optimal democratic mechanisms for taxation and public good provision abstract we study the interdependence of optimal tax and expenditure policies an optimal policy requires that information on preferences is made available we first study this problem from a general mechanism design perspective and show that efficiency is possible only if the individuals who decide on public good provision face an own incentive scheme that differs from the tax system we then study democratic mechanisms with the property that tax payers vote over public goods under such a mechanism efficiency cannot be reached and welfare from public good provision declines as the inequality between rich and poor individuals increases

answering the skeptics yes standard volatility models do provide accurate forecasts a voluminous literature has emerged for modeling the temporal dependencies in financial market volatility using arch and stochastic volatility models while most of these studies have documented highly significant in sample parameter estimates and pronounced intertemporal volatility persistence traditional ex post forecast evaluation criteria suggest that the models provide seemingly poor volatility forecasts contrary to this contention we show that volatility models produce strikingly accurate interdaily forecasts for the latent volatility factor that would be of interest in most financial applications new methods for improved ex post interdaily volatility measurements based on high frequency intradaily data are also discussed

the undesirability of randomized income taxation under decreasing risk aversion abstract for the standard specification of the utilitarian optimal income tax problem with hidden characteristics the paper shows that randomized tax schemes are undesirable if preferences exhibit a property of weakly decreasing risk aversion according to the multidimensional risk aversion concept of hellwig hellwig m f 2004 risk aversion in the small and the large with multidimensional outcomes max planck institute for research on collective goods bonn preprint 2004 6 http www mpp rdg mpg de pdf dat 2005 23online pdf this property of decreasing risk aversion also implies that the optimal income tax schedule is unique and depends continuously on the data of the problem

on the sign of the optimum marginal income tax this paper studies a central aspect of optimal income taxation as modelled in mirrlees original paper on the topic identical leisure consumption preferences qualitatively homogeneous skills in production namely whether given concave utilitarianism alone the optimal marginal income tax will be non negative a well known positive answer to this question in weak inequality form was given in the said paper which however we show requires additive separability of individual utility in the ordinal and cardinal senses our main result here is to derive the required strict positivity of the marginal tax under weak conditions slightly wider than noninferiority of consumption and leisure with preferences otherwise arbitrary

a contribution to the theory of optimal utilitarian income taxation abstract the paper provides a new formulation of the mirrlees seade theorem on the positivity of the optimal marginal income tax under weaker assumptions and in a more general model the formulation of the theorem is independent of whether the model involves finitely many types or a continuous type distribution the formal argument makes the underlying logic transparent relating the mathematics to the economics and showing precisely how each assumption enters the analysis

the optimal linear income tax revisited abstract this paper shows that the mirrlees seade conditions of agent monotonicity and noninferiority of leisure imply the positivity of the optimal marginal income tax rate in sheshinski s model of linear income taxation as well as in the general model the optimal marginal tax rate is bounded above by the rawlsian rate which in turn is bounded by the revenue maximizing rate the optimal marginal tax rate may be arbitrarily close to the rawlsian rate however the optimal marginal tax rate is bounded away from the revenue maximizing rate whenever the individual with the lowest ability works

income maintenance and labor force participation the paper studies the optimal tax subsidy schedules in an economy where the only decision of the agents is to work or not with an application to the case of france given an income guarantee provided by the welfare state the tax schedule that maximizes government revenue provides a benchmark the laffer bound above which it is inefficient to tax in fact under mild conditions a feasible allocation is second best optimal if and only if the associated taxes are lower than the laffer bound the only restriction that efficiency puts on the shape of the tax scheme is this upper laffer bound the laffer tax scheme itself can be computed from the joint distribution of the agents productivities and work opportunity costs depending on the economy it can take widely different forms and exhibit for instance negative marginal tax rates after estimating the joint distribution of productivities and work opportunity costs on french data i compute the laffer bound for two subpopulations single women and married women with two children or more quite surprisingly the actual incentives to work appear to be very close to the bound

how optimal nonlinear income taxes change when the distribution of the population changes abstract the impacts of changing the number of individuals of a particular skill level on the solutions to two versions of the finite population optimal nonlinear income tax problem are investigated in one version preferences are quasilinear in leisure for this version it is shown that it is possible to sign the directions of change in everyone s optimal consumptions and optimal marginal tax rates in the other version preferences are quasilinear in consumption for this version it is shown that it is possible to sign the directions of change in everyone s optimal before tax incomes and optimal marginal tax rates moreover the directions of change in the optimal marginal tax rates are the same for the two specifications of preferences

monopoly provision of product quality and warranties an exploration in the theory of multi dimensional screening we address the monopoly problem of designing and pricing a product line of goods distinguished by different quality and warranty levels consumers vary in their evaluations of these attributes so that the problem is one of screening it is sufficiently complex that the local approach commonly used does not work instead we use new techniques for dealing with incentive constraints between nonadjacent consumer types these techniques allow us to characterize optimal allocations that may not be monotonic in particular although the more eager types of buyer do pay higher prices and yield the monopoly higher profit they may receive lower quality or lower warranty coverage we find preference restrictions that restore monotonicity concave risk tolerance implies that warranty coverage increases in type and constant absolute risk aversion implies that quality increases in type

separability and public finance abstract in a second best environment the optimal policy choice sometimes follows first best rules this paper presents a formal general argument which allows to unify much of the literature it lays down the information structure and separability assumptions under which the results hold in a variety of setups with extensions to preference heterogeneity and individual production sets

nonstationarities in stock returns the paper outlines a methodology for analyzing daily stock returns that relinquishes the assumption of global stationarity giving up this common working hypothesis reflects our belief that fundamental features of the financial markets are continuously and significantly changing our approach approximates the nonstationary data locally by stationary models the methodology is applied to the s p 500 series of returns covering a period of over seventy years of market activity we find most of the dynamics of this time series to be concentrated in shifts of the unconditional variance the forecasts based on our nonstationary unconditional modeling were found to be superior to those obtained in a stationary long memory framework and to those based on a stationary garch 1 1 data generating process

screening with convex menus and optimal flow taxation abstract this paper considers a family of screening problems in which the principal is constrained to offer only convex menus applications include i optimal flow taxation when individuals can substitute consumption and leisure inter temporally ii optimal product design for a linear pricing monopolist iii non exclusive cum linearly priced annuity markets a modified version of a myerson 1979 mirrlees 1971 direct mechanism in which standard incentive compatibility constraints are replaced by no convexification constraints can be used to compute optimal allocations in this family of problems in the flow taxation application the optimal tax schedule necessarily features progressive marginal tax rates typically features distortions at the top and can be analyzed by adapting standard ironing techniques

on the optimality of optimal income taxation abstract the mirrleesian model of income taxation restricts attention to simple allocation mechanism with no strategic interdependence i e the optimal labor supply of any one individual does not depend on the labor supply of others it has been argued by piketty 2009 12 that this restriction is substantial because more sophisticated mechanisms can reach first best allocations that are out of reach with simple mechanisms in this paper we assess the validity of piketty s critique in an independent private values model as a main result we show that the optimal sophisticated mechanism is a simple mechanism or equivalently a mirrleesian income tax system

modeling long memory and structural breaks in conditional variances an adaptive figarch approach this paper introduces a new long memory volatility process denoted by adaptive figarch or a figarch which is designed to account for both long memory and structural change in the conditional variance process structural change is modeled by allowing the intercept to follow a slowly varying function speci ed by gallant 1984 s exible functional form a monte carlo study nds that the a figarch model outperforms the standard figarch model when structural change is present and performs at least as well in the absence of structural instability an empirical application to stock market volatility is also included to illustrate the usefulness of the technique

a note on the optimum income tax abstract this paper analyzes the optimum utilitarian income tax with special attention given to the characterization of the lower end of the optimum tax function in the case when the least qualified individuals do not work moreover the positivity of the marginal tax rate throughout is shown to be a consequence of the desirability of redistribution of income or leisure given the self selection constraints and preferences fulfilling agent monotonicity and non inferiority of leisure

a comparison of optimal tax policies when compensation or responsibility matter this paper examines optimal redistribution in a model with high and low skilled individuals with heterogeneous tastes for labor we compare the extent to which optimal policies based on different normative criteria obey the principles of compensation for differential skills and responsibility for preferences for labor when labor supply is along the extensive margin with heterogeneity in skills and preferences traditional welfarist criteria including utilitarianism present unappealing policy recommendations in some scenarios as they fail to take compensation and responsibility issues into account criteria from the social choice literature perform better in this regard in first and second best more importantly these equality of opportunity criteria push the second best policy away from an earned income tax credit and in the direction of a negative income tax

modelling exchange rate volatility with random level shifts abstractrecent literature has shown that the volatility of exchange rate returns displays long memory features it has also been shown that if a short memory process is contaminated by level shifts the estimate of the long memory parameter tends to be upward biased in this article we directly estimate a random level shift model to the logarithm of the absolute returns of five exchange rates series in order to assess whether random level shifts rlss can explain this long memory property our results show that there are few level shifts for the five series but once they are taken into account the long memory property of the series disappears we also provide out of sample forecasting comparisons which show that in most cases the rls model outperforms popular models in forecasting volatility we further support our results using a variety of robustness checks

some important properties of the social marginal utility of income this paper contains an analysis of how the social marginal utilities of income assigned to different persons change in response to changes in prices the provision of public goods and other parameters faced by the individual the effect of a parameter change is interpreted as composed of a change in the real value of marginal income and a change in total real income or utility level it is implied that even if utility levels are kept constant social marginal utilities of income remain unaltered only under special conditions which are exposed and interpreted the results are useful in applied welfare economics

a note on the marginal tax rate in a finite economy abstract the marginal tax rate is shown to be non negative in guesnerie and seade s model of nonlinear pricing in a finite economy under assumptions that are as mild as those customarily adopted in nonlinear tax models with a one dimensional continuum population

a reduced form optimal nonlinear income tax problem abstract for a finite population with quasilinear preferences it is shown how mirrlees optimal nonlinear income tax problem can be simplified to a reduced form problem involving only the allocation of the consumption good this result is a finite version of a proposition established in the continuum by s lollivier and j c rochet

forecasting the volatility of crude oil futures using har type models with structural breaks abstract we introduce sixteen har type volatility models with structural breaks and estimate their parameters by applying 5 min high frequency transaction data for wti crude oil futures we find significant structural breaks in the volatility of crude oil futures additionally the historical realized volatility continuous sample path variation negative realized semivariance signed jump signed semi jump and leverage components contain substantial and salient information for forecasting the volatility of crude oil futures then we use loss functions to assess the forecasting performance of these sixteen new models and finally rank these models using the promethee ii method our results indicate that different models exhibit different predictive power in forecasting the 1 day 1 week and 1 month volatility of crude oil futures of the new har type models the new har rsv model performs best at forecasting the 1 day and 1 month volatilities whereas the new har cj best forecasts the 1 week volatility

estimation of garch process in the presence of structural change abstract this paper blends the switching regression model of goldfeld and quandt 1973 with the garch model of bollerslev 1987 in order to estimate and test for the significance of garch parameters in the presence of structural breaks the garch parameter values the switch date at which one regime supersedes another and the gradualness of each regime switch are all determined endogenously

the spatial evolution of the british automobile industry does location matter this article aims to describe and explain the spatial evolution of the automobile sector in great britain from an evolutionary perspective this analysis is based on a unique database of all entries and exits in this sector during the period 1895 1968 collected by the authors cox regressions show that spinoff dynamics agglomeration economies and time of entry have had a significant effect on the survival rate of automobile firms during the period 1895 1968

shifts in volatility driven by large stock market shocks abstract this paper presents an extension of the stochastic volatility model which allows for level shifts in volatility of stock market returns known as structural breaks these shifts are endogenously driven by large return shocks innovations reflecting large pieces of market news these shocks are identified from the data as being bigger in absolute terms than the values of two threshold parameters of the model one for the negative shocks and one for the positive shocks the model can be employed to investigate different sources of stock market volatility shifts driven by market news without relying on exogenous information in addition to this it has a number of interesting features which enable us to study the effects of large return shocks on future levels of market volatility the above properties of the model are shown based on a study for the us stock market volatility

optimal taxation in the extensive model abstract we study optimal taxation under extensive preferences the agents utilities are constant for positive actions up to a maximal productivity level utilities may be discontinuous at the origin reflecting fixed costs of participation allowing for general distributions of work opportunity costs and productivity and for income effects we characterize optimal incentive compatible tax schedules we then give sufficient conditions for society to desire redistribution when these conditions hold upward distortions of the financial incentives to work can only occur for low skilled workers such upwards distortions are indeed always present when the fixed participation costs are pecuniary

a reexamination of the optimal nonlinear income tax abstract this paper investigates mirrlees model of optimal income taxation it provides a concrete example of utility and density functions for which the solution to the usual first order model is not implementable i e and example where the first order approach does not work adding second order conditions leads to an extended model and to implementable solutions if these conditions are binding one gets a kink in the optimal net income schedule and bunching of individuals occurs the properties of an optimal nonlinear income tax are reexamined within the extended model

long memory and level shifts in the volatility of stock market return indices there has been interest in the possibility of confusing long memory and structural changes in level and studies showed that when a short memory process is contaminated by level shifts the estimate of the fractional differencing parameter is biased upward and the autocovariances decay slowly we analyze the properties of the autocorrelation function the periodogram and the log periodogram estimate of the memory parameter when the level shift component is a mixture model our results explain many findings reported and uncover new features we confront our theoretical predictions using log squared returns as a proxy for the volatility of some assets returns including daily s p 500 returns over the period 1928 2002 the estimates follow patterns that would obtain if the process was short memory with level shifts instead of fractionally integrated a simple test is also proposed which reinforces this conclusion

optimal income transfer programs intensive versus extensive labor supply responses this paper analyzes optimal income transfers for low incomes labor supply responses are modeled along the intensive margin intensity of work on the job and along the extensive margin participation into the labor force when behavioral responses are concentrated along the intensive margin the optimal transfer program is a classical negative income tax program with a substantial guaranteed income support and a large phasing out tax rate however when behavioral responses are concentrated along the extensive margin the optimal transfer program is similar to the earned income tax credit with negative marginal tax rates at low income levels and a small guaranteed income carefully calibrated numerical simulations are provided

a complete solution to a class of principal agent problems with an application to the control of a self managed firm this paper considers a class of principal agent problems which have the following features 1 there is adverse selection because the principal ignores the value of one parameter of the agent s true characteristics 2 leaving aside the information parameter the principal s welfare as well as the agent s welfare depend on two types of variables observable to both of them the first ones possibly multidimensional are called action variable s and the second one which is one dimensional has in general the meaning of a money transfer 3 the principal is a stackelberg leader of the two person game he can commit himself to decision rules which are admissible on informational grounds he optimizes within the adequate class taking into account besides the agent s reaction one constraint which has generally the meaning of an individual rationality constraint and sometimes of a feasibility constraint the optimization is limited to the class of non stochastic mechanisms 4 the problem can also receive an alternative interpretation the principal faces a continuum of agents of unknown characteristics the distribution being known however stylized principal agent problems of this type have often been considered in the economic literature in particular the reader will later be able to recognize that the standard income tax model a la mirrlees 1971 the quality or quantity choice model of the monopolist a la mussa and rosen 1978 or maskin and riley 1982 and the model of government regulation of the private monopolist of baron and myerson 1982 all belong to

power monotonicity in detecting volatility levels change we show that the cusum and lm tests for structural change in the volatility process enjoy monotonic power the framework is general including many recently proposed non stationary garch type models the result is in contrast to the well known issue of non monotonic power for the cusum based tests for changing mean simulations and an empirical example provide further support

optimal income taxation and job choice in this paper we study optimal income taxation when different job types exist for workers of different skills each job type has some feasible range of incomes from which workers choose by varying labor supply workers are more productive than others in the jobs that suit them best the model combines features of the classic optimal tax literature with labor variability along the intensive margin with the extensive margin approach where workers make discrete job choices and or participation decisions we find that first best maximin utility can be achieved in the second best and marginal tax rates below the top can be negative or zero

the impact of changing skill levels on optimal nonlinear income taxes abstract the impact of changing an individual s skill level on the solution to a finite population version of the mirrlees optimal nonlinear income tax problem with quasilinear in leisure preferences is investigated it is shown that it is possible to sign the directions of change in everyone s optimal consumptions and optimal marginal tax rates in response to such a change

the design of income maintenance programmes this paper provides a comprehensive treatment of a basic income maintenance problem for a group of individuals who differ in their income generating abilities it stresses the impact that imperfect information about such abilities has on programme design the analysis serves two purposes first we are able to unify the theoretical literature on the income maintenance problem second we examine the impact of allowing the government to impose workfare on recipients of income support in addition to being of policy interest this is a theoretically challenging problem since it requires solving a multi dimensional screening problem the solution that we find is strikingly simple it separates the poor into two categories with the lower income groups subject to workfare while facing a 100 marginal tax rate on earnings the second group does no public work and is offered a benefit schedule which taxes earnings at a lower rate

efficiency welfare and political competition we study political competition in an environment in which voters have private information about their preferences our framework covers models of income taxation public goods provision or publicly provided private goods politicians are vote share maximizers they can propose any policy that is resource feasible and incentive compatible they can also offer special favors to subsets of the electorate we prove two main results first the unique symmetric equilibrium is such that policies are surplus maximizing and hence first best pareto efficient second there is a surplus maximizing policy that wins a majority against any welfare maximizing policy thus in our model policies that trade off equity and efficiency considerations are politically infeasible jel codes c72 d72 d82 h21 h41 h42

a markov model of switching regime arch in this article i present a new approach to model more realistically the variability of financial time series i develop a markov arch model that incorporates the features of both hamilton s switching regime model and engle s autoregressive conditional heteroscedasticity arch model to examine the issue of volatility persistence in the monthly excess returns of the three month treasury bill the issue can be resolved by taking into account occasional shifts in the asymptotic variance of the markov arch process that cause the spurious persistence of the volatility process i identify two periods during which there is a regime shift the 1974 2 1974 8 period associated with the oil shock and the 1979 9 1982 8 period associated with the federal reserve s policy change the variance approached asymptotically in these two episodes is more than 10 times as high as the asymptotic variance for the remainder of the sample i conclude that regime shifts have a greater impact on the properties of the data and i ca

volatility spillovers between crude oil and chinese sectoral equity markets evidence from a frequency dynamics perspective abstract we examine the frequency dynamics of volatility spillovers between crude oil and china s stock markets in a spectral representation framework of generalized forecast error variance decomposition using sectoral stock indices data we find evidence of total volatility spillover driven mainly by short term spillovers the net spillovers of the oil market are almost all positive and dominated by short ter m components although the spillover during china s 2015 financial crisis is negative and attributable to long term components in addition there exists heterogeneity in net pairwise frequency spillovers between the oil and sectoral stock markets moreover structural breaks in volatilities appear to be a significant feature of volatility spillovers finally frequency spillovers in our system can predict future stock market volatility these results have economic implications for investors and policymakers

persistence in variance structural change and the garch model this article examines the persistence of the variance as measured by the generalized autoregressive conditional heteroskedasticity garch model in stock return data in particular we investigate the extent to which persistence in variance may be overstated because of the existence of and failure to take account of deterministic structural shifts in the model both an analysis of daily stock return data and a monte carlo simulation experiment confirm the hypothesis that garch measures of persistence in variance are sensitive to this type of model misspecification

political competition and mirrleesian income taxation a first pass we study downsian competition in a mirrleesian model of income taxation the competing politicians may dier in competence if politicians engage in vote share maximization the less competent politician s policy proposals are attractive to the minority of rich agents whereas those of the competent politician are attractive to the majority of poor agents the less competent politician wins with positive probability which gives rise to a political failure in the sense of besley and coate 1998 political failures are avoided if politicians maximize winning probabilities nevertheless the two equilibria cannot be pareto ranked the minority may be better o under vote share maximization

real and spurious long memory properties of stock market data we test for the presence of long memory in daily stock returns and their squares using a robust semiparametric procedure of lobato and robinson spurious results can be produced by nonstationarity and aggregation we address these problems by analyzing subperiods of returns and using individual stocks the test results show no evidence of long memory in the returns by contrast there is strong evidence in the squared returns

self selection and pareto efficient taxation abstract this paper analyses the set of pareto efficient tax structures the formulation of the problem as one of self selection not only shows more clearly the similarity between this problem and a number of other problems such as the optimal pricing of a monopolist which have recently been the subject of extensive research but also allows the derivation of a number of new results we establish i under fairly weak conditions randomization of tax structures is desirable ii if different individuals are not perfect substitutes for one another in production then the general equilibrium effects until now largely ignored in the literature of changes in the tax structure may be dominant in determining the optimal tax structure in particular if the relative wage of high ability and low ability individuals depends on the relative supplies of labor the optimal tax structure entails a negative marginal tax rate on the high ability individuals and a positive marginal tax rate on the low ability individuals the marnitude of which depends on the elasticity of substitution iii if individuals differ in their preferences pareto efficient taxation may entail negative marginal tax rates for high incomes while iv if wage income is stochastic the marginal tax rate at the upper end may be 100 our analysis thus makes clear that the main qualitative properties of the optimal tax structure to which earlier studies called attention are not robust to these attempts to make the theory more realistic