the role of reference prices in experimental auctions abstract we examine the role of reference prices field prices in willingness to pay studies involving experimental auctions using a 2nd price vickrey auction we find that provision of reference prices increases bid values

spectrum auction designs and revenue variations this study examines a sample of 93 national 3g spectrum auctions for the period 2000 2011 to identify the sources of substantial revenue variations an implied reduced form econometric model that recognises the censored nature of the sample relates per capita winning bid per mhz per million populations values to regulator determined auction design characteristics auction competitiveness mobile wireless market conditions and spectrum package attributes identified from tender documents the analysis reveals that among other factors all auction design characteristics independently impact on realized 3g spectrum auction revenues

how to set minimum acceptable bids with an application to real estate auctions in a general auction model with affiliated signals common components to valuations and endogenous entry we compute the equilibrium bidding strategies and outcomes and derive a lower bound on the optimal reserve price this lower bound can be computed using data on past auctions combined with information about the subsequent sales prices of unsold goods we illustrate how to compute the lower bound using data from real estate auctions

taxing capital not a bad idea after all we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic uninsurable income shocks and permanent productivity difierences of households the optimal capital income tax rate is signiflcantly positive at 36 percent the optimal progressive labor income tax is roughly a at tax of 23 percent with a deduction of 7 200 relative to average household income of 42 000 the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is attributable to the insurance and redistribution role of the tax system jel e62 h21 h24

reforming taxes and raising revenue part of the fiscal solution this paper reviews the fiscal outlook in the united states discusses why revenue increases are a critical aspect of any enduring fiscal solution and outlines constructive policies to reform the tax system and simultaneously raise revenues in particular this paper highlights the merits of curtailing income tax expenditures introducing a value added tax and imposing levies on consumption and production of non renewable energy copyright 2011 oxford university press

valuing lost home production of dual earner couples using a life cycle model in which women divide their time between home and market work we establish a link between retirement wealth and the value of forgone home production we use data from the health and retirement study to estimate the model s parameters and adjust the growth rate of gdp to reflect reductions in non market output we find that the value of forgone home production is modest about 25 percent of women s measured earnings

fiscal consolidation and climate policy an overlapping generations perspective abstract this paper examines the distributional and efficiency impacts of public debt consolidation financed through a carbon tax employing a dynamic general equilibrium model with overlapping generations of the u s economy the numerical model features government taxes and spending and a multi sectoral production structure including intermediate production specific detail on the energy sector both in terms of primary energy carriers and energy intensive industries and sector and fuel specific carbon inputs in contrast to revenue neutral carbon tax swaps using the carbon revenue for deficit reduction implies a relaxation of future public budgets as debt repayment results in lower future interest obligations while intergenerational welfare impacts depend importantly on what tax recycling instrument is used we find that combining public debt consolidation with a carbon policy entails the possibility of sustained welfare gains for future generations if social discount rates are sufficiently low or if social preferences exhibit a large aversion with respect to intergenerational inequality combining fiscal consolidation and climate policy may offer the chance for societal gains even without considering potential benefits from averted climate change

unfunded liabilities and uncertain fiscal financing we develop a rational expectations framework to study the consequences of alternative means to resolve the unfunded liabilities problem the projected exponential growth in federal social security medicare and medicaid spending with no known plan for financing the transfers resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century beliefs based on that distribution determine the existence of and the nature of equilibrium we consider policies that in expectation combine reaching a fiscal limit some distorting taxation modest inflation and some reneging on the government s promised transfers in the equilibrium inflation targeting monetary policy and debt targeting tax policy cannot anchor expectations on those target variables expectational effects are always present but need not have large impacts on inflation and interest rates in the short and medium runs in the economy s stationary distribution the capital stock may grow or shrink and substantial probability falls on little or no reneging

gradual tax reforms if you like it you can keep it abstract one of the key practical challenges facing by tax reforms are their short run welfare consequences in this paper i focus on a consumption based tax reform for which despite long run welfare gains it generates welfare for some groups such as retirees or the working poor falls during transition between steady states using a life cycle model with heterogeneous households i show how to devise a transition path from the current u s federal tax system to a consumption based tax system that improves the welfare of current as well as future generations in a nutshell all households alive at the time of the policy change can choose when they want to switch to the new tax system or whether they want to switch at all i find that implementing a tax reform with this feature improves the welfare of 95 of population in the short run compared to less than a quarter of population in the conventional case with no choice it takes about twenty years for half of the population to pay their taxes under the new tax code

an empirical model of labor supply in a life cycle setting this paper formulates and estimates a structural intertemporal model of labor supply using theoretical characterizations derived from an economic model of lifetime behavior a two step empirical analysis yields estimates of intertemporal and uncompensated substitution effects which provide the information needed to predict the response of hours of work to life cycle wage growth and shifts in the lifetime wage path

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

optimal auctions revisited in symmetric privately known values oral auctions with costly entry for bidders the seller can do no better than by committing ex ante to a reservation price and entry fees or subsidies which result in no fewer and at most one more bidders than a reservation price equal to the seller s value would in the absence of entry fees or subsidies journal of economic literature classification numbers d44 c72

tax progressivity and tax incidence of the rich and the poor with the labor supply being flexible a revenue neutral increase in the tax progressivity decreases the tax incidence of the rich and increases the tax incidence of the poor if the tax scheme is highly progressive

how much is a dollar worth tipping versus equilibrium coexistence on competing online auction sites theory models of platform competition predict that prices and buyer seller ratios should be approximately equal on coexisting auction sites using field experiments on ebay and yahoo auctions we find evidence that is inconsistent with equilibrium hypotheses and suggest that the market is tipping prices on ebay are consistently 20 70 percent higher than those on yahoo and ebay attracts two additional buyers per seller on yahoo prices and bidders counts are unaffected by the auction ending rule various differences between the sites cannot account for the magnitude of these disparities however a model of imitation dynamics can rationalize our findings

marginal welfare costs of taxation with human and physical capital i introduction marginal welfare cost of taxation is the amount by which the social cost of an additional tax dollar differs from 1 because of distortionary taxation browning and johnson 1984 stuart 1984 browning 1987 ballard 1988 and allgood and snow 1998 use static models of the u s economy in which labor supplies adjust but the stocks of human and physical capital are fixed to calculate estimates of this welfare cost relevant to cost benefit analysis the studies by lucas 1990 and perroni 1995 incorporate human and physical capital into calculations of excess burden for the purpose of comparing alternative tax systems but do not address the welfare costs of marginal tax and spending reforms ballard et al 1985 and judd 1987 provide estimates of welfare cost using models that allow the stock of physical capital to change in response to marginal reforms but the stock of human capital is exogenous in these studies however judd 2001 argues that there is ample evidence indicating that human capital investment decisions have a significant effect on the cost of altering the tax system which suggests that these decisions could also have an important influence on marginal welfare cost in this article we present estimates of welfare costs for marginal reforms to government tax and spending policies when labor supply saving and education decisions are all endogenous we focus our analysis on marginal reforms because as skinner and slemrod 1985 observe most policy reforms enacted do not involve replacing one tax or spending system with another but instead typically entail marginal adjustments in tax laws and government appropriations using a perfect foresight overlapping generations model with a three period life cycle we derive analytical expressions for the changes in labor supply saving and education and use them to calculate marginal welfare cost as shown by auerbach et al 1983 in overlapping generations models steady state welfare comparisons of alternative tax policies are biased unless households are compensated for intergenerational redistribution along the transition path to arrive at our steady state estimates of welfare costs we adapt the compensation method introduced by gravelle 1991 for analyzing fundamental tax reforms to the context of incremental tax and spending reforms in a static one consumer model triest 1990 has shown that marginal welfare cost mwc is positive solely because of tax leakage the decline in tax revenue caused by reductions in the tax base we extend this insight to an intertemporal context that incorporates tax leakage arising from changes in both human and physical capital investment we evaluate three sets of reforms first a revenue neutral reduction in the tax on capital income funded by a higher tax on labor income second spending on a public good financed by either a higher tax on labor or interest income third a per capita lump sum transfer or demogrant also funded by either a higher tax on labor or interest income we find that marginal welfare costs are uniformly lower in the dynamic model where investment decisions are endogenous than in the static model where investment decisions are fixed and that the majority of the difference between the dynamic and static estimates is attributable to human capital decisions the principal reason is that a reallocation of time between labor hours and human capital investment has opposing and potentially offsetting effects on effective labor supply as a result labor supply responds less elastically in the dynamic model and changes in labor supply are the main source of tax leakage because wage taxation is the main source of tax revenue we also find that shifting marginal financing from capital to labor results in a lower welfare cost the reason being that such a change encourages saving which increases wage rates and stimulates labor supply leading to a reduction in marginal welfare costs

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

existence and uniqueness of steady state equilibrium in a two sector overlapping generations model abstract in his seminal paper galor a two sector overlapping generations model a global characterization of the dynamical system econometrica 60 1992 1351 1386 establishes conditions for the existence of equilibrium in the two sector overlapping generations olg model although appealing theoretically these conditions are implicit and not easy to apply this paper develops new theorems on the existence and uniqueness of steady state equilibrium in the two sector olg model we provide explicit conditions on the utility and production functions for the existence and uniqueness of equilibrium with which one only needs to check the derivatives of the production and utility functions and their interactions without requiring solving for the savings function and its derivatives we present detailed steps to check the existence and uniqueness of equilibrium and provide illustrative examples

mitigating america s demographic dilemma by pre funding social security abstract financing social security benefits at current levels implies significant increases in payroll taxes within the next 20 years under current us demographic developments using a general equilibrium overlapping generations model with realistic patterns of fertility and lifespan extension this study shows that future generations would be harmed during the demographic transition due to rising payroll taxes which crowd out savings and slow real wage growth below the rate of technological progress a faster rate of technological progress would mitigate only some of the payroll tax increase and its economic consequences but could not overcome them addressing the financing problem by reducing social security benefits as needed or by raising the eligibility age for benefits imposes major welfare losses on current or near term retirees by contrast a pre funding of social security financed with consumption taxes more evenly spreads the welfare losses across generations and it helps future generations especially the poor by stimulating capital formation

earnings test non actuarial adjustments and flexible retirement abstract in response to the challenges of increasing longevity many countries have introduced flexibility reforms for their public pension systems a key measure of these reforms is the abolishment of earnings tests it is claimed that these reforms increase labor supply and therefore the financial sustainability of pension systems we build a simulation model to show that abolishing an earnings test may indeed create more labor supply but simultaneously reduce the average claiming age when adjustments remain less than actuarial as is the case in most european pension systems flexibility reforms may therefore worsen rather than improve the sustainability of public pension systems

heterogeneity and government revenues higher taxes at the top abstract how effective is a more progressive tax scheme in raising revenues we answer this question in a life cycle economy with heterogeneity across households and endogenous labor supply our findings show that a tilt of the u s income tax schedule towards high earners leads to small increases in revenue maximal revenue in the long run is only 6 8 higher than in our benchmark about 0 8 of initial gdp while revenues from all sources increase by just about 0 6 our conclusions are that policy recommendations of this sort are misguided if the aim is to exclusively raise government revenue

how do selling mechanisms affect profits surplus capacity and prices with unknown demand i analyze a model in which a seller wishes to sell multiple homogeneous goods to a large group of buyers with unknown demand the seller may either sell objects via a posted price mechanism a discriminatory price auction a uniform price auction their open bid analogs or a revelation mechanism in which the seller first asks all potential buyers to report their valuations and then sets a reserve price i show that the revelation mechanism leads to the greatest profits the auction mechanisms result in identical expected profits and the posted price mechanism results in the smallest profits however the more profitable mechanisms impose stronger informational requirements that may make these mechanisms infeasible in practice and the posted price mechanism also results in the greatest total surplus i also find the seller chooses a lower capacity and reserve price in an auction than in the posted price mechanism

growth effects of flat rate taxes recent estimates of the potential growth effects of tax reform vary wildly ranging from zero to eight percentage points using an endogenous growth model we assess which model features and parameter values are important for determining the quantitative impact of tax reform we find that the critical parameters are factor shares depreciation rates the elasticity of intertemporal substitution and the elasticity of labor supply the elasticities of substitution in production on the other hand are relatively unimportant the quantitative estimates in several recent papers are compared with each other and with some of the evidence from u s experience we find that robert lucas s conclusion that tax reform would have little or no effect on the u s growth rate is theoretically robust and consistent with the evidence

economic effects of fundamental tax reform brookings institution the tax system profoundly affects countless aspects of private behavior it is a powerful policy influence on the distribution of income and it is the one aspect of government that almost every citizen cannot avoid with tax reform high on the political agenda this book brings together studies of leading tax economists and lawyers to assess the various reform proposals and examine the effects of tax reform in several distinct areas together these studies and comments on them present a balanced evaluation of professional opinion on the issues that will be critical in the tax reform debate the book addresses annual and lifetime distributional effects saving investment transitional problems simplification home ownership and housing prices charitable groups international taxation financial intermediaries and insurance labor supply and health insurance

tax policy and the financing of innovation we study tax policy in a schumpeterian growth model with asymmetric information in the financing of innovation investors cannot a priori distinguish between more or less talented entrepreneurs net worth allows talented entrepreneurs to self invest and avoid being pooled with less talented entrepreneurs in the credit market increasing net worth boosts innovation even when financed through higher profit taxes taxing consumption effectively raises net worth and subsidizes profits simultaneously sufficiently taxing consumption implements the social optimum free of adverse selection if forced to tax consumption less the government implements a second best allocation with adverse selection when boosting net worth enough to avoid adverse selection requires taxing profits excessively

a survey of recent empirical work concerning auctions in this paper the authors survey some recent empirical work concerning auctions first outlining two complementary approaches to the empirical analysis of auctions and then discussing several recent developments in the econometric analysis of field data concerning auctions

the effects of progressive taxation on labor supply when hours and wages are jointly determined this paper extends a standard intertemporal labor supply model to account for progressive taxation as well as the joint determination of hourly wages and hours worked we show that these two factors can have implications for both estimating labor supply elasticities as well as for using these elasticities in tax analysis failure to account for wage hours ties and progressive taxation may cause the hours response to marginal tax rate changes to be understated by 5 to 30 percent for men

tax deferred saving accounts heterogeneity and policy reforms abstract tax deferred saving accounts tda are systematically used in many countries in the united states households access to tda exhibits substantial heterogeneity 401 k has a higher contribution limit than ira but only 50 of workers are eligibility for it i developed an overlapping generations model that captures the tax benefits of tda and the heterogeneity in 401 k eligibility to investigate the quantitative impacts of tda on the aggregate economy and their implications on policy reforms experiment results show that ira already provides sufficient tax benefits for most households the effects of providing universal 401 k are relatively insignificant because households who can benefit from 401 k already have access to it on the other hand raising the tda contribution limit allows high income households to increase their use of tda and results in stronger effects on the economy when households use of tda is considered the u s income tax system is less distortionary and the welfare gain from a consumption tax reform is reduced by more than half

a national micro data based model of residential electricity demand new evidence on seasonal variation building on earlier estimates of electricity demand the author estimates elasticities by month to determine differences between heating and cooling seasons he develops a three equation model of residential electricity demand that includes all the main components of economic theory the model generates seasonal elasticity estimates that generally support economic theory based on the model using a national current household data set monthly division the evidence indicates there is a seasonal pattern for price elasticity of demand while less pronounced there also appears to be seasonal patterns for cross price elasticity of alternative fuels for the elasticity of appliance stock index and for an intensity of use variable

social security and individual welfare precautionary saving borrowing constraints and the payroll tax this paper examines the impact of social security on national saving and individual welfare in the presence of realistic capital market imperfections market failure in the private provision of annuities and restrictions on borrowing against anticipated future wages the introduction of social security increases lifetime welfare and reduces national saving if borrowing restrictions are absent however the increase in individual welfare is reduced and in some cases eliminated when borrowing constraints are taken into consideration the substantial difference suggests the importance of reexamining the proportional payroll tax finance of social security copyright 1987 by american economic association

public education reform community or national funding of education abstract i use a political economy model of public funding of education to evaluate the welfare implications of a move from a community to a nation wide funding policy broadening the scope of education finance has intragenerational redistribution effects as well as intergenerational effects previous studies have emphasized the intragenerational redistribution effects of moving from local to state financed systems while holding factor prices fixed the model in this paper includes a social security system and allows factor prices to vary endogenously i examine the welfare effects of broadening the scope of financing from a community to a nation wide system and find that there are very large welfare gains as voters internalize the effect of the education policy on both factor prices and social security benefits i also focus on the intergenerational distributional effects finding that significant welfare gains occur despite the displacement of the median voter to an older agent that cares less about children s well being

on optimal reservation prices in auctions the theory of auction design examines how various factors affect the outcome of an auction most of the existing literature focuses on how varying the amount of information available to each bidder affects the bid taker s expected revenue when all other factors remain constant this paper studies how the bid taker s expected revenue varies with changes in the auction format when such changes affect the number of bidders and in turn the bidders maximum value for the object being sold specifically we examine how varying the reservation price or screening level affects the bid taker s expected revenue though its effect on the number of bidders for two simple examples the losses associated with a reduced number of bidders outweighs any benefits that nontrivial reservation prices might have had in models with an exogonously set number of bidders

capital taxation in the twenty first century in capital in the twenty first century thomas piketty presents a compelling story of the ascendency of capital and the powerlessness of the market forces of capitalism to arrest the growing threat to democracy from growing wealth and its increasing concentration in the hands of the few piketty prescribes a global coordinated wealth tax as the antidote to this dystopian trend arguing that only such a direct assault on wealth concentrations will succeed where the other policies of governments that already play large roles in their respective economies have failed

on the consequences of demographic change for rates of returns to capital and the distribution of wealth and welfare in the industrialized world the population is aging over time reducing the fraction of the population in working age consequently labor is expected to be scarce relative to capital with an ensuing decline in the real return on capital this paper uses demographic projections together with a large scale multi country overlapping generations model with uninsurable idiosyncratic uncertainty to quantify the distributional and welfare consequences of these changes in factor prices induced by the demographic transition in our model capital can freely flow between different regions in the oecd the u s the eu and the rest of the oecd thus international capital flows may in principle mitigate the decline in rates of returns one would expect in the u s if it were a closed economy we find exactly the opposite in the u s as an open economy rates of return are predicted to decline by 86 basis points between 2005 and 2080 if the u s were a closed economy this decline would amount to only 78 basis points this result is due to the fact that other regions in the oecd will age even more rapidly therefore the u s is importing the more severe aging problem from these regions especially europe a similar conclusion is reached if we let capital flow freely between the oecd and the rest of the world row while row currently has a younger population structure it is predicted to age even more severely in the next decades giving rise to an even more pronounced decline in world rates of return to capital in order to evaluate the welfare consequences of the demographic transition we ask the following hypothetical question suppose a household economically born in 2005 would live through the economic transition with changing factor prices induced by the demographic change but keeping her own survival probabilities constant at their 2005 values how would its welfare have changed relative to a situation without a demographic transition we find that households experience significant welfare losses due to the demographic transition in the order of 2 5 of consumption depending on their initial productivity level and the design of the pension system these losses are mainly due to the fact that lower future returns to capital make it harder for households to save for retirement on the other hand if the oecd suddenly opens up to row in 2005 and row has higher returns to capital before the world capital market integration then these losses are reduced to 1 5 2 5

field experiments on the effects of reserve prices in auctions more magic on the internet i present experimental evidence on the effects of minimum bids in first price sealed bid auctions the auction experiments manipulated the minimum bids in a preexisting market on the internet for collectible trading cards from the game magic the gathering i examine a number of outcomes including the number of participating bidders the probability of sale the levels of individual bids and the auctioneer s revenues the benchmark theoretical model is one with symmetric risk neutral bidders with independent private values the results verify a number of the predictions concerning equilibrium bidding many bidders behave strategically anticipating the effects of the reserve price on others bids

optimal fiscal policy with consumption taxation we characterise optimal fiscal policies in a general equilibrium model with monopolistic competition and endogenous public spending the government can tax consumption as alternative to labour income taxes consumption taxation acts as indirect taxation of prots intratemporal gains of taxing consumption and enables the policy maker to manage the burden of public debt more efficiently intertemporal gains of taxing consumption we show analytically that these two gains imply that the optimal share of government spending is higher under consumption taxation than with labour income taxation then we quantify numerically each of these gains by calibrating the model on the us economy

social security reform and investment in education is there scope for a pareto improvement we propose a pareto improving policy which reduces the overall wage tax burden in an economy with intergenerational trade in a fixed factor of production here labelled as land we analyse a second best environment in which the government cannot resort to non distortionary land taxes reducing the social security contribution rate encourages investment in human capital future efficiency gains accruing to complementary land are capitalized in its value the capital gains may compensate land owning pensioners for reduced benefits we also explain why the unfunded pension system may have lost its appeal even for pensioners after its introduction

social security universal versus earnings dependent benefits i compare the welfare implications of bismarckian earnings dependent benefits and beveridgean universal benefits social security systems agents are better off with a beveridgean system than with a comparable bismarckian system in an environment with intragenerational homogeneity the latter results in a larger decrease in net wages with intragenerational skill heterogeneity most agents benefit from the more redistributive beveridgean system when agents vote for the replacement rates with intragenerational homogeneity the resulting bismarckian system is larger than the beveridgean system with intragenerational skill heterogeneity the beveridgean system is larger overall agents are worse off with the larger system

marginal tax rates and income inequality in a life cycle model in this paper we perform computational counterfactual experiments to examine the quantitative impact of marginal tax rates on the distribution of income our methodology builds on previous simulation models developed by auerbach and kotlikoff and fullerton and rogers and uses an algorithm that allows us to examine marginal tax rate structures in their literal form we find that distortions associated with particular marginal tax rate structures have sizable effects on income inequality in a reasonably quantified life cycle setting in our baseline experiments the change in steady state income inequality under 1989 u s income tax rates vis a vis 1984 rates is about half as large as the change actually seen in the data over those two years when measured in terms of a monetary metric derived from gini coefficients

deadweight costs and the size of government abstract we provide a model for analyzing effects of the tax system and spending programs on the determination of government spending and taxpayer welfare an improvement in the efficiency of either taxes or spending would reduce political pressure for suppressing the growth of government and thereby increase total tax revenue and spending we demonstrate the similarity of the political responses to revenue shocks spending shocks changes in tax efficiency and changes in spending program efficiency empirical analysis of oil shocks intergovernmental grants and other autonomous changes in taxes or spending indicates that cause and effect is not only from spending to tax structures

population aging social security and fiscal limits abstract we use an overlapping generations olg life cycle model with distortionary taxation on labor and capital to derive a threshold dependency ratio i e a point in the cross section distribution of the population beyond which tax revenues can no longer sustain the planned level of transfers to retirees we quantify the level of the threshold the distance of the economy from the threshold and the probability of reaching the threshold at some point in the future the model is calibrated on the united states and fourteen european countries which have dependency ratios among the highest in the world we examine the effects on the threshold and welfare of a number of policies often advocated to improve the sustainability of pension systems new tax data on dynamic laffer effects are provided

optimal reservation prices in auctions the risk neutral independent private values ipv auction model produces curious results regarding the use of reservation prices no matter how many bidders the seller should announce a fixed reservation price above his true value this is notable since the seller gains by adopting an inefficient institution and puzzling because it conflicts with common practice the authors relax the ipv assumption characterize optimal reservation prices in a richer class of auctions and show that when information is correlated the seller s optimal reservation price converges to his true value often monotonically and rapidly as the number of bidders grows copyright 1996 by royal economic society

effects of minimum bid increments in internet auctions evidence from a field experiment i study the role of minimum bid increments mbi in internet auctions using natural field experiment data from a finnish online auction site huuto net internet auctions are typically viewed as secondprice implying truthful bidding however due to the presence of the mbi equilibrium bidding behavior involves bid shading i sell otherwise identical gift cards while varying the mbi and test between truthful bidding and bid shading truthful bidding is rejected consistently with equilibrium behavior bid shading increases as the mbi increases this implies that real world bidders are capable of reacting rationally even to seemingly small variations in their strategic environment this version september 17 2015 replaces the february 15 2013 version this abstract was borrowed from another version of this item

the role of intergenerational transfers in aggregate capital accumulation this paper uses historical u s data to directly estimate the contribution of intergenerational transfers to aggregate capital accumulation the evidence presented indicates that intergenerational transfers account for the vast majority of aggregate u s capital formation only a negligible fraction of actual capital accumulation can be traced to life cycle or hump savings a major difference between this study and previous investigations of this issue is the use of more accurate longitudinal age earnings and age consumption profiles these profiles are simply too flat to generate substantial life cycle savings this paper suggests the importance of and need for substantially greater research and data collection on intergenerational transfers life cycle models of savings that emphasize savings for retirement as the dominant form of capital accumulation should give way to models that illuminate the determinants of intergenerational transfers

residential demand for fuelwood this is the first national microbased study of residential demand for wood as fuel the data are from the us department of energy residential energy consumption survey the model employs a somewhat unique interaction dummy for price that allows the simultaneity problem to be adjusted for in a 2sls format and then the interaction term to be calculated and entered in the second stage results are compared with elasticity estimates derived from the same data set for the four other main residential fuels wood has a price elasticity of 0 421 for main users

social security reform and intertemporal smoothing abstract this paper examines the welfare and distributional impact of switching from a defined benefit pension system like social security to a defined contribution system of personal retirement accounts pras while such a switch would do away with the transfers that low wage workers receive through social security it would have the benefit of reducing labor supply distortions moreover a particular kind of pra suggested in this paper one that has very low or zero contribution rates early in life substantially enhances life cycle patterns of consumption and labor supply by making more resources available to credit constrained young workers simulations of a life cycle model show that in welfare terms these pras significantly outperform conventional pras because of this enhanced intertemporal smoothing

wealth inequality and altruistic bequests this paper examines the role of bequests and inter vivos gifts in the u s economy considering their importance in determining i the economy s aggregate capital stock ii the distribution of private net worth and iii public policy outcomes and options it focuses on several recent calibrated simulations this abstract was borrowed from another version of this item

does social security privatization produce efficiency gains while privatizing social security can improve labor supply incentives it can also reduce risk sharing we analyze a 50 privatization using an overlapping generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty when wage shocks are insurable privatization produces about 18 100 of extra resources for each future household after all transitional losses have been compensated for with lump sum taxes when wages are not insurable privatization reduces efficiency by about 2 400 per future household we check the robustness of these results to different model specifications as well as policy reforms and arrive at several surprising conclusions first privatization performs better in a closed economy where interest rates decline with capital accumulation than in an open economy second privatization also performs better when an actuarially fair private annuity market does not exist third government matching of private contributions on a progressive basis is not very effective at restoring efficiency and can actually cause harm

retirement pensions and ageing we study the effects of demographic shocks and changes in the pension system on the macroeconomic performance of an advanced small open economy facing a given world interest rate we construct an overlapping generations model which includes a realistic description of the mortality process individual agents choose their optimal retirement age taking into account the time and age profiles of wages taxes and the public pension system the early retirement provision in most pension systems acts as a trap inducing most workers to retire well before the normal retirement age simulations show that pension reform must be drastic for it to have any effects on the retirement behaviour of workers

changes in beef packers market power after the livestock mandatory price reporting act an agent based auction controversy remains about the effectiveness of the 1999 livestock mandatory price reporting act mpra we determine the likely changes in beef packers market power after the mpra by using an agent based first price common value auction past research has employed cournot models but we use an auction model which more closely resembles the actual cattle procurement process we find that feeders benefit from the mpra regardless of whether price uncertainty decreases for packers and or feeders if the packers price uncertainty is reduced the feeder benefits from an increase in competition between the packers if the feeder s price uncertainty is reduced the feeder benefits from imposing more accurate reserve prices copyright 2013 oxford university press

intergenerational policy and the measurement of tax incidence we evaluate the ability of generational accounting to assess the potential welfare implications of policy reforms in an intergenerational context policy reforms usually have redistributive efficiency and general equilibrium implications our analysis shows that when the policy reform implies changes in economic efficiency generational accounts can be misleading not only about the magnitude of welfare changes but also about the identity of who wins and who losses in contrast the generational accounts correctly identify welfare changes when the policy reform has only a pure intergenerational redistribution component we illustrate and quantify this issue in the context of widely considered policy reforms substitution of consumption for labor taxation and the increase of retirement age and in a more general context of optimal policy

the winner s curse reserve prices and endogenous entry empirical insights from ebay auctions internet auctions have recently gained widespread popularity and are one of the most successful forms of electronic commerce we examine a unique data set of ebay coin auctions to explore the determinants of bidder and seller behavior we begin by documenting a number of empirical regularities in our data set of ebay auctions next we specify and estimate a structural econometric model of bidding on ebay using our parameter estimates from this model we measure the extent of the winner s curse and simulate seller revenue under different reserve prices

opting out of social security abstract the liability facing a pay as you go social security system can be calculated in several ways many conversions including that which took place in chile and in many plans to convert the u s system assume the largest measure known as the shutdown liability this measure pays many workers who have contributed to the public system more money than the public system is actually worth to them thereby placing a larger burden on future generations but other liability measures are hard to implement due to an information asymmetry between the government and individuals about an individual s skill level this paper demonstrates that a very simple reform plan simply letting people opt out of social security generates a truthful revelation equilibrium in which agents reveal private information about their skill levels the new assumed liability measure is much smaller since it more accurately assigns a liability to each individual a smaller liability therefore is passed onto future generations which also generates quicker transition paths it also does a better job protecting the welfare of the initial elderly when general revenue is used to pay for the transition simulation evidence is provided using a large scale lifecycle model with heterogeneous skill levels

welfare implications of switching to consumption taxation abstract we evaluate a reform of the us tax system switching to consumption taxation instead of income taxation we do so in an environment that allows for progressivity of consumption taxes through differential tax rates between basic and non basic consumption goods the consumption tax system that maximizes aggregate welfare involves a 4 subsidy on basic consumption goods and a 68 tax on non basic goods such a tax scheme generates 10 higher output in the long run with a small increase in inequality nonetheless the benchmark with progressive income taxes and mild consumption taxes provides higher welfare on aggregate in the steady state and even more so if we consider the transition

altruism incomplete markets and tax reform abstract we compute the welfare effects of different revenue neutral tax reforms that eliminate capital income taxation in two general equilibrium models calibrated to the u s economy in our dynastic model the reform with the largest welfare gain is the one that eliminates all income taxation and increases the consumption tax to 35 75 of the population alive at the time of the reform benefit from it individuals use intervivos transfers and bequests to redistribute the long run benefits in a pure life cycle economy that lacks this redistribution technology we find that the same reform would benefit only 9 of the population

labor dependent capital income taxation abstract capital taxation which is negatively correlated with labor supply is proposed this paper uses a life cycle model of heterogeneous agents that face idiosyncratic productivity shocks and shows that the tax scheme provides a strong work incentive when households possess large assets and high productivity later in the life cycle when they otherwise would work less the system also adds to the saving motive of prime age households and raises aggregate capital the increased economic activities expand the tax base and the revenue neutral reform results in a lower average tax rate the negative cross dependence generates a sizable welfare gain in the long run relative to the tax system that treats labor and capital income separately as a tax base the reform however can hurt the elderly during the transition with a high marginal tax on their capital income

on absolute auctions and secret reserve prices from a theory viewpoint the use of auctions with zero public reserve prices also called absolute auctions or of auctions with secret reserve prices is somewhat puzzling despite being common by allowing that buyers differ in their processing of past data regarding how the participation rate varies with the auction format and how reserve prices are distributed when secret we show in a competitive environment that these auction formats may endogenously emerge we also analyze how buyers with various sophistications and sellers with various costs sort into the different formats thereby offering a range of testable predictions alternative approaches are reviewed

auctions with heterogeneous entry costs it is well known that if bidders have independent private values and homogeneous entry costs a rst or second price auction with a reserve price equal to the seller s value maximizes social surplus and seller revenue and leaves bidders with no surplus further in mixed strategy entry equilibria social surplus and seller revenue decrease with the number of bidders we show that when entry costs are heterogeneous and private information the revenue maximizing reserve price is above the seller s value a positive inspection fee and a reserve price equal to the seller s value generates even more revenue and in either case bidders capture informational rents further seller revenue and social surplus may either increase or decrease with the number of bidders nevertheless seller revenue is asymptotically the same whether entry costs are homogeneous or heterogeneous our results are framed in terms of screening values rather than reserve prices and apply to any standard auction

empirical evidence on the impact of reserve prices in english auctions we study the impact of reserve prices on the revenue of english auctions using a unique hand collected database of virtual football players from the online football management game hattrick as theoretically predicted setting a reserve price entails a trade off between the cost of setting it too high and having the good go unsold and the benefit associated with a higher revenue should the reserve price successfully extract surplus from the highest bidder overall we find the net benefit of setting a higher reserve price to be negative regardless of the value of the reserve price this is a novel result insofar as previous literature has generally found an insignificant or positive effect of the reserve price on unconditional auction revenue

consumption retirement and social security evaluating the efficiency of reform that encourages longer careers abstract this paper proposes and analyzes a social security reform in which individuals no longer face the oasi payroll tax after say age 54 or a career of 34 years and their subsequent earnings have no bearing on their benefits we first estimate parameters of a life cycle model our specification includes non separable preferences and possible disability it predicts a consumption expenditure change at retirement we use the magnitude of the expenditure change together with households retirement age decisions to identify key structural parameters the estimated magnitude of the change in consumption expenditure depends importantly on the treatment of consumption by adult children of the household simulations indicate that the reform could increase retirement ages one year or more equivalent variations could average more than 4000 per household and income tax revenues per household could increase by more than 14 000

endogenous price expectations as reference points in auctions the paper models auctions with bidders who have reference dependent payos the reference point is endogenised as the expected price of the good in the auction the model predicts that in equilibrium bidders both overbid and underbid in comparison to the standard bidding function without reference dependent utility the model predicts that more bidders overbid than underbid and that bidders bid more aggressively as the number of bidders or the reserve price increases finally it is shown perhaps surprisingly that revenue equivalence continues to hold between rst and second price

tax reform and adjustment costs the impact on investment and market value this paper provides an effective tax rate measure that is valid in the presence of adjustment costs and anticipated tax changes and a measure of the impact of tax changes on market value that may be decomposed into the effects on discounted pure profits and normal returns to capital changes in the value of capital may in turn be decomposed further into changes in the marginal value of new capital and changes in the relative value of new and existing capital these new measures are used to evaluate tax changes similar to those introduced by the recent u s tax reform copyright 1989 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

trade and economic impacts of destination based business cash flow taxes proposals for destination based business cash flow taxes dbcft that effectively combine a value added tax and a wage subsidy have received enormous attention in the united states and are being proposed as a major tax reform worldwide much controversy has focused on trade impacts but this paper shows that a dbcft would not create long term trade barriers or export subsidies if prices and wages are flexible it would leave business profits and rents untaxed providing an unambiguous benefit to foreign investors relative to an origin based corporate tax domestic wage earners would be compensated for higher prices by the wage deduction while the position of domestic investors would depend on whether their gains from abolition of origin based taxes outweighed their losses from higher consumer prices a key concern is small volatile and vulnerable net revenues even with high tax rates at current us consumption and labour shares a 20 corporate cash flow tax with a wage subsidy would generate less than 2 of gdp in net revenues which could be obtained with much less volatility from a 2 8 consumption tax alone under a dbcft revenues would become negative if consumption and labour shares returned to their historical norms or if difficult to tax sectors like owner occupied housing were excluded

aging pension reform and capital flows a multi country simulation model we present a quantitative analysis of the effects of population aging and pension reform on international capital markets first demographic change alters the time path of aggregate savings within each country second this process may be amplified when a pension reform shifts old age provision towards more pre funding third while the patterns of population aging are similar in most countries timing and initial conditions differ substantially hence to the extent that capital is internationally mobile population aging will induce capital flows between countries all three effects influence the rate of return to capital and interact with the demand for capital in production and with labor supply in order to quantify these effects we develop a computational general equilibrium model we feed this multi country overlapping generations model with detailed long term demographic projections for seven world regions our simulations indicate that capital flows from fast aging regions to the rest of the world will initially be substantial but that trends are reversed when households decumulate savings we also conclude that closed economy models of pension reform miss quantitatively important effects of international capital mobility this version 25 august 2004

consumption taxes and corporate investment consumers nominally pay the consumption tax but theoretical and empirical evidence is mixed on whether corporations partly shoulder this burden thereby affecting corporate investment using a quasi natural experiment we show that consumption taxes decrease investment firms facing more elastic demand decrease investment more strongly because they bear more of the consumption tax we corroborate the validity of our findings using 86 consumption tax changes in a cross country panel we document two mechanisms underlying the investment response reduced firms profitability and lower aggregate consumption importantly the magnitude of the investment response to consumption taxes is similar to that of corporate taxes received september 25 2017 editorial decision august 26 2018 by editor wei jiang authors have furnished an internet appendix which is available on the oxford university press web site next to the link to the final published paper online

search and choice in online consumer auctions price dispersion in simultaneous online auctions is a puzzle in light of the relatively low search costs required to find the lower price much of this price dispersion appears to be due to a lack of switching by bidders between auctions which in turn could be due to inertia related to search costs we identify some of the influencing factors through a controlled field experiment involving pairs of simultaneous auctions keeping the sellers and the goods sold identical between two auctions we vary auction design features between and within pairs including shipping cost open reserve secret reserve price and duration and we provide bidders with incentives to search we use a choice model that examines individual choice between pairs of simultaneous auctions we find that within pair price dispersion is substantial and that prices and auction choice by bidders are indeed related to search costs we find strong inertia in auction choice and find that this effect significantly interacts with time left in the auction although individuals do not always choose a lower priced auction they are more likely to do so when search costs are low or search incentives are high

consumption taxes and redistribution this study considers replacing the current us tax system with only aflat tax con sumption tax showing in contrast to the literature that such a reform leads to a decline in inequality and increase in welfare for the welfare poor the results are obtained from a simple model that identifies the main channels through which the reform affects the economy it is shown also that these novel results depend on the distribution of wealth and earnings and that they hold for the relevant

reviews of the 2006 economic report of the president the u s tax system in international perspective a review of the 2006 economic report of the president s tax chapter 1 alan j auerbach university of california berkeley and nber april 12 2006 what can you say about a tax reform proposal that died this was the challenge facing the writers of the chapter on taxation for the 2006 economic report of the president hereafter erp one year ago the erp included a chapter entitled options for tax reform that began with the section heading why do we need tax reform and proceeded to lay out the available options that it suggested could make the u s tax system simpler more equitable and efficient in making the case for tax reform that chapter set the stage for the impending work of the president s advisory panel on tax reform while being careful to leave the president s options open until the panel reported the 2005 chapter twice included the phrase the president has not endorsed any specific proposal and this chapter does not advocate the adoption of any particular prototype for reform in case the reader didn t get the message the first two times the chapter concluded with a reminder that the president has not endorsed any specific proposal 2 that was then in november 2005 the tax reform panel issued its report so one might have anticipated a follow up chapter in this year s erp evaluating the panel s i am grateful to rosanne altshuler bill gale kevin hassett and joel slemrod for comments on an earlier draft slemrod 2005 provides a critical evaluation of the 2005 chapter

reserve price effects in auctions estimates from multiple regression discontinuity designs i introduction online auctions are an important trading mechanism in modern economies ebay alone has 81 million active users worldwide and auctions a billion objects annually ebay 2009 as data from auction settings has become accessible especially from online auction environments there has been a surge in empirical analysis testing whether the behavior of buyers and sellers is consistent with auction theory bajari and hortacsu 2004 we contribute to this empirical literature by presenting evidence from 260 000 online auctions of second hand cars that took place between january 2003 and november 2008 we identify the impact of a common feature of online and offline auctions public reserve prices on a rich set of auction outcomes 1 to establish causality we present evidence from multiple regression discontinuity rd research designs an empirical method that has not been used in the earlier literature to test the predictions of auction theory guided by theory we first identify the impact of reserve prices on various standard margins of bidder s behavior such as their entry into auctions bidding behavior within the auction and ultimately the winning bid we then combine these estimates to shed light on whether the reserve prices set by the auctioneer indeed maximize her ex ante expected revenue at a final stage we exploit our rich data to provide new insights that have not previously been documented in the empirical auctions literature such as the impact of reserve prices on i bidder s search behavior and ii the composition and characteristics of bidders this new evidence helps shed light on how to best characterize this environment in terms of whether bidders endogenously enter auctions and whether they hold symmetric valuations or not our analysis has broad relevance in three regards first car sales through auctions form an important share of the market the value of cars sold via auction in the united states was 89 billion in 2007 and used car dealers filled over 30 of their inventory via auctions roberts 2013 second the auction mechanism used in our setting an open ascending second price auction that allows proxy bidding is widely suggested to be the most prevalent online auction format bajari and hortacsu 2004 third the specific auction design feature we study reserve prices is commonly observed in online and offline formats the first set of outcomes we study are motivated by the theoretical auction literature these relate to the impact of reserve prices on winning bids the number of entrants that is the number of bidders that place at least one bid and the probability the object is sold 2 theory suggests reserve price impacts on these margins depend on three factors i whether bidders have private or common valuations of the auctioned object ii whether bidder entry is exogenous or endogenous and iii whether the reserve price signals the auctioneer s private information on the true value of the auctioned object in exogenous entry models predictions about the impact of reserve prices on these outcomes are robust with regard to whether bidders have private affiliated or common values for the object milgrom and weber 1982 myerson 1981 riley and samuelson 1981 and to whether the reserve price conveys a signal of the object s value to buyers cai riley and ye 2007 as is intuitive in this class of exogenous entry models a higher reserve price discourages entry of marginal bidders decreases the likelihood the object is sold and increases winning payments conditional on sale theoretical predictions on reserve price impacts are less clear cut in endogenous entry models levin and smith 1994 tan and yilankaya 2006 analogous to exogenous entry models a higher reserve price discourages entry of both potential and actual bidders and decreases the probability of sale however a higher reserve price might decrease winning payments through its adverse impact on entry

reserve prices in auctions as reference points we consider second price and first price auctions in the symmetric independentprivate values framework we modify the standard model by theassumption that the bidders have reference based utility where the reserveprice minimum bid plays the role of the reference point in contrast to theusual result the seller s optimal reserve price is increasing in the number ofbidders even if an individual bidder perceives only a very small utility losswhen he has to pay more than the reserve price the impact on the optimalreserve price can be strong when there are many bidders

residential demand for liquid petroleum gas abstract this is the first micro based study of residential demand for liquid petroleum gas lpg the data are from doe s residential energy consumption survey results are compared with elasticity estimates derived from the same data set for the three other main residential fuels lpg has a price elasticity for space and water heating combined of 1 3 income elasticity is 0 207

intergenerational transfers and the accumulation of wealth h t ouseholds acquire wealth from two sources they save out of income they have earned and they receive transfers from other people the first method of wealth accumulation goes under the name of life cycle saving in which people save during their working lives and dissave after retirement the second involves either an inter vivos transfer that is a transfer between living people or a bequest a transfer that occurs at the death of the donor while inter vivos transfers and bequests will arise in dynastic models where preferences include a taste for the well being of one s descendents few empirical life cycle models reflect these concerns indeed a sharp debate has arisen over the ability of the simple life cycle model to explain observed wealth accumulation understanding the relative sizes of these sources of wealth accumulation affects a variety of issues for example the effects of government debt social insurance public transfer programs estate taxes and incentives for charitable giving depend to some extent on the magnitude and nature of private saving and transfers of wealth analyses of the inequality of wealth may depend on whether most of wealth is earned or received as transfers appropriate policies for encouraging private saving may look rather different depending on whether most saving is to be consumed later in life or passed along to the next generation finally evidence on transfer patterns relates to more fundamental

growth effects of shifting from a graduated rate tax system to a flat tax i introduction recently the debate concerning fundamental u s tax reform has led to a number of proposals that involve a shift toward a consumption based system 1 one such proposal is the so called flat tax of hall and rabushka 1995 the flat tax would apply a single tax rate to all labor income above a given threshold and to all capital income after fully expensing investment expenditures hall and rabushka 1995 argue that the adoption of their proposal would provide an enormous boost to the u s economy by dramatically improving incentives to engage in productive activities and would save taxpayers hundreds of billions of dollars in compliance and administration costs 2 in this article we develop a quantitative general equilibrium model to assess the growth effects of adopting a flat tax plan similar to the one proposed by hall and rabushka 1995 the model captures many of the features of the current u s tax code such as graduated personal tax rates a standard personal deduction separate tax rates applied to personal and business income double taxation of business income and differential tax treatment of physical and human capital under appropriate parameter settings the model can exhibit either endogenous or exogenous long run growth our choice of functional forms facilitates a closed form solution to the model this allows us to characterize explicitly the economy s transition path following the reform a central issue in the debate over fundamental tax reform is the effect that such a reform would have on economic growth the present analysis builds on the work of stokey and rebelo 1995 who use an endogenous growth framework to identify the key model features and parameters that are important for determining the quantitative impacts of distortionary taxes on long run growth 3 our study differs from theirs and the bulk of the dynamic tax literature in one fundamental respect here we evaluate the growth effects of shifting from a graduatedrate tax system to a flat rate system stokey and rebelo 1995 consider only flat rate systems in which the marginal tax rate is equal to the average tax rate we approximate the graduated rate tax system in the u s economy by an empirical tax rate function that allows the personal tax rate to depend positively on household taxable income in equilibrium household decisions are influenced by both the level and slope of the tax schedule to implement the flat tax reform we shift the parameters of the tax rate function to flatten the marginal tax schedule while maintaining revenue neutrality our methodology treats the hall rabushka proposal as one that in effect moves a representative household from one tax rate schedule to another we view this setup as a reasonable approximation to gauge the growth effects of tax reform at the macro level a more elaborate setup would of course allow for household heterogeneity at a given point in time in this regard we note that caucutt et al 2003 have recently examined the growth effects of graduated rate taxes in a two period overlapping generations model that includes both skilled and unskilled agents in their model a flatter tax schedule increases the fraction of skilled agents in the economy the share of total output devoted to education rises accordingly and the economy s long run growth rate is observed to increase the quantitative implications of their model are difficult to compare to ours however because their two period framework implies a very long time horizon between household decisions about 30 years moreover their model abstracts from many of the features of the u s tax code that we include here in addition to examining the consequences of flattening the marginal tax schedule we investigate the growth effects attributable to other parts of the flat tax proposal such as allowing full investment expensing eliminating the double taxation of business income and increasing the standard personal deduction

consumption vs wage taxation and the capital levy abstract based on a representative consumer framework it has been argued that wage taxation is inferior to consumption taxation this note shows that the opposite result may emerge in a model where households are heterogeneous and where a uniform poll tax or subsidy is available

simulating fundamental tax reform in the united states this paper uses a new large scale dynamic life cycle simulation model to compare the welfare and macroeconomic effects of transitions to five fundamental alternatives to the u s federal income tax including a proportional consumption tax and a flat tax the model incorporates intragenerational heterogeneity and a detailed specification of alternative tax systems simulation results project significant long run increases in output for some reforms for other reforms namely those that seek to insulate the poor and initial older generations from adverse welfare changes long run output gains are modest

modeling overlapping generations in a complementarity format abstract this paper provides an introduction to numerical simulation of overlapping generations models with perfect foresight and finite lifetimes the exposition presents the fundamental characteristics of this class of problems and gams programs illustrate how models can be formulated in applied research using the complementarity framework issues addressed in the paper include how to calibrate to baseyear data and how to represent international trade bequests government tax and expenditure policies and a labor leisure choice with endogenous retirement

nit picking the macroeconomic effects of a negative income tax i study a revenue neutral reform of the u s income tax and welfare system that involves the adoption of a negative income tax nit the reform is undertaken in a life cycle economy with individual heterogeneity and uninsurable idiosyncratic labor risk the optimal nit consists of a 22 rate and a transfer equivalent to 11 of per capita gdp the ex ante average welfare gain is a 2 1 annual increase of individual consumption i show that a nit outperforms a flat tax reform income tax plus deduction by a considerable margin the key consequence of the reform is that high productivity agents increase their relative importance in the labor supply at the expense of low productivity agents