optimal nonuniform pricing with generalized consumer choice a frequent assumption in nonuniform pricing models is that local maximizing conditions are met exactly once for each purchasing consumer no consumer can be indifferent between two nonadjacent usage levels each consumer then responds to a change in marginal price only by incrementally reducing her usage more realistically maximizing conditions are sometimes twice met for some interior users who can be indifferent between nonadjacent usage levels and may therefore jump discretely if marginal prices change at either level the author derives a monopolist s generalized price schedule under these circumstances and shows that marginal price may fall below marginal cost copyright 1994 by blackwell publishing ltd

on measures of excess burden and their application abstract new measures of the additional excess burden of a tax reform are proposed and are shown to be useful in three key policy applications these new measures induce a unique measure of marginal excess burden meb among its interesting properties meb is uniformly zero for a proportional tax on inelastically supplied labor problems in applying the standard measures of total excess burden are demonstrated it is concluded that the induced measure of the marginal cost of funds mcf should be regarded as the most useful concept in applied tax analysis

distortionary taxes and the provision of public goods economists have long been concerned with finding an efficient level of public expenditure the classic statement of the problem was given by paul samuelson 1954 an optimal level of expenditure is where the sum of the marginal rates of substitution between the public good and a reference good equals the marginal rate of transformation between the public good and the reference good mrs mrt however samuelson s formula assumes that all of the revenue needed to finance public goods can be raised with lump sum taxes since this is not generally possible the formula must be modified to account for the distortionary effects of the tax system an appropriate modification is to multiply the cost side of the equation by a term that is commonly called the marginal cost of public funds mcf in the case of samuelson s formula where government is entirely financed with lump sum taxes the mcf would be exactly 1 0 in the traditional view of economists distortionary taxes cause the mcf to be greater than one thus raising the cost of providing public goods in this paper we discuss some cases where the mcf may be less than one we will illustrate this possibility using numerical examples for labor taxes

the good the bad and the regulator an experimental test of two conditional audit schemes conditional audit rules are designed to achieve regulatory compliance with fewer inspections than required by random auditing a regulator places individuals into audit pools that differ in probability of audit or severity of fine and species transition rules between pools future pool assignment is conditional on current audit results we conduct an experiment to compare two specific schemes harrington s past compliance targeting and friesen s optimal targeting against random auditing we find a production possibility frontier between compliance and minimizing inspections optimal targeting generates the lowest inspection rates as predicted but random auditing the highest compliance past compliance targeting is intermediate

distributional weights in cost benefit analysis should we forget about them many argue that it is socially inefficient to use distributional weights in cost benefit analysis and that doing so implies large inefficiency losses when distributional matters can be dealt with trough income taxation instead our results question this view by showing a large range of cases when distributional weights are second best optimal to use one example is when different provided goods affect tax revenues equally per dollar spent utility functions that are separable in the provided goods is sufficient for this most results hold for linear and non linear income taxes and whether they are optimal or not general policy implications are discussed

progressive taxation and the social marginal cost of public funds abstract this paper describes the calculation of the social marginal cost of public funds smcf for a progressive tax system which distorts individuals labour supply decisions a formula for the smcf indicates that the income and substitution effects of the labour supply response are weighted by the changes in individuals average and marginal tax rates respectively other well known formulas for the smcf are shown to be special cases of this formula the difference between this formula and the mayshar 1991 formula is shown to be due to different but equally valid ways of computing the change in the average tax rate the condition under which a marginal tax rate increase may lead to a reduction in revenues is derived

the marginal welfare cost of public funds theory and estimates abstract we derive a general analytic formula for the marginal welfare cost mwc of public funds without imposing restrictive assumptions on preferences or technologies the framework encompasses the various special cases previously considered and reconciles the disparities among the reported estimates of mwc unresolved differences in existing estimates are fully explained by appropriate interpretations of intended thought experiments and alternative assumptions about the elasticity of labor supply with respect to public spending further progress in measuring mwc requires empirical estimation of labor supply functions that include government spending as an explanatory variable

disclosure strategies for pollution control disclosure strategies which involve public and or private attempts to increase the availability of information on pollution form the basis for what some have called the third wave in pollution control policy after legal regulation the first wave and market based instruments the second wave while these strategies have become common in natural resource settings forest certification and organic farming for example they are less familiar in a pollution control context yet the number of applications in that context is now growing in both oecd and developing countries this survey will review what we know and don t know about the use of disclosure strategies to control pollution and conclude with the author s sense of where further research would be particularly helpful

using elasticities to derive optimal income tax rates this paper derives optimal income tax formulas using compensated and uncompensated elasticities of earnings with respect to tax rates a simple formula for the high income optimal tax rate is obtained as a function of these elasticities and the thickness of the top tail of the income distribution in the general non linear income tax problem this method using elasticities shows precisely how the different economic effects come into play and which are the key relevant parameters in the optimal income tax formulas of mirrlees the optimal non linear tax rate formulas are expressed in terms of elasticities and the shape of the income distribution these formulas are implemented numerically using empirical earning distributions and a range of realistic elasticity parameters

graduated punishments in public good games a host of social situations feature graduated punishments we explain this phenomenon by studying a repeated public good game in which a social planner imperfectly monitors agents to detect shirkers agents cost of contributing is private information and administering punishments is costly a low punishment today imperfectly sorts agents by type only low cost agents contribute the planner uses this information optimally punishing tomorrow s alleged repeat shirkers harsher than rst time shirkers the threat of becoming branded as repeat oender allows the planner to use a very mild punishment for rst time shirkers attenuating the costs associated with administering punishments graduated punishments are consequently socially optimal as long as the population is not too homogeneous

evaluation of four tax reforms in the united states labor supply and welfare effects for single mothers an emerging consensus is that labor force participation is more responsive to taxes and transfers than hours worked to understand the implications of participation responses for the welfare analysis of tax reform this paper embeds this margin of labor supply in an explicit welfare theoretic framework we apply the framework to examine the welfare effects on single mothers in the united states following four tax acts passed in 1986 1990 1993 and 2001 we propose a simulation method combining features of fully structural microsimulation studies and simple deadweight loss calculations our approach accounts for the observed heterogeneity in the microdata but is simple to implement because we do not need to specify utility functions and estimate utility parameters we find that each of the four tax acts created substantial welfare gains and that the gains were concentrated almost exclusively on the participation margin our results imply that standard approaches not modeling the participation decision can make large errors

regulatory dealing revisiting the harrington paradox abstract despite the fact that i when the epa observes regulatory violations it rarely pursues the violator and ii the expected penalty faced by a violator who is pursued is small compared to the cost of compliance it is still the case that iii firms comply a significant portion of the time winston harrington harrington w 1988 enforcement leverage when penalties are restricted journal of public economics 37 29 53 provides a dynamic model consistent with this apparent paradox we offer an alternative rationalisation in a model of regulatory dealing in which the agency uses tolerance in some contexts to induce increased compliance in others the observed tolerance of the epa to non compliance may be a strategic response by the agency to a difficult enforcement environment rather than evidence that it has gone soft on pollution or been captured by industry interests we use the model to consider the impact of the growing trend towards citizen suits and ngo enforcement of regulation arriving at some unconventional conclusions we argue that the model is consistent with existing empirical analyses

on the possibility of an inverse relationship between tax rates and government revenues abstract when arthur laffer and other supply side advocates plot total tax revenue as a function of a particular tax rate they draw an upward sloping segment called the normal range followed by a downward sloping segment called the prohibitive range a brief literature review indicates that tax rates on the prohibitive range in theoretical and empirical models have been the result of particularly high tax rates high elasticity parameters or both the labor tax rate which maximizes total revenue for example will depend on the assumed labor supply elasticity this paper introduces a new curve which summarizes the tax rate and elasticity combinations that result in maximum revenues separating the normal area from the prohibitive area a general purpose empirical u s general equilibrium model is used to plot the laffer curve for several elasticities and to plot the newly introduced curve using the labor tax example results indicate that the u s could conceivably be operating in the prohibitive area but that the tax wedge or labor supply elasticity would have to be much higher than most estimates would suggest

enforcement leverage when penalties are restricted a reconsideration under asymmetric information abstract harrington harrington w 1988 enforcement leverage when penalties are restricted journal of public economics 37 29 53 offers an explanation for how relatively high compliance rates might co exist with low expected fines his results are highly dependent on the assumptions that all firms are identical and their compliance costs are known this paper shows that harrington s results are not necessarily robust in a more general model where asymmetric information and uncertainty are present

measurement error and state dependent pollution control enforcement abstract a two group model of state dependent enforcement is applied to identical firms which minimize the expected present value of costs and fines measurement error affects the probabilities of transitions between groups and the receipt of fines it is shown that state dependent enforcement can reduce social cost below the level attainable with static enforcement and that differentiation in both monitoring probabilities and standards may be optimal however setting fines for both groups at the maximum is likely to be optimal comparisons between models and alternative model interpretations are offered

penalty structures and deterrence in a two stage model experimental evidence multiperiod models of criminal enforcement based on the standard economic approach of becker 1968 generally find that the optimal penalty structure is either flat or declining we present the first experimental test of a two stage theoretical model that predicts decreasing penalty structures will yield greater deterrence than increasing penalty structures this prediction is based on the belief that if the penalty for the first offenses is sufficiently low the agent should commit the offense and continue to offend if undetected our results are consistent with the theoretical prediction that decreasing fine structures are more effective at reducing risky behavior jel c91 k42 k10

hierarchical design and enforcement of income tax policies abstract a hierarchical model of tax compliance is studied in which the government selects a tax policy and then delegates the responsibility to collect taxes to the irs there is a fixed distribution of income in the economy individuals differ by their income which is known niether to the government nor to the irs we completely characterize the solution to the irs s revenue maximizing problem when taxpayers are risk neutral the optimal auditing policy divides the reported incomes into at most three groups we show that the government provides a smaller budget to the irs than the irs would wish

redistribution and the marginal cost of public funds abstract discussions of the marginal cost of public funds with distortionary taxation are often cast in the framework of a one consumer economy while the main justification of distortionary taxes is that they are needed for redistribution this paper analyzes the issue in a model with heterogeneous consumers and a linear income tax focusing on the tradeoff between labour market distortions and the redistribution from high wage to low wage workers in an optimal tax system the mcf will be the same for all sources of funds and under certain assumptions less than one without optimality the mcf will in general differ between different sources of finance

enforcement leverage when penalties are restricted in the united states empirical studies of the enforcement of continuous compliance with environmental regulations especially air and water pollution regulations have repeatedly demonstrated the following i for most sources the frequency of surveillance is quite low ii even when violations are discovered fines or other penalties are rarely assessed in most states iii sources are nonetheless thought to be in compliance a large part of the time the evidence for the apparently low level of enforcement activity is found in a number of case studies of state and local enforcement of air and water quality regulations conducted jointly by the environmental protection agency epa and council on environmental quality ceg together with periodic surveys of implementation of air and water quality legislation conducted by the general accounting office gao these surveys show

the relationship between the marginal cost of public funds and marginal excess burden a large literature has recently developed which attempts to measure the marginal cost shadow price of public funds the motivation for much of this literature is the recognition that many of the tax instruments used by governments generate substantial amounts of excess burden deadweight loss jerry a hausman 1981 for example estimates that for an average prime aged american male with a wage of ten dollars in 1975 the excess burden generated by the federal income tax was over fifty percent of the revenue raised from taxing that individual one might suspect that such large excess burden estimates would require a change in the way government project costs are calculated in benefit cost analysis if the revenue required to finance a project is raised through distortionary taxation then intuition would suggest that the excess burden generated by the increase in tax rates needed to finance the project should be incorporated into the cost of the project however this analysis is not entirely consistent with the theoretical literature on the optimal provision of public goods which are financed by distortionary taxation when distortionary taxes are used to finance public goods and the level of public good provision does not affect consumption of the taxed goods the standard samuelsonian rule which equates the sum over consumers of the marginal rates of substitution between a private good and a public good with the marginal rate of transformation between the two goods must be modified to account for the marginal effect of increases in tax rates on the revenue raised from the existing taxes 2 the intuition behind this result is that we need to correct for indirect leakages from existing government revenue sources when considering an incremental expenditure if the increase in tax rates needed to finance the project causes a reduction in the revenue raised by the current tax structure then we need to account for this loss in calculating the cost of the project it is important to note that this result concerns the values of uncompensated demand elasticities an example first provided by atkinson and stern 1974 illustrates this point consider a world where the only tax is on labor earnings and incremental expenditure on the public good does not affect the demand for leisure in this case the marginal rate of transformation will overstate the cost of the public good as long as the uncompensated wage elasticity of labor supply is negative this is because an increase in the tax rate causes an increase in labor supply leading to an indirect increase in government revenue from the excess burden perspective described earlier this example is very puzzling it is well known that even if the uncompensated own price elasticity of a good is zero a tax on that good can still result in a large deadweight loss we instead need the compensated elasticity to be zero to ensure that there will be no excess burden however the department of economics university of california davis ca 95616 this paper is based on chapter two of my dissertation at the university of wisconsin madison i wish to thank the members of my dissertation committee martin david robert haveman chair and arthur goldberger for very helpful advice and comments i have also benefited from comments by don fullerton and bruce hamilton an anonymous referee provided unusually helpful comments and corrected an error in the figure 1don fullerton 1989 provides a recent survey and analysis of this literature 2this is shown by anthony atkinson and nicholas h stern 1974 and david e wildasin 1979 the effect of provision of the public good on consumption of the taxed goods must also generally be taken into account

political economy and the social marginal cost of public funds the case of the meltzer richard economy i introduction the marginal cost of public funds mcf is defined as the full cost to the private sector of raising an additional dollar of tax revenue including deadweight loss or excess burden of taxation imposed on taxpayers much of the theoretical literature on the mcf is cast in the framework of a one consumer economy however the main reason why we have distortionary taxes in the first place is precisely because of the need for redistribution or the existence of consumers with heterogeneity in view of this inconsistency several papers including dahlby 1998 and sandmo 1998 have recently started addressing the so called social marginal cost of public funds smcf in models with heterogenous consumers 1 these papers highlight how the redistributive concern may alter the calculation of the smcf 2 in previous studies on the mcf or smcf the existing of status quo tax system has been assumed to be either arbitrary or optimal 3 it is arguable however that the existing tax system is neither arbitrary nor optimal but rather represents a political equilibrium the approach adopted by hettich and winer 1999 and persson and tabellini 2000 corroborates this argument in surveying the political economy of public finance the authors of these two books explicitly portrayed public policy as the equilibrium outcome of some specified political process in this note we study the smcf issue on the basis of the plausible premise that the existing tax system itself represents a political equilibrium the calculation of the smcf is basically a normative exercise the premise that the existing tax system is a policy outcome in political equilibrium will enable us to exploit the positive property of political equilibrium in this normative exercise as an illustration of our approach we revisit the political economy of redistributive taxation as set out in meltzer and richard 1981 hereafter m r the m r model holds a prominent position in the redistribution literature and has been elaborated and extended in many directions persson and tabellini 2000 part ii 4 section ii overviews the m r model sections iii and iv derive and discuss the smcf in the m r economy an interesting feature of our finding is that the degree of income inequality as measured by the ratio of mean to median income can play an important role in estimating the smcf and judging whether the level of redistribution is excessive or inadequate ii the m r model a economy consideran economy in which there are n 1 u sup i u c sup i l sup i i 1 n this utility function is assumed to be smooth and possess the usual properties the income tax system consists of two parameters a marginal tax rate t and a lump sum grant a the tax system pays the lump sum grant or demogrant a to each individual and finances the payment by imposing the marginal tax rate t on all earned income 5 the budget constraint facing individual i is 2 c sup i 1 t w sup i l sup i a i 1 n where l sup i denotes the labor supply with l sup i l sup i 1 from equations 1 and 2 we can derive the indirect utility function 3 v sup i v 1 t w sup i a u 1 t w sup i l sup i a 1 l sup i i 1 n it is assumed that the government budget is balanced denoting per capita pretax income by y we then have 4 ty a where y summation y sup i n with y sup i w sup i l sup i b political economy the preferences of individuals qua voters over income tax policy are represented by the indirect utility function 3

note on the shape of the optimum income tax schedule abstract we consider the class of two bracket piecewise linear tax schedules sheshinski 1971 1972 and provide sufficient conditions for the optimum income tax schedule to have positive marginal rates and to be strictly convex calculations yield optimum tax rates between 20 and 35 percent and moderate rate progression the max min optimum has higher tax rates but not necessarily more rate progression than the utilitarian optimum the conditions are quite general postulating nondecreasing income effects as the level of income increases

a marginal cost of funds approach to multi period public project evaluation implications for the social discount rate abstract although the use of marginal cost of funds mcf has been widely appreciated in public finance literature discussions of mcf have been confined to a static setting this paper develops a multi period project evaluation rule that is based on mcf unlike previous approaches the parameters required for implementing the mcf rule are independent of projects under consideration a lesson from this paper is that the government discount rate policies that are largely based on the concepts of social discount rate and shadow price of capital should be rewritten with the use of parameters representing mcf

optimal nonuniform prices we consider optimal nonuniform pricing schedules where the price depends upon the amount purchased such schedules are regularly used by public utilities and other services welfare optimal nonuniform prices are related to the theory of optimal uniform prices developed by ramsey we characterize situations in which upward or downward discontinuities in pricing schedules are optimal our results are applicable to a number of related problems including optimal taxation insurance and incentives economic theory has confined most of its attention to markets with uniform prices in which the price per unit charged is invariant to the level of a customer s purchases this focus is warranted when goods are resellable since any attempt to charge nonuniform prices could be circumvented by reselling amongst customers but when goods are not resellable nonuniform prices are not only possible but common public utilities have declining block pricing with lower unit charges for large levels of consumption many agencies providing services including communications transportation even education use two part pricing with a fixed entry or retainer charge and a further charge per unit consumption nonuniform price schedules can be expected to be ever more common as services become a larger fraction of total output the increasing prevalence of nonuniform pricing policies have made them the focus of recent public and economic attention oi 1971 feldstein 1972 and ng and weisser 1974 have examined optimal two part pricing policies leland and meyer 1976 examine block pricing and show by example that optimal welfare policies may require nonuniform prices if zero profit constraints are binding in this paper we consider arbitrary nonuniform pricing policies using variational techniques two part and block pricing schedules are of course special cases of the environment we consider the work most closely related to our examination is the seminal paper by spence 1978 and subsequent analysis by roberts 1979 spence however does not pay explicit attention to the key role played by constraints on optimal pricing schedules roberts considers upward price discontinuities which lead to bunching of consumers at a given level of consumption but not downward price discontinuities which lead to regions in which no consumer chooses to consume gaps bunching or gaps may appear in the optimal price schedule even when underlying demand and cost functions are smooth and well behaved the prevalence of discontinuous pricing schedules e g the block pricing structures of public utilities argues that these questions are of practical as well as theoretical interest

on the marginal welfare cost of taxation this paper develops a rigorous partial equilibrium analysis of the determinants of margin al welfare cost mwc of taxes on labor earnings it shows that four key parameters interact to determine the magnitude of mwc using aggregate data and plausible ranges of values for the parameters mwc can vary from under 10 percent to more than 300 percent of marginal tax revenue intermediate parameter values sugge st mwc is in the 25 50 percent range however the more extreme estimates cannot be ruled out on the basis of available evidence suggesting that mwc cannot yet be copyright 1987 by american economic association

the optimal two bracket linear income tax abstract we investigate two bracket piecewise linear income tax structures in a two class economy pareto efficient tax schedules of this type feature at least one marginal tax rate equal to zero and that the marginal tax rate may be increasing and declining we then investigate the optimal structure of taxation when the social welfare function utility function and distribution of abilities are characterized as in the standard optimal linear income tax problem in all cases the second marginal tax rate is less than the first rate but progressivity in the sense of a uniformly rising average tax rate generally obtains

niskanen effects in the california community colleges the regression results of this paper show that bureaucrats act to maximize both their outputs and their discretionary budgets as predicted by niskanen for demand constrained conditions but the evidence does not confirm the niskanen hypothesis concerning chronic oversupply by bureaus further the evidence here shows that the discretionary budgets of bureaus may not fall to zero as suggested by niskanen instead it would appear that given severe budget constraint bureaus may not produce an excess supply of output and may cut costs in an effort to maintain a positive discretionary budget balance

the marginal cost of public funds hours of work versus labor force participation this paper extends the theory and measurement of the marginal cost of public funds mcf to account for labor force participation responses our work is motivated by the emerging consensus in the empirical literature that extensive participation responses are more important than intensive hours of work responses in the modelling of extensive responses we argue that it is crucial to account for the presence of non convexities created by fixed work costs in a non convex framework tax and transfer reforms give rise to discrete participation responses generating first order effects on government revenue these revenue effects make the marginal cost of funds higher and we show numerically that the implications for mcf tend to be substantial

a model of optimal fines for repeat offenders abstract this paper analyzes optimal fines in a model in which individuals can commit up to two offenses the fine for the second offense is allowed to differ from the fine for the first offense there are four natural cases in the model defined by assumptions about the gains to individuals from committing the offense in the case fully analyzed it may be optimal to punish repeat offenders more severely than first time offenders in another case it may be optimal to impose less severe penalties on repeat offenders and in the two remaining cases the optimal penalty does not change

endogenous private safety investment and the willingness to pay for mortality risk reductions when individuals cannot undertake safety improving expenditures the effect of an increase in the initial risk on the willingness to pay wtp for mortality risk reduction is positive because of the dead anyway effect when they can undertake safety improving expenditures the effect of an increase in the initial risk is governed by two effects the dead anyway effect which is positive and the high payment effect which is negative we treat the two types of risk reducing expenditures endogenous and exogenous as inputs in a safety improving technology function and find conditions that guarantee that the high payment effect dominates

optimal provision of public goods a synthesis the standard approach to the optimal provision of public goods highlights the importance of distortionary taxation and distributional concerns a new approach neutralizes distributional concerns by adjusting the income tax schedule we demonstrate that both approaches are derived from the same basic formula we also take the new approach further by deriving an intuitive formula for the optimal level of public goods without imposing strong assumptions on preferences this formula shows that distortionary taxation has a role to play as in the standard approach however the main determinants of optimal provision are different and the modified samuelson rule is likely to lead to underprovision

welfare reform in european countries a microsimulation analysis this article compares the effects of increasing traditional welfare to introducing in work benefits in the 15 pre enlargement countries of the european union we use a labour supply model encompassing responses to taxes and transfers along both the intensive and extensive margins and the euromod microsimulation model to estimate current marginal and participation tax rates we quantify the equity efficiency trade off for a range of elasticity parameters in most countries because of large existing welfare programmes with high phase out rates increasing traditional welfare is undesirable unless the redistributive tastes of the government are extreme in contrast the in work benefit reform is desirable in a very wide set of cases

us consumers willingness to pay for green electricity abstract we analyze us consumers demand for environmental attributes of deregulated residential electricity services using results from a survey designed to elicit consumers willingness to pay for such attributes and using results from a hedonic analysis of actual price premiums charged for green electricity in several deregulated markets survey results suggest that many population segments are willing to pay for decreased air emissions even if there is no alteration in fuel source furthermore several groups are willing to pay significantly more when emissions reductions stem from increased reliance upon renewable fuels the hedonic analysis suggests that several product features not considered in the survey help explain real price premiums including fuel mix from newly created renewable generation capacity green e certification brand name and state of offer while survey and hedonic results are not easily compared due to limitations of the survey both point to similar values for key environmental attributes though the survey results are likely to overstate actual willingness to pay in sum the results suggest that consumer driven purchases can in part support the future of renewable generation capacity in the united states though reliance upon other policy alternatives may be needed if energy prices spike

the enforcement of pollution control laws inspections violations and self reporting targeting is the practice of inspecting firms most likely to violate a regulation this paper provides empirical evidence on the role of targeting in regulatory compliance i propose that self reporting by a firm is used to demonstrate that firms are willing to cooperate the results indicate that there is a one quarter penalty period following a violation inspections are also determined by the economic situation of the surrounding community demonstrating that targeting opens the door to interest group influence inspections that detect violations encourage self reporting showing that firms demonstrate their desire to cooperate with regulators by disclosing violations

determinants of pollution abatement in developing countries evidence from south and southeast asia abstract developing countries pa ticularly those in asia are fast adopting industrial pollution control standards similar to those in developed countries formal regulation has been greatly hampered however by the absence of clear and legally binding regulations limited institutional capacity lack of appropriate equipment and trained personnel and inadequate information on emissions one would predict highly pollution intensive production under such conditions our research however has uncovered strongly contradictory evidence despite weak or nonexistent formal regulation there are many clean plants in the developing countries of south and southeast asia of course there are also many plants which are among the world s most serious polluters what explains such extreme interplant variation this paper reviews evidence drawn from three empirical studies of plant level abatement practices conducted 1992 1994 the analyses test the importance of plant characteristics economic considerations and external pressure in determining environmental performance the results consistently show that pollution intensity is negatively associated with scale productive efficiency and the use of new process technology it is strongly and positively associated with public ownership but foreign ownership has no significant effect once other plant characteristics are taken into account among external sources of pressure community action or informal regulation emerges as a clear source of interplant differences in all three studies the results suggest that local income and education are powerful predictors of the effectiveness of informal regulation they also show that existing formal regulation has measurably beneficial effects even when it is quite weakly developed

effects of institutional history and leniency on collusive corruption and tax evasion we investigate the effects of an institutional mechanism that incentivizes taxpayers to blow the whistle on collusive corruption and tax compliance we explore this through a formal leniency program in our experiment we nest collusive corruption within a tax evasion framework we not only study the effect of the presence of such a mechanism on behavior but also the dynamic effect caused by the introduction and the removal of leniency we find that in the presence of a leniency mechanism subjects collude and accept bribes less often while paying more taxes but there is no increase in bribe offers our results show that the introduction of the opportunity to blow the whistle decreases the collusion and bribe acceptance rate and increases the collected tax yield it also does not encourage bribe offers in contrast the removal of the institutional mechanism does not induce negative effects suggesting a positive spillover effect of leniency that persists even after the mechanism has been removed

optimal bypass and cream skimming this paper develops a normative model of regulatory policy toward bypass and cream skimming it analyzes the effects of bypass on second degree price discrimination on the rent of the regulated firm and on the welfare of low demand customers it shows that pricing under marginal cost may be optimal for the regulated firm excessive cream skimming occurs if access to the bypass technology is not regulated and the prohibition of bypass may increase or decrease the regulated firm s rent jel 026 613 the regulation of natural monopolies is often associated with policies toward competition including restrictions on entry this paper is concerned with a common form of competition which threatens the regulated firm on its most lucrative markets examples abound in the telecommunications industry the development of microwave radio and communication satellites in the 1960 s introduced the possibility that big telecommunication customers might bypass the major common carrier att and the 1978 natural gas policy act in the united states has created the possibility for industrial plants to bypass the local distribution utilities by building direct connections to the pipelines gas producers or intermediaries

credible communication in dynastic government abstract this paper studies information disclosure in a model of dynastic government when information about past policy choices comes exclusively from the reports of previous administrations each administration has an incentive to choose its suboptimal one shot expenditure policy and then misrepresent its choice to its successor consequently it has been suggested that horizontal accountability i e a system of governance where auditing functions lie outside the executive branch can ensure credible disclosure of a government s activities this paper suggests a cautious approach to that view the baseline model examines the reporting incentives of an external auditor who can independently verify the information each period even with auditing credible disclosure is shown to be problematic various extensions to this baseline model are examined in one extension liberal i e those prefering larger government expenditures and conservative those prefering smaller expenditures regimes and auditors evolve over time it is shown that conservative liberal auditors are not credible when the current regime is also conservative liberal moreover because information transmission stops when the auditor s and the regime s biases coincide effective deterrents even in the good periods when the auditor s and the administration s biases differ are difficult to construct in all periods the equilibrium requirement of auditor neutrality constrains the dynamic incentives for efficient policy choices these constraints are shown to bind away from optimal policies in standard constructions of equilibrium various ways in which auditing protocols can overcome these problems are discussed

a theory of consumer boycotts under symmetric information and imperfect competition this article models strategic interactions between non identical duopolistic firms and a public interest environmental organisation eo that promotes green production practices by threatening consumer boycotts against brown producers the article describes when boycotts are deterred by prior firm commitments to be green and also when a boycott arises in equilibrium despite symmetric information when a boycott arises it is either a small persistent boycott against the small firm in the industry or a large transitory boycott against the large firm in the industry that prompts the target firm to accede to the boycott demands quickly

a generalized approach to multigeneration project evaluation 1 introductionit is well known that the choice of discount rate plays a significant role in the ranking of projects with varying time paths of costs and benefits for public projects the choice of the appropriate social discount rate sdr is not clear cut even in the context of short lived projects in which costs and benefits occur within a single generation in particular when capital taxes produce a wedge between gross and net rates of return should one discount at the economy s rate of return the before tax rate or the individual s rate of return the after tax rate in the single generation context the literature falls in two camps 1 one camp argues that the appropriate sdr is a weighted average of the gross and net rates of return with weights typically determined by the fractions of resources drawn from consumption and private investment respectively 2 a second camp argues that future benefits should be discounted at the net rate of return but that the initial investment should be multiplied by a scale factor so that the direct costs of the project can be expressed in terms of consumption units 3both approaches suffer from severe implementation problems for the first approach there is no general formula for the weights needed to calculate the sdr as a weighted average of two market rates of return dreze 1974 indeed the appropriate sdr to use is project specific stiglitz 1982 without a systematic methodology to derive project specific sdrs the weighted average approach is hard to implement for the second approach which equalizes the sdr to the net rate of return the scale factor the opportunity cost of public investment must be quantified the opportunity cost of public investment depends on whether resources come from private investment or consumption and on the calculation of the present value of the future consumption yielded by a unit of capital discounted at the net rate of return that is the shadow price of capital as lind 1997 points out however there is no general agreement on a specific procedure for calculating the shadow price of capital indeed the concept of the opportunity cost of public investment suffers the same project dependence problem as the first view of the sdr diamond 1968 multigeneration projects such as nuclear waste disposal natural resource conservation or even social security reform further complicate discount rate choice specifically intergenerational equity in addition to intertemporal efficiency plays a role in determining the appropriate social discount rate for multigeneration public project evaluation 4 as in the single generation context there are two competing views on the appropriate discount rate when evaluating multigeneration projects the descriptive and the prescriptive approaches 5the descriptive approach to discounting is a market based approach it does not rely on an explicit social welfare function swf or the pure time preference rate embedded in the swf however the descriptive approach works under the assumption that intergenerational compensation through changes in the tax debt policy is available 6 it is argued that under appropriate intergenerational compensation the market rates of return are still relevant for calculating the sdr for multigeneration project evaluation and in general the sdr should be a weighted average of the gross and net rates of return this descriptive view of setting the sdr equal to the market return appears to underlie the office of management and budget s omb adoption of 7 as the appropriate discount rate for federal programs 7the intent of the prescriptive approach is to use the social discount rate as an expression of ethical judgment on how consumption of future generations should be compared to consumption of current generations

optimality and sustainability regulation and intermodal competition in telecommunications as regulators continue to open utility markets to entry new market contestants may specialize in providing service for the utility s largest customers consequently old utility pricing procedures may no longer be sustainable taking telecommunications regulation as an example this article develops optimal pricing strategies for utilities that have large customers who have other attractive service options i demonstrate that under an optimal nonuniform price schedule utilities can legitimately price high level usage below its associated marginal usage cost furthermore customers will make economically efficient choices when deciding whether to forego utility service

tax revenue and the marginal cost of public funds in sweden abstract we assess the welfare cost of raising a marginal unit of tax revenue in a balanced budget general equilibrium framework the calculated social cost of an increment of public funds is sensitive to both the specific type of tax increase and the type of public spending used on the margin best guess assumptions on labor supply elasticities yield marginal costs of public funds for different fiscal mixes of between 0 67 and 4 51 at prevailing tax rates in sweden alternative labor supply assumptions well within the range of current estimates substantially affect the results and can imply infinite marginal welfare costs marginal welfare costs are also sensitive to assumptions about both the income and substitution effects of labor supply

public economics and the theory of public policy when james mirrlees and william vickrey were awarded the nobel prize in economics last year it marked only the third time that the award had gone to scholars of public sector economics in contrast to the reception given to the previous two winners ronald coase and james buchanan the news was greeted with some bewilderment by policy specialists once removed from the academic literature who are mirrlees and vickrey and what have they done that has been of lasting benefit to the study of public economics let alone of practical benefit to policy makers this seems to me to be a fair question coase after all had set out a conceptual approach to the study of externalities and transaction costs that has become an implicit part of the methodological baggage carried around by policy economists and policy makers alike buchanan was in part responsible for the welcome emphasis on institutions in public sector decision making and for insisting that politicians bureaucrats and voters are human beings with human motives the legacy of mirrlees and vickrey is less well known but i would argue it is every bit as profound their approach to the theory of economic policy which is grounded on the importance of imperfect information as a constraint on public policy has changed the very nature of public economics research and of its implications for economic

durable goods monopoly with stochastic values i analyze a durable goods model that allows consumers values to vary over time the optimal mechanism for a monopolist is computed and compared to both the sales and leasing equilibria i show that sales may implement the optimal strategy and that the dominance of leasing over sales is not necessarily true this implication is consistent with the prevalence of simple sales contracts in many markets copyright 2001 by the rand corporation

environmentalism stimulus and inequality reduction through industrial policy did cash for clunkers achieve the trifecta the 2009 american cash for clunkers program which subsidized consumers who scrapped old vehicles and purchased new vehicles was promoted by appealing to multiple constituencies we evaluate the policy and alternatives according to its stated goals emissions reductions economic stimulus and reducing inequality we calibrate a dynamic partial equilibrium portfolio model to match consumer expenditure data from 1998 to 2011 focusing on heterogeneity across cars and trucks we find the program generated 0 17 in environmental benefits 0 28 in consumer surplus and 0 31 in net discounted additional spending per subsidy dollar since subsidies largely went to middle income infra marginal consumers the program exacerbated consumption inequality we evaluate alternative policy designs and find no policy which simultaneously improves all outcomes jel h23 l52 l92 d63

incentive generating state dependent penalty system the case of income tax evasion abstract penalty systems can very often be looked upon as corrective measures established in order to eliminate or reduce costly externalities generated by optimizing economic agents hence penalties can be viewed as regulatory measures and their efficient structure should be of interest to economists we propose a dynamic incentive generating penalty system which if instituted may reduce at a given cost the generation of undesirable externalities the special case to which we refer is income tax evasion although our scheme should be applicable to any kind of externalities such as pollution of the environment violation of antirust laws and others which are created by repititive actions of economic agents

an experimental study of compliance and leverage in auditing and regulatory enforcement evidence suggests that a large majority of firms and individuals comply with regulations and tax laws even though the frequency of inspections and audits is often low moreover fines for noncompliance are also typically low when regulatory violations are discovered these observations are not consistent with static compliance models harrington 1988 modified these static models by specifying a dynamic game in which some agents have an incentive to comply even when the cost of compliance each period is greater than the expected penalty this paper reports a laboratory experiment based on the harrington model framework in which subjects move between two inspection groups that differ in the probability of inspection and severity of fine subjects decide to comply or not in the presence of low medium or high compliance costs enforcement leverage arises in the harrington model from movement between the inspection groups based on previous observed compliance and noncompliance our results indicate that consistent with the model violation rates increase when compliance costs become higher and as the probability of switching groups becomes lower behavior does not change as sharply as the model predicts however since violation rates do not jump from 0 to 1 as parameters vary across critical thresholds a simple model of bounded rationality explains these deviations from optimal behavior

community pressure for green behavior the desire to avoid rousing community hostility may encourage firms to behave in an environmentally responsible manner firms may engage in corporate social responsibility csr to maintain community support and or to regain the support of a community where it has been lost it has been conjectured that such informal regulation could effectively replace formal intervention in some settings and usefully complement it in others we explore these conjectures with mixed results informal regulation is necessarily less efficient than a well designed formal alternative and the pattern of green behavior induced by the threat of community hostility may increase or decrease welfare the existence of community pressure may increase or decrease the optimal calibration of a formal intervention in this case an environmental tax and may complement or detract from the incentives generated by an optimally calibrated tax

avoiding tax avoidance a repeated game theoretic approach abstract we propose an optimal auditing scheme for the tax authorities who face a given tax and penalty functions and a given budget constraint under our proposed strategy individuals can be classified into one of three groups each group is characterized by two parameters i the probability of being audited in that group and ii into which group will an individual move if ii a he reported truthfully ii b he cheated it is then shown that there is a choice of these parameters so that in equilibrium i e when every individual maximizes his payoff given the auditing strategy the percentage of individuals that cheat is arbitrarily small

on the marginal cost of public funds and the optimal provision of public goods abstract this paper argues that in models with heterogeneous agents the concept of the marginal cost of public funds mcpf will only be useful if it is compared with an analogous concept for the benefit side the mcpf does not assume a unique value and is not particularly illuminating in and out of itself also gone is the benchmark status of mcpf 1 turning to the provision of public goods using a mechanism design approach the paper constructs a two stage proof for kaplow s kaplow l 1996 the optimal supply of public goods and the distortionary cost of taxation national tax journal 49 513 533 proposition concerning the irrelevance of labor supply and distributional concerns in public good provision this highlights the two fundamental ingredients for his result first the provision of public goods per se when it satisfies the samuelson s rule is only potentially pareto improving second the actual pareto improvement will materialize when or if one reforms the income tax structure if the reform is not forthcoming the decision on public goods provision must rely on redistributional concerns finally the paper generalizes broadway and keen s boadway r keen m 1993 public goods self selection and optimal income taxation international economic review 34 463 478 result to a model with many types of agents many private goods and without making any assumptions regarding which self selection constraints are or are not binding

formal and informal regulation of industrial pollution comparative evidence from indonesia and the united states the authors start from the premise that governments act as agents of the public in regulating pollution using the instruments at their disposal but when formal regulatory mechanisms are absent or ineffective communities will seek other means of translating their preferences into reality recent empirical work suggests the widespread existence of such informal regulation communities are often able to negotiate with or otherwise informally pressure polluting plants in their vicinity to clean up their thesis is that such informal regulation is likely wherever formal regulation leaves a gap between actual and locally preferred environmental quality they use plant level data from indonesia and the united states two countries that are very different both socio economically and in terms of pollution regulation to test a model of equilibrium pollution under informal regulation their results suggest three common elements across countries and pollutants abatement is generally subject to significant scale economies within country variations in labor and energy prices have little impact on pollution intensity community incomes have a powerful negative association with pollution intensity their findings on community income are especially important as they suggest a powerful role for informal regulation whether or not formal regulation is in place the impact of income disparity on inter county differences in u s pollution intensities seems to match the impact in indonesia undoubtedly this reflects differences in both preference for environmental quality and ability to bring pressure on polluting factories the fact that such disparities exist in the united states even for traditionally regulated pollutants shows that u s regulation has not been able to ensure uniform environmental quality for all citizens regardless of income class

subgame perfect punishment for repeat offenders i introduction the literature on optimal law enforcement typically assumes that the government can commit to sanction schemes 1 this means the government can use any set of threats to penalize wrongdoers in particular if a crime occurs the government actually sanctions the wrongdoers even though ex post it may have no incentive to do so potential wrongdoers believe that the government will carry out the threat at any cost and therefore do not engage in the act in the first place in this article i give up the assumption that the government can commit to whatever sanction scheme i consider the analysis of optimal sanctions without the possibility to commit important because judges often have a lot of discretion as to the size of the penalty they may for example adjust sanctions to the financial possibilities age education and so on of the wrongdoer accordingly i allow only for sanctions that the government actually wishes to implement should a crime have occurred ruling out full commitment changes the optimal enforcement schemes suppose for example the government does not care about the sanction as is typically assumed in the literature then it will not enforce the penalty if a crime has happened given that there is say a small cost of doing so the rational criminal will anticipate the ex post enforcement behavior of the government therefore she will commit the crime because the threat of being sanctioned is not credible once one drops the commitment assumption the typical deterrence equilibria of the law enforcement literature between potential wrongdoers and the government are based on empty threats in the language of game theory the equilibria are not subgame perfect or time consistent i study the problem of subgame perfect sanctions using the framework of emons 2003 agents may commit a crime twice the act is inefficient the agents are thus to be deterred the agents are wealth constrained so that increasing the fine for the first offense means a reduction in the possible sanction for the second offense and vice versa the agents may follow history dependent strategies that is commit the crime a second time if and only if they were were not apprehended the first time the government seeks to minimize the probability of apprehension ignoring the government s commitment problem it is optimal to set the sanction for the first offense equal to the entire wealth of the agents while the sanction for the second offense equals zero the intuition is as follows a money penalty imposed for the second offense reduces the amount a person can pay for the first offense because the wealth available to pay penalties is assumed to be fixed over the two periods for that reason a higher probability event namely a first offense that is detected will be more effective use of the scarce money penalty resource than a lower probability event namely a second detected offense why is the probability of detection lower for the second rather than for the first crime simply because an agent faces the possibility of being sanctioned for the second crime if and only if he or she has already been sanctioned the first time for further results it is important to note that the optimal probability of apprehension increases with the benefit from the crimes this decreasing sanction scheme raises of course the issue of time consistency will the government really charge the agent the entire wealth when she was apprehended for the first crime knowing that then she will commit the second act for sure isn t it better for the government to renege and charge little for the first act so that the agent still has sufficient wealth to pay a sanction that deters the second crime given that the first act has been committed anyway that way the government can at least deter the second act to study this problem i consider a rent seeking government