s characteristics theory of value in random utility theory and in experimental design we show how marginal values for the attributes of environmental assets such as forests and rivers can be estimated from pair wise choices as well as the value of the environmental asset as a whole these choice pairs are designed so as to allow efficient statistical estimation of the underlying utility function and to minimise required sample size choice experiments have important advantages over other environmental valuation methods such as contingent valuation and travel cost type models although many design issues remain unresolved applications to environmental issues have so far been relatively limited we illustrate the use of choice experiments with reference to a recent uk study on public preferences for alternative forest landscapes this study allows us to perform a convergent validity test on the choice experiment estimates of willingness to pay

intertemporal substitution in labor supply evidence from micro data the sensitivity of the supply of labor to intertemporal variation in the wage is an important issue in macroeconomics the analysis of social security and pensions and the study of life cycle patterns of work this paper explores two approaches to the measurement of intertemporal substitution that have appeared in the literature the first approach is to use consumption to control for wealth and unobserved expectations about future wages in the labor supply equation the second approach is to estimate a first difference equation for hours in which labor supply from the previous period serves as a control for wealth and wage expectations the results indicate that intertemporal substitution elasticity for married men is positive but small

the effects of male and female labor supply on commodity demands we examine the effects of male and female labor supply on household demands and present a simple and robust test for the separability of commodity demands from labor supply using data on individual households from six years of the uk fes we estimate a demand system for seven goods which includes hours and participation dummies as conditioning variables allowance is made for the possible endogeneity of these conditioning labor supply variables we find that separability is rejected furthermore we present evidence that ignoring the effects of labor supply leads to bias in the parameter estimates

from unanimity to consensus an analysis of the negotiations at the eu s constitutional convention disputes filed at the world trade organization wto are attracting a growing number of third parties most observers argue that their participation influences the institution s rulings the authors argue that third parties undermine pretrial negotiations their influence on rulings is conditioned by this selection effect they test their hypotheses along with the conventional wisdom using a data set of wto disputes initiated through 2002 consistent with the authors argument they find that third party participation lowers the prospects for early settlement controlling for this selection effect the evidence also suggests that third party support increases the chances of a legal victory at the wto

wage risk and employment risk over the life cycle we specify a structural life cycle model of consumption labour supply and job mobility in an economy with search frictions that allows us to distinguish between different sources of risk and to estimate their effects the sources of risk are shocks to productivity job destruction the process of job arrival when employed and unemployed and match level heterogeneity our model allows for four main social insurance programmes in contrast to simpler models that attribute all income fluctuations to shocks our framework allows us to disentangle the effects of the shocks from the responses to these shocks estimates of productivity risk once we control for employment risk and for individual labour supply choices are substantially lower than estimates that attribute all wage variation to productivity risk increases in productivity risk impose a considerable welfare loss on individuals and induce substantial precautionary saving increases in employment risk have large effects on output and primarily through this channel affect welfare the welfare value of government programs such as food stamps which partially insure productivity risk is greater than the value of unemployment insurance which provides partial insurance against employment risk and no insurance against persistent shocks

disability insurance and the dynamics of the incentive insurance trade off we provide a life cycle framework for comparing insurance and disincentive effects of disability benefits the risks that individuals face and the parameters of the disability insurance di program are estimated from consumption health disability insurance and wage data we characterize the effects of disability insurance and study how policy reforms impact behavior and welfare di features high rejection rates of disabled applicants and some acceptance of healthy applicants despite worse incentives welfare increases as programs become less strict or generosity increases disability insurance interacts with welfare programs making unconditional means tested programs more generous improves disability insurance targeting and increases welfare

the use of structural models in econometrics costas meghir has been supported by the cowles foundation and the institution for social and policy studies isps at yale university

assessing the impact of a school subsidy program in mexico using a social experiment to validate a dynamic behavioral model of child schooling and fertility this paper uses data from a randomized social experiment in mexico to estimate and validate a dynamic behavioral model of parental decisions about fertility and child schooling to evaluate the effects of the progresa school subsidy program and to perform a variety of counterfactual experiments of policy alternatives our method of validation estimates the model without using post program data and then compares the model s predictions about program impacts to the experimental impact estimates the results show that the model s predicted program impacts track the experimental results our analysis of counterfactual policies reveals an alternative subsidy schedule that would induce a greater impact on average school attainment at similar cost to the existing program

household choices in equilibrium this paper is an empirical investigation of equilibrium restrictions on household consumption and male labor supply it exploits a simple factor structure rationalized by two assumptions that household allocations are pareto optimal and that the labor market is competitive the paper estimates household preferences and tests how well this parsimonious factor structure represents panel data on married couples and time series data on asset returns most of the estimates are roughly comparable to those found in previous work no evidence against the simple factor representation is found and the intertemporal capital asset pricing model is not rejected copyright 1990 by the econometric society

neorealism and neoliberalism the classic dialectic between realist and liberal theories of international politics as expressed by robert o keohane ed in neorealism and its critics and richard rosecrance the rise of the trading state can be transcended neither paradigm singularly explains international behavior realism is the dominant approach but liberal theories of transnationalism and interdependence help to illuminate how national interests are learned and changed keohane and fellow critics argue that neorealism articulated definitively in kenneth waltz s theory of international politics 1979 elegantly systematizes realism but concentrates on international system structure at the expense of system process focused tightly on the concept of bipolarity waltz s theory tends toward stasis the unit state level unproductively becomes an analytical dumping ground as a neoliberal counterpoint rosecrance s argument does not go far enough in the tradition of commercial liberalism he argues that an open trading system offers states maneuverability through economic growth rather than through military conquest he tempers his argument with realist considerations of prudence but fails to clarify realist liberal links in his theory or to explore fully the connections between power and non power incentives influencing states behavior a synthesis of neorealism and neoliberalism is warranted a systemic theory using the former to analyze at the level of structure the latter more often at the level of process

intersectoral labor mobility and the growth of the service sector one of the most striking changes in the u s economy over the past 50 years has been the growth in the service sector between 1950 and 2000 service sector employment grew from 57 to 75 percent of total employment however over this time the real hourly wage in the service sector grew only slightly faster than in the goods sector in this paper we assess whether or not the essential constancy of the relative wage implies that individuals face small costs of switching sectors and we quantify the relative importance of labor supply and demand factors in the growth of the service sector we specify and estimate a two sector labor market equilibrium model that allows us to address these empirical issues in a unified framework our estimates imply that there are large mobility costs output in both sectors would have been double their current levels if these mobility costs had been zero in addition we find that demand side factors that is technological change and movements in product and capital prices were responsible for the growth of the service sector

globalizing electoral politics political competence and distributional bargaining in the european union this article analyzes electoral cycles in distributional bargaining in the european union the author argues that governments attempt to increase their eu membership benefits above average levels in the preelection period hoping to appear politically competent to voters the theory discusses when and how eu members can increase these gains before elections through negotiations in the council of ministers a time series cross sectional analysis of eu member states annual budget negotiations from 1977 to 2006 supports the existence of conditional electoral cycles in distributional bargaining and generally points to the importance of accounting for such cycles when analyzing patterns of international cooperation

relative gains and the pattern of international cooperation many political situations involve competitions where winning is more important than doing well in international politics this relative gains problem is widely argued to be a major impediment to cooperation under anarchy after discussing why states might seek relative gains i demonstrate that the hypothesis holds very different implications from those usually presumed relative gains do impede cooperation in the two actor case and provide an important justification for treating international anarchy as a prisoner s dilemma problem but if the initial absolute gains situation is not a prisoner s dilemma relative gains seeking is much less consequential its significance is even more attenuated with more than two competitors relative gains cannot prop up the realist critique of international cooperation theory but may affect the pattern of cooperation when a small number of states are the most central international actors

female labour supply human capital and welfare reform we estimate a dynamic model of employment human capital accumulation including education and savings for women in the united kingdom exploiting tax and benefit reforms and use it to analyze the effects of welfare policy we find substantial elasticities for labor supply and particularly for lone mothers returns to experience which are important in determining the longer term effects of policy increase with education but experience mainly accumulates when in full time employment tax credits are welfare improving in the u k increase lone mother labor supply and marginally reduce educational attainment but the employment effects do not extend beyond the period of eligibility marginal increases in tax credits improve welfare more than equally costly increases in income support or tax cuts

product differentiation and oligopoly in international markets the case of the u s automobile industry this paper develops and estimates a model of the u s automobile industry on the demand side a discrete choice model is adopted that is estimated using micro data from the consumer expenditure survey the estimation results are used in conjunction with population weights to derive aggregate demand on the supply side the automobile industry is modelled as an oligopoly with product differentiation equilibrium is characterized by the first order conditions of the profit maximizing firms the estimation results are used in counterfactual simulations to investigate two trade policy issues the effects of the ver and exchange rate pass through

wage differentials employer size and unemployment the unique equilibrium solution to a game in which a continuum of individual employers choose permanent wage offers and a continuum of workers search by sequentially sampling from the set of offers is characterized wage dispersion is a robust outcome provided that workers search while employed as well as when unemployed the unique nondegenerate equilibrium distribution of wage offers is constructed for three cases 1 identical workers and employers 2 identical employers and an atomless distribution of worker supply prices and 3 identical workers and an atomless distribution of job productivities copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

the elasticity of taxable income evidence and implications abstract a central tax policy parameter that has recently received much attention but about which there is substantial uncertainty is the overall elasticity of taxable income we provide new estimates of this elasticity which address identification problems with previous work by exploiting a long panel of tax returns to study a series of tax reforms throughout the 1980s this identification strategy also allows us to provide new evidence on both the income effects of tax changes on taxable income and on variation in the elasticity of taxable income by income group we find that the overall elasticity of taxable income is approximately 0 4 the elasticity of real income not including tax preferences is much lower we estimate small income effects of tax changes on reported income implying that the compensated and uncompensated elasticities of taxable income are very similar we estimate that this overall elasticity is primarily due to a very elastic response of taxable income for taxpayers who have incomes above 100 000 per year who have an elasticity of 0 57 while for those with incomes below 100 000 per year the elasticity is less than one third as large moreover high income taxpayers who itemize are particularly responsive to taxation our estimates suggest that optimal tax structures may feature tightly targeted transfers to lower income taxpayers and a flat or even declining marginal rate structure for middle and high income taxpayers