skewed wealth distributions theory and empirics invariably across a cross section of countries and time periods wealth distributions are skewed to the right displaying thick upper tails that is large and slowly declining top wealth shares in this survey we categorize the theoretical studies on the distribution of wealth in terms of the underlying economic mechanism generating skewness and thick tails further we show how these mechanisms can be micro founded by the consumption saving decisions of rational agents in speci c economic and demographic environments finally we map the large empirical work on the wealth distribution to its theoretical underpinning

multiproduct short run hospital cost functions empirical evidence and policy implications from cross section data economists and policymakers have been interested in hospital costs and the structure of hospital technologies for several decades now early interest was focused on the possibility of scale economies which implied increased efficiency for larger hospitals 6 8 12 13 18 20 while more recent interest has been stimulated by the inflationary spiral of hospital costs 1 15 17 22 as hospital costs have risen important policy questions concerning the impact on costs of the hospitals diagnostic case mix the hospitals admitting physicians the hospitals size and the hospitals efficiency have emerged and researchers have attempted to deal with these issues within the context of increasingly complex econometric models 1 2 5 24 27 however in attempting to analyze these important policy issues researchers have been forced to make two major types of compromises on the one hand appropriate data are often not available for estimating a well specified cost function e g information on admitting physicians and diagnostic case mix are often missing so that problems of specification error often plague the econometric results conversely in using imaginative ways to deal with data problems e g weighting in patient and out patient care to form a single index of hospital services 1 27 or estimating separate cost functions for each department in the hospital 2 researchers sometimes place unrealistic and unnecessary constraints on their econometric models the purpose of this study is to analyze the impact of several of the primary hospital characteristics mentioned above on the short run costs of hospitals within a theoretically consistent framework in the following discussion we also develop the theoretical

why hasn t tax competition triggered a race to the bottom some quantitative lessons from the eu abstract the integration of european financial markets in the early 1980s created an environment of near perfect capital mobility across countries that had harmonized indirect taxes but maintained large differences in factor taxes the years that followed witnessed several rounds of competition in capital taxes with puzzling results instead of the dreaded race to the bottom in capital taxes the uk lowered its capital tax to a rate closer to those of france germany and italy while capital taxes changed slightly in these countries the uk increased its labor tax marginally but the other countries increased theirs sharply this paper shows that these results are consistent with the quantitative predictions of a dynamic neoclassical general equilibrium model of tax competition that incorporates the key international externalities of tax policy operating via relative prices wealth distribution and fiscal solvency tax competition is modeled as a one shot game over time invariant capital taxes with dynamic payoffs relative to a status quo calibrated to european data the calibration is preceded by an empirical analysis that shows that the relationship linking taxes to labor supply and the investment rate in the model are in line with empirical evidence and that domestic taxes seem to respond to foreign taxes the solutions of the games show that when countries compete over capital taxes adjusting labor taxes to maintain fiscal solvency there is no race to the bottom and the nash equilibrium is close to observed taxes in contrast if consumption taxes adjust to maintain fiscal solvency competition over capital taxes triggers a race to the bottom but this outcome entails large welfare gains surprisingly the gains from coordination are small in all of these experiments

on the optimal progressivity of the income tax code this paper computes the optimal progressivity of the income tax code in a dynamic general equilibrium model with household heterogeneity in which uninsurable labor pro ductivity risk gives rise to a nontrivial income and wealth distribution a progressive tax system serves as a partial substitute for missing insurance markets and enhances an equal distribution of economic welfare these bene cial eects of a progressive tax system have to be traded oagainst the e ciency loss arising from distorting endoge nous labor supply and capital accumulation decisions a determination of the optimal progressivity of the income tax code therefore calls for a quantitative exploration using a utilitarian steady state social welfare criterion we nd that the optimal us income tax is well approximated by a at tax rate of19 5 and a xed deduction of about 3 700 the steady state welfare gains from a fundamental tax reform towards this tax system are equivalent to 0 4 higher consumption in each state of the world an explicit computation of the transition path induced by a reform of the current towards the optimal tax system indicates however that a majority of the population currently alive would suer welfare losses calling into question the political feasibility of such

the response of the informal sector to trade liberalization this paper studies the relationship between trade liberalization and informality it is often claimed that increased foreign competition in developing countries leads to an expansion of the informal sector defined as the sector that does not comply with labor market legislation using data from two countries that experienced large trade barrier reductions in the 1980 s and 1990 s brazil and colombia we examine the response of the informal sector to liberalization in brazil we find no evidence of a relationship between trade policy and informality in colombia we do find evidence of such a relationship but only for the period preceding a major labor market reform that increased the flexibility of the colombian labor market these results point to the significance of labor market institutions in assessing the effects of trade policy on the labor market

agricultural productivity and structural transformation evidence from brazil we study the eects of the adoption of new agricultural technologies on structural transfor mation to guide empirical work we present a simple model where the eect of agricultural productivity on industrial development depends on the factor bias of technical change we test the predictions of the model by studying the introduction of genetically engineered soybean seeds in brazil which had heterogeneous eects on agricultural productivity across areas with dierent soil and weather characteristics we nd that technical change in soy production was strongly labor saving and lead to industrial growth as predicted by the model

the optimum quantity of debt abstract we find that the welfare gains to being at the optimum quantity of debt rather than the current us level are small and therefore concerns regarding the high level of debt in the us economy may be misplaced this finding is based on a model of a large number of infinitely lived households whose saving behavior is influenced by precautionary saving motives and borrowing constraints this model incorporates a different role for government debt than is found in standard models and it captures different cost benefit trade offs on the benefit side government debt enhances the liquidity of households by providing an additional means of smoothing consumption and by effectively loosening borrowing constraints on the cost side the implied taxes have adverse wealth distribution and incentive effects in addition government debt crowds out capital via higher interest rates and lowers per capita consumption

earnings inequality and mobility in the united states evidence from social security data since 1937 this paper uses social security administration longitudinal earnings micro data since 1937 to analyze the evolution of inequality and mobility in the united states annual earnings inequality is u shaped decreasing sharply up to 1953 and increasing steadily afterward short term earnings mobility measures are stable over the full period except for a temporary surge during world war ii virtually all of the increase in the variance in annual log earnings since 1970 is due to increase in the variance of permanent earnings as opposed to transitory earnings mobility at the top of the earnings distribution is stable and has not mitigated the dramatic increase in annual earnings concentration since the 1970s long term mobility among all workers has increased since the 1950s but has slightly declined among men the decrease in the gender earnings gap and the resulting substantial increase in upward mobility over a lifetime for women are the driving force behind the increase in long term mobility among all workers

the evolution of wealth inequality over half a century the role of taxes transfers and technology over the last 50 years the u s tax system went through a striking transformation that reduced the effective tax rates for top income groups and raised transfers to seniors this paper investigates the macroeconomic repercussions of this change in policy particularly for the distributions of income wealth and consumption changes in taxes and transfers account for nearly half of the rise in wealth concentration nonetheless their impact on the distributions of income and consumption has been minor due to changes in equilibrium prices and the offsetting effects of tax cuts and transfers on the dispersion of consumption results highlight the role of increasing wage dispersion during this period as the main driver of trends in inequality

capital is back wealth income ratios in rich countries 1700 2010 how do aggregate wealth to income ratios evolve in the long run and why we address this question using 1970 2010 national balance sheets recently compiled in the top eight developed economies for the united states united kingdom germany and france we are able to extend our analysis as far back as 1700 we find in every country a gradual rise of wealth income ratios in recent decades from about 200 300 in 1970 to 400 600 in 2010 in effect today s ratios appear to be returning to the high values observed in europe in the eighteenth and nineteenth centuries 600 700 this can be explained by a long run asset price recovery itself driven by changes in capital policies since the world wars and by the slowdown of productivity and population growth in line with the s g harrod domar solow formula that is for a given net saving

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

on the distributional effects of reducing capital taxes this article asks whether household heterogeneity and market incompleteness have quantitatively important implications for the welfare effects of tax changes we compare a representative agent economy to an economy in which households face idiosyncratic uninsurable income risk the income process is consistent with empirical estimates and implies a realistic wealth distribution we find that capital tax cuts imply large welfare gains in the representative agent economy however when households are heterogeneous substantial redistribution during transition means that only a minority will support capital tax cuts whereas most households can expect large welfare losses

informality and development in developing countries informal firms account for up to half of economic activity they provide livelihood for billions of people yet their role in economic development remains controversial some like hernando de soto 1989 2000 see informal firms as an untapped reservoir of entrepreneurial energy held back by government regulations in this view unleashing this energy by reducing entry regulations or improving property rights would fuel growth and development others like levy 2008 take a more cynical view stressing the advantages enjoyed by informal firms and workers from avoiding taxes and regulations a report from the mckinsey global institute describes informal firms as parasites competing unfairly with law abiding formal firms farrell 2004 in this view informality should be suppressed not unleashed still others follow the development tradition of lewis 1954 harris and todaro 1970 and more recently rauch 1991 and see informality as a byproduct of poverty from this dual perspective formal and informal firms are fundamentally different productive formal entrepreneurs pay taxes and bear the cost of government regulation to reach new customers raise capital and access public goods these entrepreneurs are often educated and find it more profitable to run bigger formal firms rather than the smaller informal ones in contrast informal entrepreneurs are typically uneducated and unproductive and they run small businesses producing low quality products for low income customers using little capital and

consumption inequality and family labor supply we examine the link between wage and consumption inequality using a life cycle model incorporating consumption and family labor supply decisions we derive analytical expressions for the dynamics of consumption hours and earnings of two earners in the presence of correlated wage shocks nonseparability progressive taxation and asset accumulation the model is estimated using panel data for hours earnings assets and consumption we focus on family labor supply as an insurance mechanism and find strong evidence of smoothing of permanent wage shocks once family labor supply assets and taxes are properly accounted for there is little evidence of additional insurance jel d12 d14 d91 j22 j31

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

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

export markets and labor allocation in a low income country we study the effects of a positive export shock on labor allocation between the informal microenterprise sector and the formal firm sector in a low income country the united states vietnam bilateral trade agreement led to large reductions in us tariffs on vietnamese exports we find that the share of manufacturing workers in vietnam in the formal sector increased by 5 percentage points in response to the us tariff reductions the reallocation was greater for workers in more internationally integrated provinces and for younger cohorts we estimate the gap in labor productivity within manufacturing across the informal and formal sectors this gap and the aggregate labor productivity gain from the export induced reallocation of workers across the two sectors are reduced when we account for worker heterogeneity measurement error and differences in labor intensity of production

public debt under limited private credit there is a conventional wisdom in economics that public debt can serve as a substitute for private credit if private borrowing is limited the purpose of this paper is to show that while a government could in principle use such a policy to fully relax borrowing limits this is not generally optimal in our economy agents invest in a short term asset a long term asset and government bonds agents are subject to idiosyncratic liquidity shocks prior to the maturity of the long term asset we show that a high public debt policy fully relaxes private borrowing limits and is suboptimal this is because agents expecting such a policy respond by investing less than is socially optimal in the short asset which can protect them in the event of a liquidity shock the optimal policy is more constrained and it induces a wedge between the technological rate of return on the long asset and the rate of return on bonds in such a regime agents subject to liquidity shocks are also borrowing constrained and this expectation of being borrowing constrained induces them to invest the optimal level in the short asset jel h63 e62 g20

income inequality in the united states 1913 1998 this paper presents new homogeneous series on top shares of income and wages from 1913 to 1998 in the united states using individual tax returns data top income and wages shares display a u shaped pattern over the century our series suggest that the large shocks that capital owners experienced during the great depression and world war ii have had a permanent effect on top capital incomes we argue that steep progressive income and estate taxation may have prevented large fortunes from fully recovering from these shocks top wage shares were flat before world war ii dropped precipitously during the war and did not start to recover before the late 1960s but are now higher than before world war ii as a result the working rich have replaced the rentiers at the top of the income distribution

exploring hospital production relationships with flexible functional forms this paper estimates a multiproduct variable cost function using data on a sample of california hospitals the results provide useful insights into the advantages and disadvantages of flexible functional forms for cost analysis the translog function appears to provide reasonable estimates of marginal costs when evaluated at or near the approximation point of the function the estimated function performs less satisfactorily however when evaluated outside this range the paper s results do not provide strong evidence of either ray scale economies or of weak cost complementarities there is some evidence however that the degree of scale economies may be underestimated

accounting for the u s earnings and wealth inequality we show that a theory of earnings and wealth inequality based on the optimal choices of ex ante identical households that face uninsured idiosyncratic shocks to their endowments of efficiency labor units accounts for the u s earnings and wealth inequality almost exactly

a welfare analysis of social security in a dynastic framework in this article we study the welfare effects of unfunded social security in a general equilibrium model populated with overlapping generations of altruistic individuals that differ in lifetime expectancy and earnings ability contrary to previous research our results indicate that steady state welfare increases with social security for most households although by very different amounts this result is mainly due to two factors first the presence of two sided altruism significantly mitigates the crowding out effect of unfunded social security second ability shocks and uncertain lifetimes generate significant heterogeneity among households to yield different induced preferences for social security

policy commitment and the welfare gains from capital market liberalization this paper evaluates the quantitative impact of capital liberalization on the taxation structure and welfare of the liberalizing countries when governments conduct fiscal policy optimally but without commitment time consistent policies the transition from a regime of capital autarky to a regime of free mobility leads to a decrease in the long term tax rate on capital of 13 percent and an increase in the tax rate on labor of 2 percent as a consequence of this taxation shift welfare increases by about 1 percent the reduction in capital taxation induced by capital market liberalization is welfare improving because in the absence of capital mobility the time consistent policies over tax capital

trade liberalization and unemployment theory and evidence from india abstract a widely held view among the public is that trade liberalization increases unemployment using state and industry level unemployment and trade protection data from india we find no evidence of any unemployment increasing effect of trade reforms in fact our state level analysis reveals that urban unemployment declines with trade liberalization in states with flexible labor markets and larger employment shares in net exporter industries moreover our industry level analysis indicates that workers in industries experiencing greater reductions in trade protection were less likely to become unemployed especially in net export industries our results can be explained within a theoretical framework incorporating trade and search generated unemployment and some institutional features of the indian economy

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

trade liberalization and regional dynamics abstract we study the evolution of trade liberalization s effects on brazilian local labor markets regions facing larger tariff cuts experienced prolonged declines in formal sector employment and

wages and informality in developing countries we develop an equilibrium wage posting model with heterogeneous firms that decide to locate in the formal or the informal sector and workers who search randomly on and off the job we estimate the model on brazilian labor force survey data in equilibrium firms of equal productivity locate in different sectors a fact observed in the data wages are characterized by compensating differentials we show that tightening enforcement does not increase unemployment and increases wages total output and welfare by enabling better allocation of workers to higher productivity jobs and improving competition in the formal labor market jel e26 j24 j31 j46 o15 o17

selection on observed and unobserved variables assessing the effectiveness of catholic schools in this paper we measure the effect of catholic high school attendance on educational attainment and test scores because we do not have a good instrumental variable for catholic school attendance we develop new estimation methods based on the idea that the amount of selection on the observed explanatory variables in a model provides a guide to the amount of selection on the unobservables we also propose an informal way to assess selectivity bias based on measuring the ratio of selection on unobservables to selection on observables that would be required if one is to attribute the entire effect of catholic school attendance to selection bias we use our methods to estimate the effect of attending a catholic high school on a variety of outcomes our main conclusion is that catholic high schools substantially increase the probability of graduating from high school and more tentatively attending college we find little evidence of an effect on test scores

cost and access among non profit hospitals in jurisdictions with and without public hospitals the tax exempt status of america s from non profit hospitals is frequently challenged by policy makers interest groups argue that the provision of charitable services within these institutions does not offset the windfall accrued in the form of property and corporate tax exemption conversely non profit hospitals dispute this claim citing their historical and contemporary role as the centrepiece of the provision of charitable hospital services those who agree with this position frequently challenge the relative efficacy in sustaining publicly funded institutions thereby arguing that access to essential hospital services including charitable services will not be adversely jeopardized if public hospitals were closed in specific jurisdictions and services contracted out to the non profit sector this study estimates levels of access and costs among non profit hospitals in jurisdictions with and without the presence of a public hospital

financial globalization inequality and the rising public debt abstract during the last three decades government debt has increased in most developed countries during the same period we have also observed a significant liberalization of international financial markets we propose a multicountry model with incomplete markets and show that governments may choose higher levels of debt when financial markets become internationally integrated we also show that public debt increases with the volatility of uninsurable income idiosyncratic risk to the extent that the increase in income inequality observed in some industrialized countries has been associated with higher idiosyncratic risk the paper suggests another potential mechanism for the rise in public debt jel d31 e62 f65 h63

us agricultural exports and labor market adjustments this study empirically investigates the impact of us agricultural exports on farm and nonfarm employment and tests how individuals adjust to agricultural export shocks based on the data from 1991 to 2017 and a bartik style instrument that exploits cross regional variation in agricultural export exposure stemming from initial differences in agricultural specialization and temporal variation in predicted us exports from exogenous tariff reductions we find that a 1 increase in agricultural exports increases farm employment by 0 302 and has no statistically significant impact on nonfarm employment the individual level analysis shows that in response to positive agricultural export demand shocks natives with a college degree are more likely to become self employed and start farm activities and while non natives without a college degree are more likely to become hired farmworkers a back of the envelope calculation based on the estimates of agricultural trade elasticities of employment shows that on balance job gains due to us agricultural exports are slightly larger than job loss due to agricultural imports resulting in a net gain of around 0 24 million farm jobs over 1991 2017

the elasticity of taxable income with respect to marginal tax rates a critical review this paper critically surveys the large and growing literature estimating the elasticity of taxable income with respect to marginal tax rates using tax return data first we provide a theoretical framework showing under what assumptions this elasticity can be used as a sufficient statistic for efficiency and optimal tax analysis we discuss what other parameters should be estimated when the elasticity is not a sufficient statistic second we discuss conceptually the key issues that arise in the empirical estimation of the elasticity of taxable income using the example of the 1993 top individual income tax rate increase in the united states to illustrate those issues third we provide a critical discussion of selected empirical analyses of the elasticity of taxable income in light of the theoretical and empirical framework we laid out finally we discuss avenues for future research jel h24 h31 j22

what do we know about evolution of top wealth shares in the united states in piketty s 2014 prominent book capital in the twenty first century he argues that the concentration of wealth may become increasingly extreme in the future as piketty reminds us the group of rentiers people living off accumulated capital has been historically large and politically and socially influential because so much of large fortunes end up being inherited the current concentration of wealth is bound to predict at least weakly and perhaps strongly how important rentiers will be regardless of whether one buys into depictions such as the rentier enemy of democracy p 422 the extent to which the well off are going to rely on work versus rely on the returns to their wealth in the future is clearly important for assessing the extent to which a society will view itself as in some way a meritocracy given that the us economy has experienced rising inequality in its income and earning distributions for example piketty and saez 2003 or see the symposium on the top 1 percent in the summer 2013 issue of this journal one would expect that the distribution of wealth would follow a similar path however available evidence on this topic is much more scant and conflicting than that on income and earnings in fact when piketty 2014 reports direct estimates of wealth concentration for france the united kingdom sweden and the united states in chapter 10 of his book he finds as yet little evidence of dramatic increase in wealth concentration in any of these countries

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

policy cooperation among benevolent governments may be undesirable this paper presents a simple counterexample to the belief that policy cooperation among benevolent governments is desirable it also explains circumstances under which such counterexamples are possible and relates them to the literature on time inconsistency since the work of hamada 1976 investigating the effects of increasing policy cooperation among countries has been a major topic in international economics a standard conclusion of this work is that increasing policy cooperation among countries is desirable in a seminal paper rogoff 1985 has challenged this view using a simple monetary model rogoff shows that cooperation among policy makers can lead to a lower level of welfare than noncooperation does rogoff s result has caused much consternation among those who advocate policy cooperation and his work has been criticized along several dimensions for example some authors including canzoneri and henderson 1988 have noted that a key assumption in rogoff s model is that the objective function of each country s policy maker does not coincide with the objective function of its residents indeed if in his model policy makers maximize the welfare of their country s residents the counterexample is overturned and cooperation strictly dominates noncooperation this feature leads some to interpret rogoff s result as simply saying that if policy makers form a coalition against the private sector they may be worse off than if they do not others such as neck and dockner 1988 have claimed that rogoff s result depends on private agents acting strategically under this interpretation rogoff s result is relevant to say economies with a large trade union but not to economies with a large number of competitive private agents in a somewhat different vein persson 1988 and especially devereux 1986a b have questioned the significance of welfare comparisons across different institutional regimes in a model without a solid foundation for the behavioural relationships this paper presents a simple model in which governments are benevolent but cooperation is still undesirable the model is a two country version of fischer s 1980 optimal tax model in it private agents are competitive in that each agent takes both prices and government policies as uninfluenced by his actions and each government maximizes the welfare of its country s residents in the paper the two different regimes cooperative and noncooperative

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

growth in the shadow of expropriation we propose a tractable variant of the open economy neoclassical growth model that emphasizes political economy and contracting frictions the political economy frictions involve a preference for immediate spending while the contracting friction is a lack of commitment regarding foreign debt and expropriation we show that the political economy frictions slow an economy s convergence to the steady state due to the endogenous evolution of capital taxation the model rationalizes why openness has different implications for growth depending on the political environment why institutions such as the treatment of capital income evolve over time why governments in countries that grow rapidly accumulate net foreign assets rather than liabilities and why foreign aid may not affect growth

risk uncertainty and the dynamics of inequality abstract the dynamics of wealth inequality are studied in a continuous time blanchard yaari model investment returns are idiosyncratic and subject to knightian uncertainty in response agents formulate robust portfolio policies these policies are nonhomothetic wealthy agents invest a higher fraction of their wealth in uncertain assets yielding higher mean returns this produces a feedback mechanism that amplifies inequality it also produces an accelerated rate of convergence which helps resolve a puzzle recently identified by gabaix et al 2016 an empirically plausible increase in uncertainty can account for about half of the recent increase in top wealth shares

wealth distribution and social mobility in the us a quantitative approach we quantitatively identify the factors that drive wealth dynamics in the united states and are consistent with its skewed cross sectional distribution and with social mobility we concentrate on three critical factors i skewed earnings ii differential saving rates across wealth levels and iii stochastic idiosyncratic returns to wealth all of these are fundamental for matching both distribution and mobility the stochastic process for returns which best fits the cross sectional distribution of wealth and social mobility in the united states shares several statistical properties with those of the returns to wealth uncovered by fagereng et al 2017 from tax records in norway

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

the macroeconomic implications of rising wage inequality in the united states in recent decades american workers have faced a rising college premium a narrowing gender gap and increasing wage volatility this paper explores the quantitative and welfare implications of these changes the framework is an incomplete markets life cycle model in which individuals choose education intrafamily time allocation and savings given the observed history of the u s wage structure the model replicates key trends in cross sectional inequality in hours worked earnings and consumption recent cohorts enjoy welfare gains on average as higher relative wages for college graduates and for women translate into higher educational attainment and a more even division of labor within the household

top incomes in the long run of history a recent literature has constructed top income shares time series over the long run for more than twenty countries using income tax statistics top incomes represent a small share of the population but a very significant share of total income and total taxes paid hence aggregate economic growth per capita and gini inequality indexes are sensitive to excluding or including top incomes we discuss the estimation methods and issues that arise when constructing top income share series including income definition and comparability over time and across countries tax avoidance and tax evasion we provide a summary of the key empirical findings most countries experience a dramatic drop in top income shares in the first part of the twentieth century in general due to shocks to top capital incomes during the wars and depression shocks top income shares do not recover in the immediate postwar decades however over the last thirty years top income shares have increased substantially in english speaking countries and in india and china but not in continental european countries or japan this increase is due in part to an unprecedented surge in top wage incomes as a result wage income comprises a larger fraction of top incomes than in the past finally we discuss the theoretical and empirical models that have been proposed to account for the facts and the main questions that remain open

tax and education policy in a heterogeneous agent economy what levels of redistribution maximize growth and efficiency this paper studies the effects of progressive income taxes and education finance in a dynamic heterogeneous agent economy such redistributive policies entail distortions to labor supply and savings but also serve as partial substitutes for missing credit and insurance markets the resulting tradeoffs for growth and efficiency are explored both theoretically and quantitatively in a model that yields complete analytical solutions progressive education finance always leads to higher income growth than taxes and transfers but at the cost of lower insurance overall efficiency is assessed using a new measure that properly reflects aggregate resources and idiosyncratic risks but unlike a standard social welfare function does not reward equality per se simulations using empirical parameter estimates show that the efficiency costs and benefits of redistribution are generally of the same order of magnitude resulting in plausible values for the optimal rates aggregate income and aggregate welfare provide only crude lower and upper bounds around the true efficiency tradeoff

inequality and government debt evidence from oecd panel data abstract this paper analyzes how government debt can be caused by changes in the income distribution unlike azzimonti et al 2014 i distinguish between income inequality induced by differences in labor productivity and income inequality induced by differences in capital income utilizing the luxembourg income study using data for oecd countries an increase in labor income inequality leads to higher debt level whilst capital income inequality is negatively associated with debt

taxing top earners a human capital perspective we assess the consequences of substantially increasing the marginal tax rate on u s top earners using a human capital model we nd that 1 the peak of the model laer curve occurs at a 52 percent top tax rate 2 if human capital were exogenous then the top of the laer curve would occur at a 66 percent top tax rate and 3 applying the theory and methods that diamond and saez 2011 use to provide quantitative guidance for setting the top tax rate to model data produces a tax rate that substantially exceeds 52 percent

international coordination of fiscal deficits abstract nearly all existing studies of international coordination of fiscal deficits focus on aggregate demand aspects of the problem in contrast this paper adopts a dynamic general equilibrium perspective and emphasizes the public finance side of fiscal deficits in a world with international capital mobility the fiscal deficit of any single government affects world interest rates and therefore influences intertemporal resource allocation in all countries the paper shows that these international externalities may result in inefficiently large fiscal deficits high interest rates and low levels of welfare if international policy coordination is absent

production subsidies and redistribution abstract who gains from stimulating output we explore a dynamic model with production subsidies where the population is heterogeneous in one dimension wealth there are two channels through which production subsidies redistribute resources across the population first poorer agents gain from a rise in wages since to the extent there is an operative wealth effect in labor supply they work harder second because a current output boost will raise consumption today relative to the future thus lowering real interest rates poor agents gain in relative terms since their income is based less on interest income we examine optimal redistribution from the perspective of an arbitrary consumer in the population we show that if this consumer has commitment at time zero to set all present and future subsidy rates and for a class of preferences that admits aggregation in wealth then output stimulation and hence redistribution will only occur at time zero after that subsidies are zero a byproduct of our analysis of this environment is a median voter theorem with direct voting over subsidy sequences at time zero the sequence preferred by the median wealth consumer is the unique outcome we also study lack of commitment since interest rate manipulation is associated with time inconsistency we analyze this case formally by looking at the markov perfect time consistent equilibrium in a game between successive identical decision makers e g the median agent here subsidies persist they are constant over time and are more distortionary than under commitment moreover whereas under commitment asset inequality changes initially in favor of the consumer who decides on policy it does not under lack of commitment

optimal indirect and capital taxation we consider an environment in which agents skills are private information and follow arbitrary stochastic processes we prove that it is typically pareto optimal for an individual s marginal benefit of investing in capital to exceed his marginal cost of doing so this wedge is consistent with a positive tax on capital income we also prove that it is pareto optimal for the marginal rate of substitution between any two consumption goods to equal the marginal rate of transformation this lack of a wedge is consistent with uniform taxation of consumption goods within a period

dynamic optimal taxation with private information we study dynamic optimal taxation in a class of economies with private information optimal allocations in these environments are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is similar to that in bewley 1986 agents supply labour and trade risk free claims to future consumption subject to a budget constraint and a debt limit optimal taxes are conditioned only on two observable characteristics an agent s accumulated stock of claims or wealth and her current labour income we show that optimal taxes are generally non linear and non separable in these variables and relate the structure of marginal wealth and income taxation to the properties of agent preferences this paper studies optimal taxation in a class of dynamic economies with private information we consider an environment in which agents preferences are defined over consumption and labour and each agent receives a privately observed sequence of i i d preference shocks incentivecompatibility constraints stemming from private information imply that socially optimal or constrained efficient allocations in this environment are complicated and history dependent yet we show that they can be implemented as competitive equilibria in market economies supplemented with simple tax systems the market structure in these economies is identical to that in bewley 1986 huggett 1993 or aiyagari 1994 agents can trade current consumption for claims to future consumption subject to a budget constraint and a borrowing limit these claims have a non contingent pre tax return crucially taxes are conditioned upon only two observable characteristics of an agent current wealth given by the agent s accumulated stock of claims and current labour income they do not depend on any other aspect of an agent s past history most models of dynamic optimal taxation follow the ramsey approach in which the set of fiscal instruments available to the government is exogenously specified 1 linear labour and capital income taxes are typically included in this set while lump sum taxes are ruled out the exclusion of the latter is justified by appealing to incentive or administrative constraints but these are not explicitly modelled these exogenous restrictions on fiscal instruments represent frictions that the government seeks to ameliorate through its optimal choice of tax rates the approach we adopt in this paper builds on the optimal taxation literature initiated by mirrlees 1971 mirrlees assumes that agents receive privately observed shocks to their

voluntary and proprietary hospital behavioural response to socio economic stimuli this paper contributes to the literature on the economic aspects of hospital behaviour in the united states in these substantive ways 1 a theoretical basis for incorporating socio economic variables in the form of indices into our analysis of hospital behaviour is presented 2 it is found that hospitals of the same ownership type exhibit different economic behaviour when located in different socio economic environments in fact our results indicate that the prevailing assumption of structural homogeneity among differing ownership types is incorrect 3 findings further suggest that the relative affluence of an urban area is a better determinant of the impact of factor price variation among hospitals than the extent of urbanization alone finally the cost function specified here has broad implications for future empirical studies of hospital behaviour it is found that the flexible form quadratic approximation estimated generally gives theoretically consistent results

on the size of u s government political economy in the neoclassical growth model we study a dynamic version of meltzer and richard s median voter model of the size of government taxes are proportional to total income and they are redistributed as equal lump sum transfers voting takes place periodically over time and each consumer votes for the tax rate that maximizes his equilibrium utility we calibrate the model to u s data key elements in the calibration are the income and wealth distribution and the parameters governing the leisure and consumption choices the total size of transfers predicted by our political economy model is quite close to the size of transfers in the data

financial integration entrepreneurial risk and global dynamics abstract how does financial integration impact capital accumulation current account dynamics and cross country inequality we investigate this question within a two country general equilibrium incomplete markets model that focuses on the importance of idiosyncratic entrepreneurial risk a risk that introduces not only a precautionary motive for saving but also a wedge between the interest rate and the marginal product of capital our contribution is to show that this friction provides a simple explanation for the emergence of global imbalances a resolution to the empirical puzzle that capital often fails to flow from the rich or slow growing countries to the poor or fast growing ones and a set of policy lessons regarding the intertemporal costs and benefits of capital account liberalization

how progressive is the u s federal tax system a historical and international perspective this paper provides estimates of federal tax rates by income groups in the united states since 1960 with special emphasis on very top income groups we include individual and corporate income taxes payroll taxes and estate and gift taxes the progressivity of the u s federal tax system at the top of the income distribution has declined dramatically since the 1960s this dramatic drop in progressivity is due primarily to a drop in corporate taxes and in estate and gift taxes combined with a sharp change in the composition of top incomes away from capital income and toward labor income the sharp drop in statutory top marginal individual income tax rates has contributed only moderately to the decline in tax progressivity international comparisons confirm that is it critical to take into account other taxes than the individual income tax to properly assess the extent of overall tax progressivity both for time trends and for cross country comparisons the pattern for the united kingdom is similar to the u s pattern france had less progressive taxes than the united states or the united kingdom in 1970 but has experienced an increase in tax progressivity and has now a more progressive tax system than the united states or the united kingdom

firm wage differentials and labor market sorting reconciling theory and evidence why do firms pay different wages empirical evidence suggests the presence of substantial differences in firm pay controlling for worker skill moreover these differences are uncorrelated with ski

wealth inequality family background and estate taxation this paper generates two main contributions first it provides a new theory of wealth inequality that merges two empirically relevant forces generating inequality bequest motives and inheritance of ability across generations and an earnings process that allows for more earnings risk for the richest second it uses the resulting calibrated framework to study the effects of changing estate taxation increasing the estate tax reduces the wealth concentration in the hands of the richest few and the economic advantage of being born to a rich and super rich family at the cost of reduced aggregate capital and output however all of these effects are quite small in contrast increasing estate taxation can generate a significant welfare gain to a newborn under the veil of ignorance but this comes at a large welfare cost for the super rich

politico economic consequences of rising wage inequality abstract this paper uses a dynamic political economy model to evaluate whether the observed rise in wage inequality and decrease in median to mean wages can explain some portion of the relative increase in transfers to low earnings quintiles and relative increase in effective tax rates for high earnings quintiles in the u s over the past several decades specifically we assume that households have uninsurable idiosyncratic labor efficiency shocks and consider policy choices by a median voter which are required to be consistent with a sequential equilibrium we choose the transition matrix to match observed mobility in wages between 1978 and 1979 in the panel study of income dynamics psid data set and then evaluate the response of social insurance policies to a new transition matrix that matches the observed mobility in wages between 1995 and 1996 and is consistent with the rise in wage inequality and the decrease in median to mean wages between 1979 and 1996 we deal with the problem that policy outcomes affect the evolution of the wealth distribution and hence prices by approximating the distribution by a small set of moments we contrast these numbers with those from a sequential utilitarian mechanism as well as mechanisms with commitment

margins of labor market adjustment to trade abstract we use both longitudinal administrative data and cross sectional household survey data to study the margins of labor market adjustment following brazil s early 1990s trade liberalization we document how workers and regional labor markets adjust to trade induced changes in local labor demand examining various adjustment margins including earnings and wage changes interregional migration shifts between tradable and nontradable employment and shifts between formal employment informal employment and non employment our results provide insight into the regional labor market effects of trade and have important implications for policies that address informal employment and that assist trade displaced workers

the risk free rate in heterogeneous agent incomplete insurance economies abstract why has the average real risk free interest rate been less than one percent the question is motivated by the failure of a class of calibrated representative agent economies to explain the average return to equity and risk free debt i construct an economy where agents experience uninsurable idiosyncratic endowment shocks and smooth consumption by holding a risk free asset i calibrate the economy and characterize equilibria computationally with a borrowing constraint of one year s income the resulting risk free rate is more than one percent below the rate in the comparable representative agent economy

debt and deficit fluctuations and the structure of bond markets we analyse the implications of optimal taxation for the stochastic behaviour of debt we show that when a government pursues an optimal fiscal policy under complete markets the value of debt has the same or less persistence than other variables in the economy and it declines in response to shocks that cause the deficit to increase by contrast under incomplete markets debt shows more persistence than other variables and it increases in response to shocks that cause a higher deficit data for us government debt reveals diametrically opposite results from those of complete markets and is much more supportive of bond market incompleteness

does formality improve micro firm performance evidence from the brazilian simples program abstract this paper exploits an extensive brazilian micro enterprise survey and the 1996 introduction of a business tax reduction and simplification scheme simples to examine three questions first do high tax rates and complex tax regulations really constitute a barrier to the formalization of micro firms second does formalization improve firm performance measured along several dimensions including revenues employment and capital stock third what are the channels through which this occurs we find that simples led to a significant increase in formality in several dimensions moreover newly created firms that opt for operating formally show higher levels of revenue and profits employ more workers and are more capital intensive only for those firms that have employees the channel through which this occurs is not access to credit or contracts with larger firms rather it appears that the lower cost of contracting labor leads to adopting production techniques that involve a permanent location and a larger paid labor force

trade wages and the political economy of trade protection evidence from the colombian trade reforms abstract worker industry affiliation plays a crucial role in how trade policy affects wages in many trade models yet most research has focused on how trade policy affects wages by altering the economy wide returns to a specific worker characteristic i e skill or education rather than through worker industry affiliation this paper exploits drastic trade liberalizations in colombia in the 1980s and 1990s to investigate the relationship between protection and industry wage premiums we relate wage premiums to trade policy in an empirical framework that accounts for the political economy of trade protection accounting for time invariant political economy factors is critical when we do not control for unobserved time invariant industry characteristics we find that workers in protected sectors earn less than workers with similar observable characteristics in unprotected sectors allowing for industry fixed effects reverses the result trade protection increases relative wages this positive relationship persists when we instrument for tariff changes our results are in line with short and medium run models of trade where labor is immobile across sectors or alternatively with the existence of industry rents that are reduced by trade liberalization in the context of the current debate on the rising income inequality in developing countries our findings point to a source of disparity beyond the well documented rise in the economy wide skill premium because tariff reductions were proportionately larger in sectors employing a high fraction of less skilled workers the decrease in the wage premiums in these sectors affected such workers disproportionately

is it is or is it ain t my obligation regional debt in a fiscal federation this article studies the repayment of regional debt in a multiregion economy with a central authority who pays the obligation issued by a region with commitment the central government will use its economy wide taxation power in support of its objective to smooth distortionary taxes and consumption across regions absent commitment this tool of the central government may be exploited to induce it to bail out regional government deficits we characterize the conditions under which bailouts occur and their welfare implications in particular we show when the gains from a federation may outweigh the welfare costs of a bailout we use these insights to comment on actual fiscal relations in three quite different federations the united states the european union and argentina

commitment and the adoption of a common currency in contrast to mundell s inquiry on the optimality of currency areas this article aims to understand under what circumstances a pareto dominant monetary union will be established using a multicountry overlapping generations model we highlight gains from monetary union arising from reduced transactions costs and lower inflation despite these gains countries acting independently will impose barriers to exchange through local currency restrictions thereby creating transactions costs and providing an incentive for inflation therefore the gains from monetary union are most likely to be lost without collective effort