individual taxpayer response to tax cuts 1982 1984 with implications for the revenue maximizing tax rate abstract this paper measures the response of taxpayers to the u s personal rate reductions from 1982 to 1984 a baseline income distribution is created to describe what level and distribution could be expected in the absence of tax changes comparison of this baseline with actual tax return data shows that at least one sixth and probably one quarter of the revenue ascribable to the rate reductions was recouped by changes in taxpayer behavior the data also show that federal income tax revenue would have been maximized at a tax rate of about 35 percent and total income tax revenue maximized at a total tax rate of about 40 percent

nonlinear pricing in an oligopoly market the case of specialty coffee firms that use nonlinear pricing may distort product characteristics away from their efficient levels this paper offers the first empirical study of this issue using data from a specialty coffee market i estimate a structural utility model to compute consumers benefits from changing products sizes i then compare the estimated benefits to cost data design distortions are relatively large for products not targeted to the highest demand consumers distortions decrease toward zero with drink size for products with the largest profit margins these results support some of the central predictions from nonlinear pricing theory including no distortion at the top

product and price competition in a duopoly this paper examines the role of consumer preferences costs and price competition in determining the competitive product strategy of a firm in the model studied here there are two identical firms competing on product quality and price they face consumers who prefer a higher quality product to a lower quality product but differ in how much they are willing to pay for quality the consumers can also choose a substitute if they don t like the product price offerings of the two firms for the firms a higher quality product costs more to produce than a lower quality product the paper shows that the equilibrium strategy for each firm should be to differentiate its product from its competitor with the firm choosing the higher quality choosing the higher margin as well this differentiation however is not efficient that is it is possible to choose two other products and offer them at prices that cover their marginal cost and still satisfy consumers needs better in the aggregate a monopolist by contrast would differentiate his product line efficiently this suggests that cannibalization has different effects on product strategy than competition the paper also shows that if one firm enters the market first then it can defend itself from later entrants and gain a first mover advantage by preempting the most desirable product position

increasing the capital income tax may lead to faster growth this paper shows that under rather mild conditions higher capital income taxes lead to faster growth in an overlapping generations economy with endogenous growth government expenditures are financed with labor income taxes as well as capital income taxes since capital income accrues to the old taxing it reliefs the tax burden on the young and leaves them with more income out of which to save we argue that savings are sufficiently interest inelastic so that higher savings and therefore higher growth result the basic argument is not seriously challenged by a grandfather clause for initial capital or by the old receiving some labor income as well the reasoning is similar to feldstein 1978 auerbach 1979 and in particular jones and manuelli 1992 but in contrast to the conventional wisdom about the effect of capital income taxation as say in lucas 1990

labour supply estimation and public policy abstract economists devote considerable energies towards refining their econometric techniques to overcome difficulties connected with conducting empirical research despite advances in technique it is not clear whether further refinement in this direction is worthwhile for policy purposes it may be that no further amount of statistical adjustment of inadequate data will increase understanding and that better data is simply necessary to add to our knowledge but rarely is sufficient credit paid to new forms of data in short econometric technique is emphasized to the neglect of data innovation as if new data were merely lying about waiting for an ingenious suggestion for use this paper surveys advances of the last twenty five years in estimating labour supply for policy purposes with a view towards appreciating the relative contribution of both improvements in econometric technique as well as developments of new data after briefly detailing the key parameters which economists have sought to estimate we describe the early first generation research circa 1970 which is plagued by problems of unobservable variables measurement errors truncation and selectivity bias and non linear budget constraints second generation research constitute attempts to resolve one or more of these difficulties and the respective contribution of econometric technique and new data is acknowledged and assessed including the contribution of data generated by large scale social experiments in which participants are randomly assigned to different guaranteed income plans and their labour supply behaviour measured

entrepreneurs growth and cycles i expound a model of a one good economy where long run growth and output fluctuations are endogenous consequences of the decisions taken by entrepreneurs on the allocation of their resources between production and innovation in a markovian sequence of one period games i show first that the log of output follows a process with random walk characteristics second that contrarywise to the mechanism at work in real business cycle models the variability in the rate of productivity growth does not imply by itself the occurrence of any recession third that a recession is the consequence not of a kydland prescott 1982 negative shock on technology but of the reallocation of factors in the face of an increased opportunity ex ante which the entrepreneurs fail to exploit ex post fourth and finally that although any generation could make itself unilaterally better off by reducing its level of research the onegood economy is intertemporally efficient in that such a move would imply a reduction in the level of welfare of future generations

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

the effect of income taxation on labor supply in the united states the effect of income taxation on the labor supply of prime age married men and women in the united states is examined using econometric methods similar to those used in the influential work of jerry hausman male labor supply is found to be relatively invariant to the net wage and virtual income in all specifications estimated the estimated impact of taxation on the labor supply of married women depends critically on the method used to estimate the labor supply function estimated net wage and virtual income elasticities are considerably larger when data on nonparticipants are included than when the estimation is conducted conditional on hours being greater than zero

labor supply deadweight loss and tax reform act of 1986 a nonparametric evaluation using panel data abstract tax reform act of 1986 tra 1986 has provided an invaluable source of variation in tax rates to study the effects of tax reforms on labor supply in the us most existing studies exploiting variation generated by tra 1986 have used cross sectional variation in tax rates or assumed a linear labor supply function or have not couched their analysis in a nonlinear budget set framework this paper uses the drastic variation in the budget set induced by tra 1986 as a source of identification and combines two novel approaches to estimate behavioral effects of tax reforms i first use nonparametric estimation methods with nonlinear budget sets blomquist soren newey w 2002 nonparametric estimation with nonlinear budget sets econometrica 70 6 2455 2480 to estimate a labor supply function using waves of psid just before and after tra 1986 nonparametric method developed in hausman and newey hausman j whitney newey 1995 nonparametric measurement of exact consumer s surplus and deadweight loss econometrica 63 1145 76 is then applied to estimate the deadweight loss from tra 1986 the nonparametric estimate of the compensated wage elasticity is 0 22 i find that tra 1986 had a small but positive effect on labor supply of men of about 2 at the sample mean tra 1986 was associated with robust reduction in deadweight loss from the pre tra 1986 level and this reduction is positively correlated with income and wages

price discrimination and retail configuration the hypothesis that price discrimination based on willingness to pay for quality can occur in multifirm markets is confirmed using microdata on gasoline retailing a test that discriminates between price structures associated with discrimination and with cost driven competitive differentials is developed and implemented with controls for variation in outlet and market characteristics a second test based on profitability variation rejects a competitive peak load pricing explanation for the observed price dispersion the data suggest that price discrimination at the retail level adds at least 9 a gallon to the average price of full service gasoline

tax deferred accounts constrained choice and estimation of individual saving the paper analyzes the effect of tax deferred individual retirement accounts iras in the united states on net individual saving the results are based on a model of constrained optimization with the limit on tax deferred saving the principle constraint the estimates suggest that contributions to iras represent substantial net saving increases were the ira limit to be increased only about 10 to 20 of resulting increase in ira contributions would be taken from other savings about 50 would come from reduced consumption and about 35 from reduced

assessing empirical approaches for analyzing taxes and labor supply recent surveys on the labor supply responses of men document a divergence in the estimates of substitution and income effects obtained using various estimation approaches generally studies accounting for nonlinear tax schedules in a static setting via a piecewise linear approach produce estimates that typically imply higher substitution and lower income responses than are suggested by empirical work applying other approaches this paper demonstrates that maximum likelihood estimation of a consumer choice problem with nonlinear budget sets implicitly relies on the satisfaction of inequality constraints that translate into behaviorally meaningful restrictions these constraints arise not as a consequence of economic theory but instead as a requirement to create a properly defined statistical model in the analysis of piecewise linear budget sets the implicit constraints required by maximum likelihood in estimation amount to imposition of slutsky conditions at all wage income combinations associated with kink points in the analysis of differentiable budget sets the tacit constraints invoked by maximum likelihood also involve inequality restrictions on slutsky terms the empirical work presented in this study supports the contention that these implicit constraints play a major role in explaining the discrepancies in estimates found in the literature on men s labor supply

policy watch medicare public policies are often made without much recourse to economic reasoning economists are sometimes unaware of what is happening in the world of public affairs as a result both the quality of public decision making and the role that economists play in it are less than optimal this feature contains short articles on topics that are currently on the agendas of policymakers thus illustrating the role of economic analysis in illuminating current debates suggestions for future columns and comments on past ones should be sent to daniel weinberg c o journal of economic perspectives hhes division bureau of the census department of commerce washington d c 20233

taxation and household labor supply we evaluate reforms to the u s tax system in a life cycle setup with heterogeneous married and single households and with an operative extensive margin in labor supply we restrict our model with observations on gender and skill premia labor force participation of married females across skill groups children and the structure of marital sorting we concentrate on two revenue neutral tax reforms a proportional income tax and a reform in which married individuals flle taxes separately separate flling our flndings indicate that tax reforms are accompanied by large increases in labor supply that difier across demographic groups with the bulk of the increase coming from married females under a proportional income tax reform married females account for more than 50 of the changes in hours across steady states while under separate flling reform married females account for all the change in hours

defensive marketing strategies this paper analyzes how a firm should adjust its marketing expenditures and its price to defend its position in an existing market from attack by a competitive new product our focus is to provide usable managerial recommendations on the strategy of response in particular we show that if products can be represented by their position in a multiattribute space consumers are heterogeneous and maximize utility and awareness advertising and distribution can be summarized by response functions then for the profit maximizing firm it is optimal to decrease awareness advertising it is optimal to decrease the distribution budget unless the new product can be kept out of the market a price increase may be optimal and even under the optimal strategy profits decrease as a result of the competitive new product furthermore if the consumer tastes are uniformly distributed across the spectrum a price decrease increases defensive profits it is optimal at the margin to improve product quality in the direction of the defending product s strength and it is optimal at the margin to reposition by advertising in the same direction in addition we provide practical procedures to estimate 1 the distribution of consumer tastes and 2 the position of the new product in perceptual space from sales data and knowledge of the percent of consumers who are aware of the new product and find it available competitive diagnostics such as the angle of attack are introduced to help the defending manager this article was originally published in marketing science volume 2 issue 4 pages 319 360 in 1983

have iras increased u s saving evidence from consumer expenditure surveys the vast majority of individual retirement account contributions represent net new saving based on evidence from the quarterly consumer expenditure surveys ces the results are based on analysis of the relationship between ira contributions and other financial asset saving the data show almost no substitution of iras for other saving estimates are based on a flexible constrained optimization model with the ira limit the principal constraint the implications of this model for saving in the absence of the ira option match very closely the actual non ira financial asset saving behavior prior to 1982 ira saving does not show up as other financial asset saving in the pre ira period

effects of tax reform on labor supply investment and saving the u s tax system received two major overhauls during the 1980s the tax cuts of 1981 and the tax reform act of 1986 supporters of both reforms argued that major changes in tax policy could boost saving investment labor supply and entrepreneurship eventually it was argued such changes could reverse the slowdown in economic growth that began in the early 1970s and spur improvements in american living standards the aim of this paper is to assess whether the goals of increased labor supply and capital formation were achieved

note competitive price and positioning strategies brand positioning and brand pricing are important strategic decisions for marketing managers such decisions are interrelated and depend upon competitive brand positions and prices however any unilateral decisions may encourage repositioning and price adjustment by competitors thus leading to either new market equilibria or a price positioning war this paper examines such price and positioning decisions in a competitive environment by extending the defender consumer model to more complex equilibria we assume that the brands are already in the market and that positions are sticky in the sense that brands cannot leapfrog one another among the insights for such incumbent brands are if prices are symmetric and held constant firms seek to reposition toward the center of the market but price advantages by central firms can mediate that central tendency such that an equilibrium exists with positive profits if brand positions are held constant the nash equilibria for prices exist and are unique and category profits the sum of brand profits are maximized for maximum brand differentiation for two and three brand markets the subgame perfect nash equilibrium where positioning decisions are made with foresight on the price equilibria causes firms to unilaterally seek maximum brand differentiation but for four or more brands greater foresight and or cooperation appears necessary to reach the point of maximum brand differentiation these results apply where the defender consumer model is an exact description of consumer response and where the competitive reaction assumptions hold in any empirical situation such forces might be softened resulting in differentiated but not maximally differentiated brands

the effect of ownership structure on prices in geographically differentiated industries i analyze how ownership structure and market geography jointly influence fast food prices i estimate a model of demand and supply that accounts for the market geography and run counterfactual experiments that demonstrate how mergers affect prices i find that the impact of mergers can be large that this impact decreases as the merging outlets are farther apart that mergers among market leaders generally increase prices more than mergers among weaker firms and that mergers can increase prices even if the outlets are so far apart that neither outleti s presence affects prices at the other before the merger

medical care costs how much welfare loss hardly a week goes by without a front page newspaper article on rising health care costs and the uninsured in this article i focus mainly on costs arguing that the issue has been somewhat misconceived while the level of medical care spending in the u s is a cause for concern the welfare losses associated with rises in that level of spending may not be as large as the public rhetoric can make them seem in fact cost containment may not be as urgent as is widely supposed and some proposed cost containment policies may result in welfare losses for the insured and even increase the number of uninsured

do individual retirement accounts increase savings do iras increase savings or are they merely a windfall for otherwise well off taxpayers a major objective of universal iras was to encourage saving for retirement a spirited debate has ensued over the use of ira tax deductions as a means of promoting private savings the crucial policy issue is not whether ira contributions were substantial they clearly were representing about 30 percent of personal savings from 1982 to 1986 rather the important question is the source of ira contributions iras can be financed out of 1 tax savings themselves 2 shifting existing assets into iras 3 borrowing 4 diverting new savings into iras or 5 reducing consumption the key question is how much of ira savings comes from reduced consumption for overall savings to increase private savings must increase by more than the tax savings conventional economic theory and evidence strongly suggests that iras were not effective savings incentives the challenge to this view rests largely on studies which have appealed to a variety of psychological factors not normally incorporated in economic analysis this paper reviews both types of analysis and concludes that the conventional view remains sound thus a dollar devoted to deficit reduction is likely to be a safer bet for increasing savings than a dollar devoted to ira benefits

divide the hours and conquer the surplus part time workers and pay abstract a theory is presented where the firm strategically over employs part time workers reductions in labor taxes increases in the worker s bargaining strength or reductions in their outside employment opportunities will all increase the level of part time work

altruism and innovation in health care abstractthe joint presence of technological change and consumption externalities is central to health care industries around the world because medical innovation drives the expansion of the health care sector and altruism seems to motivate many public subsidies although traditional economic analysis has proposed well known remedies to deal with consumption externalities and inefficient technological change in isolation it lacks clear principles for addressing them jointly we argue that standard remedies to each of the two problems are inadequate focusing on u s health care we provide illustrative calculations of the dynamic inefficiency in the level of research and development r d spending when innovators are unable to appropriate the altruistic surplus of nonconsumers we calibrate that altruistic gains amount to about a quarter of consumer surplus in the baseline scenario and that r d spending may be underprovided by as much as 60 percent

an empirical model of firm entry with endogenous product type choices i describe a model of entry with endogenous product type choices these choices are formalized as the outcomes of a game of incomplete information in which rivals differentiated products have nonuniform competitive effects on profits i estimate the model for location choices in the video retail industry using a nested fixed point algorithm solution the results imply significant returns to product differentiation simulations illustrate the tradeoff between demand and intensified competition and the extent to which markets with more scope for differentiation support greater entry

eurosclerosis and the sclerosis of objectivity on the role of values among economic policy experts schumpeter once observed that frequently economists not content with their scientific task yield to the call of public duty and to their desire to serve their country and their age by acting as policy experts and policy advocates schumpeter i949 p 346 this raises the issue discussed by gunnar myrdal i958 p 4 of whether social scientists can be practical and at the same time objective what is the relation between wanting to understand and wanting to change society how can the search for true knowledge be combined with moral and political valuations myrdal s questions point to serious but rarely discussed issues of objectivity and values when economists and other social scientists become involved in the making of public policy often in areas of conflict between major interest groups in western societies see also myrdal i 929 i 958 blaug i 992 ch 5 1 in everyday life the roles of the policy expert and the policy advocate tend to merge this mixing can be understood in terms of sen s distinction between b sic values supposed to apply under all conceivable circumstances and nonbasic values expected to hold only under specified factual circumstances sen i970 p 59 policymaking is typically concerned with non basic values economists can change the goals and choices of policymakers by changing their views of what the facts are by acting as policy advisors many brilliant economists have undoubtedly done excellent service to their countries and their times in this context names such as that of john maynard keynes come to many people s mind however it has also been noted that economic policy advisers frequently rely on anecdotal evidence and misleading statistics stigler i965 rivlin i986 krugman i994 like bad weather this situation has typically been accepted as a necessary evil from the point of view of scientific progress as well as the democratic process however the intellectual responsibility of academic policy experts must be increased with only the threat of losing intellectual credibility as a potential sanction from time to time they should therefore be required to

national and international tests of the new drug cost offset theory the new drug cost offset theory argues that new drugs pay for themselves by keeping people out of expensive medical facilities however few studies have tested this theory at the macroeconomic level to determine if system wide savings actually accrue this article provides two tests of the new drug cost offset theory by examining the impact of new drugs on aggregate medical care costs using time series data for the united states and also by using a panel data set of countries belonging to the organization for economic cooperation and development in support of the new drug cost offset theory the results from both tests imply the typical new drug slows the growth of overall medical care spending

the supply side effects of economic policy on october 24 and 25 1980 the center for the study of american business at washington university and the federal reserve bank of st louis cosponsored their fifth annual conference the supply side effects of economic policy this volume contains the papers and comments delivered at that conference proponents of supply side economics have challenged the policy recommendations that emerge from keynesian macroeconometric models these models focus on the effects of economic policy on the demand for output supply side economics in contrast emphasizes the response of output to changes in the supply of inputs decisions affecting the capital stock and employment in particular saving and investment decisions and labor force participation and hours decisions are the focus of the supply siders attention the 1980 conference examined most of the major themes associated with supply side economics the papers in part i of this volume develop the theory underlying various supply side propositions and present empirical evidence in support of some of these propositions in part ii the effect of taxes on capital formation and the effect of increased capital formation on output growth and inflation are examined the effect of tax and transfer programs on labor supply employment and unemployment are examined in part iii the final section contains the special luncheon and dinner presentations

vancouver s gasoline price wars an empirical exercise in uncovering supergame strategies this paper uses a unique data set to determine which dynamic model of tacit collusion best describes behaviour in a particular industry the area investigated is a region of the vancouver british columbia retail gasoline market players are service station managers who compete daily firms choose price in each period using strategies that depend on prices chosen in the previous period periodically unanticipated demand shocks precipitate price wars when shocks occur the firms in the market must determine the new demand conditions and adjust their strategies from an econometric point of view slopes of intertemporal reaction functions are latent variables the resulting system of equations with time varying parameters is estimated via the kalman filter different repeated game oligopoly models correspond to different transition matrices for the latent variables the models can thus be assessed in terms of their power to explain firm behaviour in this market

a future of lousy jobs the changing structure of u s wages politicians journalists and the public have expressed rising concern about the decline or percieved decline in middle class jobs the u s work force is viewed as increasingly divided between a prosperous minority that enjoys ever rising wages and a less affluent majority that struggles harder each year to make ends meet to determine whether and why this view of the job market is accurate labor market economists anaylze trends in the distribution of jobs and wages over the past two decades and attempt to forecast the future course of american earnings inequality mckinley l blackburn david e bloom and richard b freeman assess the reasons behind the deterioration of earnings and job opportunities among less skilled men they consider the impact of changes in industrial structure declines in unionization and trends in the level and quality of schooling for men who have limited skills and education gary burtless examines the effect of the business cycle within and across different regions of the united states on earnings inequality and analyzes the effects of demographic change on inequality over the past twenty years rebecca m blank studies the rise of part time employment and its impact on wages fringe benefits and the quality of jobs linda dachter loury focuses on the effect of the baby boom and baby bust on demand for schooling among new labor market entrants if young entrants are discouraged from seeking college training by the high cost or low payoff of schooling the long term impact will be a gradual decline in the skills of the u s work force robert mofitt analyzes the effect of welfare state programs on the growth of low wage jobs and the extent towhich the welfare reforms of the eighties have affected low income workers

growth effects of taxation under altruism and low elasticity of intertemporal substitution an increase in the tax rate on capital income may raise the rate of economic growth when the elasticity of intertemporal substitution is low and intergenerational transfers are absent since the strength of the bequest motive depends on tax rates this paper provides conditions under which taxing capital income and then reducing the labour income tax is more growth enhancing than the classical policy of zero taxes on capital income and vice versa this paper analyses the effects of different taxes on the rate of economic growth we consider an economy in which public spending is a fixed fraction of the gnp and the government can obtain revenues from proportional taxes on both labour and capital income obviously the growth effects of these two instruments will depend on the assumptions made about the economic environment in the standard overlapping generations olg model with production diamond 1965 an increase in capital income taxes allows a reduction in labour income taxes and thus agents will enjoy more income when they are young since in the olg model young agents must purchase the total stock of capital installed in the next period and saving is increasing in young income higher taxes on capital income may lead to faster capital accumulation in order to complete the argument we must ensure that the associated decrease in the after tax interest rate does not lead to a reduction in saving which would outweigh the previous income effect in other words we need a sufficiently low elasticity of intertemporal substitution the argument is thus similar to the one of jones and manuelli 1992 who have already pointed out that if the technological environment makes sustained growth feasible then taxing the old agents and subsidising the young ones may increase the rate of economic growth however the situation is completely different if we consider instead an economic environment in which the life cycle considerations are absent for instance in endogenous growth models with a representative agent or dynasty and infinite life span an increase in the capital income tax rate typically translates into lower growth see for instance sato 1967 feldstein 1974 stiglitz 1978 and the more recent contributions of lucas 1990 and rebelo 1991 a way to give a unified treatment to these two alternative models is by means

spatial price competition a semiparametric approach we investigate the nature of price competition among firms that produce differentiated products and compete in markets that are limited in extent we propose an instrumental variables series estimator for the matrix of cross price response coefficients demonstrate that our estimator is consistent and derive its asymptotic distribution our semiparametric approach allows us to discriminate among models of global competition in which all products compete with all others and local competition in which products compete only with their neighbors we apply our semiparametric estimator to data from u s wholesale gasoline markets and find that in this market competition is highly localized

product positioning under price competition this paper presents a consumer based methodology for new product pricing and positioning in the face of price competition the price competition is modelled as a nash equilibrium for which two complementary approaches are employed an analytical approach of duopoly provides qualitative insights into the competitive behavior and a numerical approach of general oligopoly provides quantitative solutions under a wide variety of market scenarios the optimal product positioning is formulated as a stackelberg nash leader followers equilibrium which can be solved numerically using recent advances in the field of variational inequalities a small example concerning analgesics is used to illustrate this methodology

an econometric model of location and pricing in the gasoline market abstract the authors propose an econometric model of both the geographic locations of gasoline retailers in singapore and price competition among retailers conditional on their geographic locations although market demand for gasoline is not observed the authors are able to infer the effects of such demand from stations locations and pricing decisions using available data on local market level demographics using the proposed location model which is based on the assumption of social welfare maximization by a policy planner the authors find that local potential gasoline demand depends positively on the local demographic characteristics of the neighborhood using the proposed pricing model which is based on the assumption of bertrand competition between retail chains the authors find that retail margins for gasoline are approximately 21 the authors also find that consumers are willing to travel up to a mile for a savings of 03 per liter using the estimates of the proposed econometric model the a

a structural explanation of recent changes in life cycle labor supply and fertility behavior of married women in the united states abstract this study documents and explains important changes in the life cycle labor supply and fertility behavior of married women in the united states from the 1950s to more recent cohorts the younger cohorts relative to the 1950s supply more labor at earlier stages of the life cycle delay motherhood to later stages without reducing the fertility rate and upon childbearing show a greater tendency to stay out of the labor force in a life cycle model for married couples in which a household makes decisions on fertility as well as labor supply consumption and savings all the behavioral changes are jointly and quantitatively explained by a combination of changes in various labor supply fertility determinants with the increased returns penalties to work non work experience being the dominant contributor the results survive a series of robustness tests including endogenizing education choice and assortative marriage