insuring and u y abstract we establish that an agent increases decreases her savings when insurance becomes unavailable when her marginal utility of consumption is convex concave in income a mean neutral not preserving spread figures in the analysis when the odds are actuarially unfair increasing decreasing absolute risk aversion is necessary and sufficient for an agent to increase decrease her holding of insurance in response to an increase in her wealth increasing absolute risk aversion is sufficient for insurance being purchased to decline in response to a higher price less fair odds

optimal taxation with endogenously incomplete debt markets abstract empirical analyses of labor tax and public debt processes provide prima facie evidence for imperfect government insurance this paper considers a model in which the government s inability to commit to future policies or to report truthfully its spending needs renders government debt markets endogenously incomplete a method for solving for optimal fiscal policy under these constraints is developed such policy is found to be intermediate between that implied by the complete insurance ramsey model and a model with exogenously incomplete debt markets in contrast to optimal ramsey policy optimal policy in this model is consistent with a variety of stylized fiscal policy facts such as the high persistence of labor tax rates and debt levels and the positive covariance between government spending and the value of government debt sales

the choice between market failures and corruption because government intervention transfers resources from one party to another it creates room for corruption as corruption often undermines the purpose of the intervention governments will try to prevent it they may create rents for bureaucrats induce a misallocation of resources and increase the size of the bureaucracy since preventing all corruption is excessively costly second best intervention may involve a certain fraction of bureaucrats accepting bribes when corruption is harder to prevent there may be both more bureaucrats and higher public sector wages also the optimal degree of government intervention may be nonmonotonic in the level of income

the constitution of economic policy one of the most exciting intellectual moments of my career was my 1984 discovery of knut wicksell s unknown and untranslated dissertation finanztheoretische untersuchungen buried in the dusty stacks of chicago s old harper library only the immediate post dissertation leisure of an academic novice allowed for the browsing that produced my own dramatic example of learning by serendipity wicksell s new principle of justice in taxation gave me a tremendous surge of self confidence wicksell who was an established figure in the history of economic ideas challenged the orthodoxy of public finance theory along lines that were congenial with my own developing stream of critical consciousness from that moment in chicago i took on the determination to make wicksell s contribution known to a wider audience and i commenced immediately a translation effort that took some time and considerable help from elizabeth henderson before final publication this abstract was borrowed from another version of this item

optimal taxation merging micro and macro approaches efficient provision of social insurance and efficient redistributionofresourcesamongindividualsaresomeofthemostimportantandchallenging questions in macroeconomics and public finance a seminal contribution of mirrlees 1971 is the starting point for the modern approach to answering these questions a trade off between efficiency and insurance or equity is inherent to this approach and is a key determinant of the optimal policy in this paper we argue that the large body of research that follows mirrlees approach has been developing in two quite separate directions referred to in this paper as the micro and macro approaches we argue that merging the two directions

macroeconomic features of the french revolution this paper describes aspects of the french revolution from the perspective of theories about money and government budget constraints we describe how unpleasant fiscal arithmetic gripped the old regime how the estates general responded to reorganize france s fiscal affairs and how fiscal exigencies impelled the revolution into a procession of monetary experiments ending in hyper inflation

an econometric analysis of the european commission s merger decisions abstract using a sample of 96 mergers notified to the european commission and logit regression techniques we analyse the commission s decision process we find that the probability of a phase 2 investigation and of a prohibition of the merger increases with the parties market shares the probabilities increase also when the commission finds high entry barriers or that the post merger market structure is conducive to collusion we do not find significant effects of political variables such as the nationality of the merging firms

politicians as experts electoral control and fiscal restraints we propose an argument for fiscal restraints that is based on the premise that the services of politicians are credence goods politicians are experts who specialize in observing the true state of the economy budget maximizing politicians are better informed than the electorate about the level of public spending necessary to manage public affairs voters who are able to observe the size of the budget but not the necessary level of spending affect the government s spending behavior via electoral control a fiscal restraint limits the maximum spending a government can choose we identify conditions under which such a fiscal restraint improves voter welfare and discuss the role of the political opposition as a second expert in situations in which the state of the economy requires a level of spending which exceeds the fiscal restraint

managing the maturity structure of government debt abstract it is known that a government can implement the optimal complete market ramsey allocations by issuing non contingent bonds of different maturities the implied optimal maturity structure is time and state invariant i e it is not actively managed i construct a model where the ramsey allocations can be implemented with active management of the maturity structure in a numerical example that reflects the time series properties of the british government s expenditure during the 18th century its historic pattern of maturity management is replicated

consumer response to tax rebates many households received income tax rebates in 2001 of 300 or 600 these rebates represented advance payments of the tax cut from the new 10 percent tax bracket based on a survey of a representative sample of households this paper finds that only 22 percent of households receiving the rebate would spent it instead they would either save it or use it to pay off debt this very low rate of spending represents a striking break with past behavior which would have suggested a much higher rate of spending the low spending rate implies that the tax rebate provided a very limited stimulus to aggregate demand this abstract was borrowed from another version of this item

political credit cycles the case of the euro zone we study the mechanisms through which the adoption of the euro delayed rather than advanced economic reforms in the euro zone periphery and led to the deterioration of important institutions in these countries we show that the abandonment of the reform process and the institutional deterioration in turn not only reduced their growth prospects but also fed back into financial conditions prolonging the credit boom and delaying the response to the bubble when the speculative nature of the cycle was already evident we analyze empirically the interrelation between the financial boom and the reform process in greece spain ireland and portugal and by way of contrast in germany a country that did experience a reform process after the creation of the euro

the dynamics of sovereign default risk and political turnover abstract this paper develops a stochastic dynamic politico economic model of sovereign debt to analyze the interaction of sovereign default risk and political turnover two parties differ in their preferred size of unproductive public spending which is financed by taxes and external debt electoral outcomes are characterized by the economic benefits from the incumbent s policies and stochastic idiosyncratic ideological aspects quantitative findings suggest that endogenous political turnover increases the discrepancies between the optimal borrowing and default policies of the two parties prior to a debt crisis the incumbent government accumulates external debt to foster the probability of remaining in power the dynamic interaction of electoral outcomes external debt and sovereign default supports arguments for imposing institutional constraints on incumbent governments

government debt threshold contracts politicians tend to push the amount of public debt beyond socially desirable levels in order to increase their reelection chances we develop a model that provides a new explanation for this behavior office holders undertake debt financed public projects but postpone the timing of part of the output to the next term this makes it difficult to replace them as a consequence the office holders reelection chances rise as does public debt as a potential remedy for this inefficiency we allow candidates for public office to offer government debt threshold contracts such a contract contains an upper limit for government debt and the sanction that an office holder violating this limit cannot stand for reelection we show that such competitively offered contracts contain low debt levels that limit debt financing and improve the citizens welfare when negative macroeconomic events occur government debt threshold contracts may be violated and the economy is stabilized jel d7 d82 h4

the surprising power of age dependent taxes this paper provides a new empirically driven application of the dynamic mirrleesian framework by studying a feasible and potentially powerful tax reform age dependent labour income taxation i show analytically how age dependence improves policy on both the intratemporal and intertemporal margins i use detailed numerical simulations calibrated with data from the u s panel study of income dynamics to generate robust policy implications age dependence 1 lowers marginal taxes on average and especially on high income young workers and 2 lowers average taxes on all young workers relative to older workers when private saving and borrowing are restricted finally i calculate and characterize the welfare gains from age dependence despite its simplicity age dependence generates a welfare gain equal to between 0 6 and 1 5 of aggregate annual consumption and it captures more than 60 of the gain from reform to the dynamic optimal policy the gains are due to substantial increases in both efficiency and equity when age dependence is restricted to be pareto improving the welfare gain is nearly as large

fiscal rules and discretion in a world economy governments are present biased toward spending fiscal rules are deficit limits that trade off commitment to not overspend and flexibility to react to shocks we compare coordinated rules chosen jointly by a group of countries to uncoordinated rules if governments present bias is small coordinated rules are tighter than uncoordinated rules individual countries do not internalize the redistributive effect of interest rates however if the bias is large coordinated rules are slacker countries do not internalize the disciplining effect of interest rates surplus limits enhance welfare and increased savings by some countries or outside economies can hurt the rest

optimal fiscal policy in a business cycle model this paper develops the quantitative implications of optimal fiscal policy in a business cycle model in a stationary equilibrium the ex ante tax rate on capital income is approximately zero there is an equivalence class of ex post capital income tax rates and bond policies that support a given allocation within this class the optimal ex post capital tax rates can range from close to independently and identically distributed to close to a random walk the tax rate on labor income fluctuates very little and inherits the persistence properties of the exogenous shocks thus there is no presumption that optimal labor tax rates follow a random walk most of the welfare gains realized by switching from a tax system like that of the united states to the ramsey system come from an initial period of high taxation on capital income

precaution and liquidity in the demand for housing we exploit cross sectional mortgage data to investigate the importance of liquidity constraints and a precautionary motive in the demand for housing households that are not liquidity constrained consume housing services essentially as the life cycle hypothesis suggests but with a significant precautionary component households that are liquidity constrained in terms of not meeting standard loan to value or payments to income constraints are similar to unconstrained households in most respects including the precautionary motive but they respond somewhat less to fluctuations in their lifetime income suggesting some influence of bank induced liquidity constraints we additionally find however that banks enforce liquidity constraints only weakly jel d91 d12 r21 i introduction the benchmark theory in the economics of consumption is the life cycle or permanent income hypothesis lcpi based on the work of modigliani and brumberg 1954 and friedman 1957 its empirical validity is sometimes questionable especially when compared against alternatives that incorporate liquidity constraints or the precautionary motive for saving see for instance deaton 1992 for a survey rejection of the lcpi may however be just a manifestation of the poor quality of consumption data at the micro level these data are typically subject to the reporting biases and omissions inherent in consumer surveys there are further difficulties in measuring a desired stream of consumption services nondurable consumption goods are a small fraction of total consumption and in the case of food essentials hardly a consumer choice variable durable consumption goods have the feature that they are lumpy and that the consumption services at any point in time are hard to measure we propose to test the lcpi at the micro level with a quite different type of data the data are obtained from the residential mortgage finance database collected by the national association of realtors they are based on actual home purchases and the associated mortgage transactions reported by realtors and thus avoid some of the reporting biases of the consumer surveys more important they allow us to accurately identify households that in principle have instantaneous access to additional liquidity by lowering the down payment for the house purchase or increasing the size of the loan further the purchase of a house provides an accurate measure of a relatively large fraction of consumption services obtained for a medium to long horizon and measured at the time of the consumption decision although our data also have some serious shortcomings they allow a look at the lcpi from an unconventional vantage point perhaps the most influential study employing the standard consumer survey in testing the lcpi at the micro level is that of hall and mishkin 1982 it examines food expenditure from the panel study of income dynamics one of their key results is that consumption tracks income more closely than would be expected under the lcpi they demonstrate that this result could be explained by assuming a group of liquidity constrained consumers consuming their income at each point in time of 20 of the total sample some of the drawbacks of this study are the use of food expenditures to represent consumption the underreporting of income and absence of proper wealth data inherent in the consumer survey and the associated inability to individually separate liquidity constrained consumers from the rest of the sample several previous studies have attempted to improve on this way of testing the lcpi by examining other data sets bernanke 1984 used data on durable consumption goods automobiles to overcome the drawbacks of using food consumption in the hall and mishkin study his results support the lcpi but are still suspect because of possible reporting biases and the lack of good wealth and savings observations

consumption leisure and earnings related liquidity constraints a note abstract the life cycle model with liquidity constraints produces a euler equation with unobservable kuhn tucker multipliers if borrowing restrictions depend on earnings preferences are non separable between goods and leisure and individuals are employed we derive a euler equation involving only observable variables

future rent seeking and current public savings abstract the conventional wisdom is that politicians rent seeking motives increase public debt and deficits this is because myopic politicians face political risk and prefer to extract political rents as early as possible in this paper we study the determination of government debt and deficits in a dynamic political economy model we show that this conventional wisdom relies on economic volatility being low relative to political uncertainty if economic volatility is high relative to political uncertainty then a rent seeking government actually over saves and over taxes along the equilibrium path relative to a benevolent government this result emerges because of the option value of rent seeking a rent seeking government over values future funds because of the possibility of using them for future rents instead of cutting taxes in the event of a future boom when marginal utility of private consumption is low this over saving bias is temporary since in the long run the rent seeking government over borrows relative to the benevolent government as it eventually squanders the funds it has accumulated we find that both the under saving and over saving bias of the government can be solved by a rule of capping deficits

elections and the strategic use of budget deficits we present a model in which a conservative incumbent with preferences for low public spending can strategically run a budget deficit to prevent the left wing opposition candidate from choosing high public spending if elected and possibly also to ensure his own reelection we find that the incumbent never manipulates the opposition candidate s public spending if he can ensure his own reelection and that a conservative incumbent who runs a budget deficit to ensure his reelection may somewhat paradoxically choose high public spending before the election

sustainable plans and mutual default this paper presents a simple general equilibrium model of optimal taxation in which both private agents and the government can default on their debt as a benchmark we consider ramsey equilibria in which the government can precommit to its policies at the beginning of time but in which private agents can default we then consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we adapt abreu s 1988 optimal trigger strategies to completely characterize the entire set of sustainable equilibria in particular we show that when there is sufficiently little discounting and government consumption fluctuates enough the ramsey allocations and policies in which the government never defaults can be supported by a sustainable equilibrium by way of an example we show that the larger the variance of government consumption the easier it is to support good outcomes we also show for moderate discount factors that in the best sustainable equilibrium tax rates are more volatile and debt is smaller than in the ramsey equilibrium

optimal maturity of government debt without state contingent bonds abstract this paper shows that state contingent debt can be synthetically constructed using non contingent debt of different maturities a main policy implication of this principle is that the ramsey allocation with complete markets can be sustained with non contingent debt only by properly managing its maturity structure the numerical experiments however suggest that this policy implication ought to be taken with care we find that the debt positions that sustain the ramsey allocation are very high on the order of a few hundred times total gdp for a very simple four state economy and increasing in the number of states in addition they are very sensitive to small variations in the parameters of the model

optimal taxation without state contingent debt in an economy studied by lucas and stokey tax rates inherit the serial correlation structure of government expenditures belying barro s earlier result that taxes should be a random walk for any stochastic process of government expenditures to recover a version of barro s random walk tax smoothing outcome we modify lucas and stokey s economy to permit only risk free debt having only risk free debt confronts the ramsey planner with additional constraints on equilibrium allocations beyond one imposed by lucas and stokey s assumption of complete markets the ramsey outcome blends features of barro s model with lucas and stokey s in our model the contemporaneous effects of exogenous government expenditures on the government deficit and taxes resemble those in lucas and stokey s model but incomplete markets put a near unit root component into government debt and taxes an outcome like barro s however we show that without ad hoc limits on the government s asset holdings outcomes can diverge in importa

fiscal policy over the real business cycle a positive theory this paper presents a political economy theory of the behavior of fiscal policy over the business cycle the theory predicts that in both booms and recessions fiscal policies are set so that the marginal cost of public funds obeys a submartingale in the short run fiscal policy can be pro cyclical with government debt spiking up upon entering a boom however in the long run fiscal policy is counter cyclical with debt increasing in recessions and decreasing in booms government spending increases in booms and decreases during recessions while tax rates decrease during booms and increase in recessions data on tax rates from the g7 countries supports the submartingale prediction and the correlations between fiscal policy variables and national income implied by the theory are consistent with much of the existing evidence from the u s and other countries

resource windfalls and public debt a political economy perspective abstract can natural resource windfalls increase public debt in democracies adopting a political economy perspective we show that the answer is in the affirmative resource windfalls increase both the government s income and wealth the former mitigates the need to borrow whereas the latter encourages further borrowing as it improves its terms implying an ambiguous pure effect of resource windfalls on debt re election considerations shorten political time horizons and give rise to political myopia we show that higher political myopia induced by more stringent institutional re election restrictions magnifies the wealth effect turning positive the effect of resource windfalls on debt we test the model s predictions using a panel of u s states over the period 1963 2007 our identification strategy rests on constitutionally entrenched differences in gubernatorial term limits that provide plausibly exogenous variation in re election prospects and geographically based cross state differences in natural endowments our baseline estimates indicate that a resource windfall of 1 induces an increase of approximately 20 in the public debt of states with more stringent re election restrictions

efficient labor contracts with employment risk this article analyzes efficient employment agreements where the demand for consumption insurance can be satisfied by noncontractual means we assume that workers can save and that consumption is determined by a strong form of the permanent income hypothesis under conditions of asymmetric information about exogenous shocks to labor demand we derive a unique compensation schedule that efficiently guides decisions by both workers and employers efficient employment outcomes are generated without a need for third party enforcement or monitoring and workers choose a consumption policy that leaves them indifferent among realizations of labor demand within this solution it is both costless and efficient for workers to delegate employment decisions to the firm within the context of the model we analyze implications for the equilibrium distribution of wages and for empirical studies of labor supply

the deaton paradox in a long memory context with structural breaks this article contributes to the permanent income hypothesis pih and excess consumption smoothness debate in the context of fractional integration we show that the excess consumption smoothness result is a consequence of the quarterly data frequency commonly employed in the empirical work in fact the i 1 hypothesis is rejected for the income process with monthly data in favour of a fractional integration order lower than 1 moreover if a structural break is taken into account we observe a substantial reduction in the degree of consumption smoothness especially after the break found in 1975

budget deficits and redistributive politics this paper proposes a new view of the forces in the political process that cause governments to accumulate debt the analysis builds on a model of redistributive politics that contrary to median voter models does not restrict the set of policies that politicians can propose i show that deficits occur even in an environment where voters and periods are homogeneous this is an environment where previous political theories of debt would predict budget balance in the model deficits are a way for candidates to better target promises to voters and are therefore used as tools of redistributive politics the main contribution of the analysis is to show that the same forces that push candidates to redistribute resources across voters to pursue political advantage are forces that generate budget deficits most countries have sizeable national debts indeed thinking of governments as debtors seems so customary that it feels awkward to talk about a national credit this suggests that there are systematic forces pushing governments to regularly borrow to cover the excess of spending over receipts at the same time a significant amount of government spending consists of transfers to special interest groups that are hard to justify on efficiency or equity grounds this paper presents a political economic model that suggests that these two phenomena are connected debt is at least in part caused by the fact that in order to get elected candidates need to appeal to groups of voters with promises of transfers debt allows candidates a finer control over the promises they make to these groups

the contributions of angus deaton angus deaton was awarded the 2015 sveriges riksbank prize in economic sciences in memory of alfred nobel for his analysis of consumption poverty and welfare this article reviews his contributions to economics

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

politicians taxes and debt the standard analysis of the efficient management of income taxes and debt assumes a benevolent government and ignores potential distortions arising from rent seeking politicians this paper departs from this framework by assuming that a rent seeking politician chooses policies if the politician chooses extractive policies citizens throw him out of power we analyse the efficient sustainable equilibrium unlike in the standard economy temporary economic shocks generate volatile and persistent changes in taxes along the equilibrium path this serves to optimally limit rent seeking by the politician and to optimally generate support for the politician from the citizens taxes resembling those of the benevolent government are very costly since the government over saves and resources are wasted on rents political distortions thus cause the complete debt market to behave as if it were incomplete however in contrast to an incomplete market economy in the long run taxes do not converge to zero and under some conditions they resemble taxes under a benevolent government

static and intertemporal household decisions we discuss the most popular static and dynamic models of household behavior our main objective is to explain which aspects of household decisions different models can account for using this insight we describe testable implications identification results and estimation findings obtained in the literature particular attention is given to the ability of different models to answer various types of policy questions

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

a measure of the sensitivity of saving to interest rate uncertainty with non expected preferences abstract we propose a local measure of the precautionary premium when the consumer faces interest rate uncertainty and has selden type preferences it appears to be useful in order to generalize and to rationalize different results obtained in comparative statics

incumbent performance and electoral control in the pure theory of electoral competition citizens compare the platforms of the candidates and vote for the one whose platform is preferred candidate strategies are identified with promises about future performance in office models of this sort have been developed in both static mckelvey 1975 and dynamic kramer 1977 i settings and all appear to have the property that if the set of alternatives is large enough in some sense equilibrium platforms rarely exist but these models have another feature that is quite as disturbing as their instability in the static setting discussed by mckelvey little attention is paid to the possibility that once in office the politician s preferences may diverge from those of his constituents and that he may therefore choose policies at variance from his platform instead it is simply assumed that promises will be kept whether or not such behavior is congruent with the interest of the officeholder it is sometimes argued that an enforcement mechanism may exist to discipline politicians for failing to keep promises but without a specification of the mechanism it is not obvious that it would be in the interests of the

why do we have nominal government debt abstract we study the choice between nominal and indexed debt in a stochastic macroeconomic model with discretionary monetary and fiscal policy with distortionary taxes nominal debt provides valuable insurance against the budgetary effects of economic fluctuations we show that a welfare maximizing government always issues some nominal debt even though nominal debt increases inflation along the time consistent path of the economy the result is fairly robust with respect to changes in assumptions about policy constraints and about the macroeconomic setting

the consumption function under exponential utility abstract a recent article by cantor derived a closed form solution for the consumer optimization problem with exponential utility and normal income shocks this paper derives solutions without imposing the normality assumption and investigates the effect of risk in this more general setting

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

a dynamic theory of public spending taxation and debt this paper presents a dynamic political economy theory of public spending taxation and debt policy choices are made by a legislature consisting of representatives elected by geographically defined districts the legislature can raise revenues via a distortionary income tax and by borrowing these revenues can be used tofinance a national public good and district specific transfers interpreted as pork barrel spending the value of the public good is stochastic reflecting shocks such as wars or natural disasters in equilibrium policy making cycles between two distinct regimes business as usual in which legislators bargain over the allocation of pork and responsible policy making in which policies maximize the collective good transitions between the two regimes are brought about by shocks in the value of the public good in the long run equilibrium tax rates are too high and too volatile public good provision is too low and debt levels are too high in some environments a balanced budget requirement can improve citizen welfare

social security liquidity and early retirement abstract this paper investigates the effect of social security on retirement decisions it argues that it is important to take realistic account of how recipients evaluate potential benefit flows the paper presents a simple retirement model in which liquidity constraints prompt individuals to use higher than market discount rates in evaluating future pension benefits as a consequence even an apparently actuarially fair early retirement benefit could on average discourage continued work using data on individual retirement decisions i find support for the argument that this phenomenon contributes to some of the observed increase in early retirement

the dynamics of political compromise we characterize efficient self enforcing divisions of political or economic surplus between two parties that interact repeatedly the party in power can decide the allocation and the parties political strength changes according to a markov process we find that the share of the party currently in power depends not only on its current strength but also on whether it had previously been even stronger since it last came to power we find that the constitutional supermajority requirements that attempt to constrain the use of power can counterproductively create less compromise

power fluctuations and political economy we study constrained pareto e cient allocations in a dynamic production economy where the group that holds political power decides the allocation of resources for high discount factors the economy converges to a rst best allocation where labor supply decisions are not distorted for low discount factors distortions do not disappear and uctuate over time most importantly the set of sustainable rst best allocations is larger when there is less persistence in the identity of the party in power because this encourages political compromise this result contradicts the common presumption that there will be fewer distortions when there is a stable ruling group

intergenerational policies public debt and economic growth a politico economic analysis abstract this study presents a two period overlapping generations model with endogenous growth in each period the government representing young and old generations provides a public good financed by labor income taxation and public debt issuance and the government s policies are determined by probabilistic voting increased political power of the old lowers economic growth a debt ceiling rule is considered to resolve the negative growth effect but it creates a trade off between generations in terms of welfare

a theory of misgovernance this paper tries to explain why government bureaucracies are often associated with red tape corruption and lack of incentives the paper identifies two specific ingredients that together can provide an explanation the fact that governments often act precisely in situations where markets fail and the presence of agency problems within the government we show that these problems are exacerbated at low levels of development and in bureaucracies dealing with poor people we also argue that we need to posit the existence of a welfare oriented constituency within the government in order to explain red tape and corruption

the sensitivity of consumption to transitory income estimates from panel data on households we investigate the stochastic relation between income and consumption specifically consumption of food within a panel of about 2 000 households our major findings are 1 consumption responds much more strongly to permanent than to transitory movements of income 2 the response to transitory income is nonetheless clearly positive 3 a simple test independent of our model of consumption rejects a central implication of the pure life cycle permanent income hypothesis the observed covariation of income and consumption is compatible with pure life cycle permanent income behavior on the part of80 percent of families and simple proportionality of consumption and income among the remaining 20 percent as a general matter our findings support the view that families respond differently to different sources of income variations in particular temporary income tax policies have smaller effects on consumption than do other more permanent changes in income of the same magnitude this abstract was borrowed from another version of this item

the political economy of fiscal policy we describe a theory of the collective choice of fiscal policy in dynamic economies that are subject to aggregate shocks the theory incorporates realistically complex policy spaces rational forward looking agents and a rich political decision process we argue that it provides a tractable framework to study a variety of important questions in macroeconomics and public finance jel e62 h63 d79

the consumption function and the precautionary demand for savings abstract under the assumptions of constant absolute risk aversion and serially correlated normally distributed income shocks an explicit solution to the consumer s intertemporal optimization problem is derived which parameterizes the precautionary demand for savings

on the consistency of merger policy this paper presents a way to get around the information problem facing outside analysts who want to scrutinize competition authorities decisions a formal model of how decisions are taken is applied to infer information that is available to the authorities but not to the outside analyst if the information thus inferred from several decisions is incompatible it is claimed that the policy executed by the competition authorities is inconsistent a case study is presented of two recent decisions by the norwegian competition authority on proposed mergers in the norwegian insurance industry indicating they most likely were mutually inconsistent

state capacity and military conflict powerful centralized states controlling a large share of national income only begin to appear in europe after 1500 we build a model that explains their emergence in response to the increasing importance of money for military success when fiscal resources are not crucial for winning wars the threat of external conflict stifles state building as finance becomes critical internally cohesive states invest in state capacity while divided states rationally drop out of the competition causing divergence we emphasize the role of the military revolution a sequence of technological innovations that transformed armed conflict using data from 374 battles we investigate empirically both the importance of money for military success and patterns of state building in early modern europe the evidence is consistent with the predictions of our model

fiscal rules and discretion under persistent shocks this paper studies the optimal level of discretion in policymaking we consider a fiscal policy model where the government has time inconsistent preferences with a present bias toward public spending the government chooses a fiscal rule to trade off its desire to commit to not overspend against its desire to have flexibility to react to privately observed shocks to the value of spending we analyze the optimal fiscal rule when the shocks are persistent unlike under independent and identically distributed shocks we show that the ex ante optimal rule is not sequentially optimal as it provides dynamic incentives the ex ante optimal rule exhibits history dependence with high shocks leading to an erosion of future fiscal discipline compared to low shocks which lead to the reinstatement of discipline the implied policy distortions oscillate over time given a sequence of high shocks and can force the government to accumulate maximal debt and become immiserated in the long run

the political economy of dynamic elections accountability commitment and responsiveness we survey the literature on dynamic elections in the traditional settings of spatial preferences and rent seeking under perfect and imperfect monitoring of politicians we define stationary electoral equilibrium which encompasses notions used by barro 1973 ferejohn 1986 banks and sundaram 1998 and others we show that repeated elections mitigate the commitment problems of politicians and voters and that a responsive democracy result holds under general conditions term limits however attenuate the responsiveness finding we also touch on related applied work and we point to areas for fruitful future research including the connection between dynamic models of politics and economics

credit rationing and rational behavior this paper shows that optimal consumption is weakly increasing in the borrowing ceiling while savings and the welfare losses caused by borrowing constraints are weakly decreasing more important the strict inequalities may hold even at high saving levels at which the constraints are not expected to bind any time soon in essence the paper shows that one can make a smooth transition between the two extremes of free and no borrowing further quantitative versions of the theory demonstrate that the distortive impact of borrowing constraints depends upon all the parameters of the economic environment in a complicated way copyright 1994 by ohio state university press

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

intertemporal choice and consumption mobility the theory of intertemporal consumption choice makes sharp predictions about the evolution of the entire distribution of household consumption not just about its conditional mean in the paper we study the empirical transition matrix of consumption using a panel drawn from the bank of italy survey of household income and wealth we estimate the parameters that minimize the distance between the empirical and the theoretical transition matrix of the consumption distribution the transition matrix generated by our estimates matches remarkably well the empirical matrix both in the aggregate and in samples stratified by education our estimates strongly reject the consumption insurance model and suggest that households smooth income shocks to a lesser extent than implied by the permanent income hypothesis jel d52 d91 i30

precautionary saving an explanation for excess sensitivity of consumption the permanent income hypothesis under certainty equivalence yields a martingale consumption process empirically this hypothesis is rejected because consumption is excessively sensitive to anticipated income one approach to account for excess sensitivity is to relax certainty equivalence by using utility functions that induce precautionary saving this article analyzes a hyperbolic absolute risk aversion utility function empirically some reasonable parameterizations of this specification allow one to match the excess sensitivity associated with the data these parameterizations also permit one to account for the excess smoothness problem excess sensitivity and excess smoothness however do not reflect the same phenomenon

split panel jackknife estimation of fixed effect models we propose a jackknife for reducing the order of the bias of maximum likelihood estimates of nonlinear dynamic fixed effect panel models in its simplest form the half panel jackknife the estimator is just 2 hat theta bar theta 1 2 where hat theta is the mle from the full panel and bar theta 1 2 is the average of the two half panel mles each using t 2 time periods and all n cross sectional units this estimator eliminates the first order bias of hat theta the order of the bias is further reduced if two partitions of the panel are used for example two half panels and three 1 3 panels and the corresponding mles on further partitioning the panel any order of bias reduction can be achieved the split panel jackknife estimators are asymptotically normal centered at the true value with variance equal to that of the mle under asymptotics where t is allowed to grow slowly with n in analogous fashion the split panel jackknife reduces the bias of the profile likelihood and the bias of marginal effect estimates simulations in fixed effect dynamic discrete choice models with small t show that the split panel jackknife effectively reduces the bias and mean squared error of the mle and yields confidence intervals with much better coverage

quantitative asset pricing implications of endogenous solvency constraints we study the asset pricing implications of an economy where solvency constraints are endogenously determined to deter agents from defaulting while allowing as much risk sharing as possible we solve analytically for efficient allocations and for the corresponding asset prices portfolio holdings and solvency constraints for a simple example then we calibrate a more general model to u s aggregate as well as idiosyncratic income processes we find equity premia risk premia for long term bonds and sharpe ratios of magnitudes similar to the u s data for low risk aversion and a low time discount factor article published by oxford university press on behalf of the society for financial studies in its journal the review of financial studies

optimal taxation with private government information the ramsey model of fiscal policy implies that taxes should be smooth in the sense of having small variances in contrast empirical labour tax processes are smooth in the sense of being random walks they provide prima facie evidence for incomplete government insurance this paper considers whether private government information might lie behind such incomplete insurance it shows that optimal incentive compatible policies exhibit limited use of state contingent debt and greater persistence in taxes and debt and it argues that they are better approximations to empirical fiscal policies than those implied by the ramsey model the paper also establishes that optimal incentive compatible allocations converge to allocations such that the government s incentive compatibility constraint no longer binds generally these limiting allocations are ones in which the government is maximally indebted their credibility and the interaction of incentive compatibility and credibility is briefly discussed

sovereign debt as intertemporal barter author s kletzer kenneth m wright brian d abstract borrowing and lending between sovereign parties is modeled as intertemporal barter that smoothes the consumption of a risk averse party subject to endowment shocks the surplus anticipated in the relationship offers sufficient incentive for cooperation by all parties including any other competitive agents who are potential lenders to the sovereign the sole punishments consist of renegotiation proof changes in the path of future payments we show that intertemporal trade can be sustained in the absence of any exogenous enforcement of lending relationships whatsoever that is borrowing and lending are possible under anarchy and are supported by punishments that consist of cheating any cheater long term implicit relationships may be fulfilled as the continual renegotiation of simple incomplete short term loans the analysis suggests that the crucial role of the explicit loan contract is the identification of the relationship and the parties involved

antitrust public choice s antitrust legislation and enforcement has over the last few decades been increasingly informed by ever more sophisticated analysis while at the same time evidence has continued to mount that the results of antitrust remedies fall far short of the promises held out under still prevalent nirvana fallacy demsetz in journal of law and economics 12 1 1 22 1969 expectations i draw upon a recent supreme court decision as well as the results of young and shughart s public choice 2010 doi 10 1007 s11127 009 9531 y novel approach to the analysis of antitrust enforcement activities to discuss the extent to which public choice theory is vital in solving the puzzle regarding the unintended effects of antitrust public choices

lack of commitment and the level of debt the tendency of countries to accumulate public debt has been rationalized in models of political disagreement and lack of commitment we analyze in a benchmark model how the evolution of public debt is affected by lack of commitment per se while commitment introduces indeterminacy in the level of debt lack of commitment creates incentives for debt to converge to specific levels one of the levels that debt often converges to implies no debt accumulation at all in a simple example we prove analytically that debt converges to zero and we analyze numerically more complex models we also show in an imperfect credibility setting that a small deviation from full commitment is enough to obtain these results

sustainable plans and debt abstract this paper presents a simple general equilibrium model of optimal fiscal policy similar to that of lucas and stokey j monet econ 12 1983 55 93 except that we let the government default on its debt we consider sustainable equilibria in which both government and private agent decision rules are required to be sequentially rational we concentrate on trigger mechanisms which specify reversion to the markov equilibrium after deviations by the government and show that such mechanisms cannot support equilibria with positive debt we go on to show by way of examples that there can be more complicated trigger mechanisms which support positive debt journal of economic literature classification numbers e61 e62

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

housing purchases and transitory income a study with panel data in this paper we explore the role of transitory income in the housing purchase decision because of moral hazard considerations banks typically require downpayments to be financed internally hence transitory income is potentially important in overcoming the downpayment constraint using a novel approach to the measurement of permanent and transitory income we estimate a two stage model in which households decide whether to purchase housing in the first stage and the quantity to be purchased in the second the results indicate a significant role for transitory income in both decision stages

political economy of ramsey taxation abstract we study the dynamic taxation of capital and labor in the ramsey model under the assumption that taxes and public good provision are decided by a self interested politician who cannot commit to policies we show that as long as the politician is as patient as the citizens the chamley judd result of zero long run taxes holds in contrast if the politician is less patient than the citizens the best subgame perfect equilibrium from the viewpoint of the citizens involves long run capital taxation

debt constrained asset markets we develop a theory of general equilibrium with endogenous debt limits in the form of individual rationality constraints similar to those in the dynamic consistency literature if an agent defaults on a contract he can be excluded from future contingent claims markets trading and can have his assets seized he cannot be excluded from spot markets trading however and he has some private endowments that cannot be seized all information is publicly held and common knowledge and there is a complete set of contingent claims markets since there is complete information an agent cannot enter into a contract in which he would have an incentive to default in some state in general there is only partial insurance variations in consumption may be imperfectly correlated across agents interest rates may be lower than they would be without constraints and equilibria may be pareto ranked

self enforcing wage contracts we examine long term wage contracts between a risk neutral firm and a risk averse worker when both can costlessly renege and buy or sell labour at a random spot market wage a self enforcing contract is one in which neither party ever has an incentive to renege in the optimum self enforcing contract wages are sticky they are less variable than spot market wages and positively serially correlated they are updated by a simple rule around each spot wage is a time invariant interval and the contract wage changes each period by the smallest amount necessary to bring it into the current interval

spending biased legislators discipline through disagreement this paper studies politicians who have a present bias for spending they want to increase current spending and procrastinate spending cuts we argue that legislators bias is more severe in economies with low institutional quality we show that disagreement in legislatures leads to policy persistence and that this attenuates the temptation to overspend depending on the environment legislators decisions to be fiscally responsible may either complement or substitute other legislator s decisions in economies with weak institutions politicians actions are strategic complements thus institutional changes that induce fiscal responsibility are desirable they generate a positive responsibility multiplier and reduce inefficient spending however in economies with better institutions the same institutional change would induce some legislators to free ride on others responsibility and may lead to more inefficient spending