aging and inequality in income and health in our earlier work we used data from the national health interview survey nhis to examine life cycle patterns in health status and in the joint distribution of health status and income deaton and paxson 1998 in this paper we summarize and extend those results and provide new evidence from the panel study of income dynamics psid both surveys contain a measure of household income and collect information on an ordinal measures of self reported health status srhs that ranges from 1 excellent to 5 poor section i concerns problems related to the measurement of inequality in health section ii presents evidence from the two surveys on health and income inequality this abstract was borrowed from another version of this item

learning and wage dynamics we develop a dynamic model of learning about worker ability in a competitive labor market the model produces three testable implications regarding wage dynamics 1 although the role of schooling in the labor market s inference process declines as performance observations accumulate the estimated effect of schooling on the level of wages is independent of labor market experience 2 timeinvariant variables correlated with ability but unobserved by employers such as certain test scores are increasingly correlated with wages as experience increases and 3 wage residuals are a martingale we present evidence from the nlsy that is broadly consistent with the model s predictions

the trick is to live is the estate tax social security for the rich because estate tax liability usually depends on how long one lives it implicitly provides annuity income in the absence of annuity markets lump sum estate taxation may be used to achieve the first best solution for individuals with a sufficiently strong bequest motive calculations of the annuity embedded in the u s estate tax show that people with 10 million of assets may be effectively receiving more than 100 000 a year financed at actuarially fair rates by their tax payments according to my calibrations the insurance effect reduces the marginal cost of funds mcf for the estate tax by as much as 30 percent and the resulting mcf is within the range of estimates for the mcf for the income tax

exploration decisions and firms in the mineral industries abstract the purpose of this paper is to demonstrate how physical characteristics of deposits and results of past exploration enter future exploration decisions a proposed decision model is presented that is consistent with a set of primitive probabilistic assumptions associated with deposit size distributions and discoverability analysis of optimal field exploration strategy showed the likely firm responses to alternative exploration taxes and effects on the distribution of future discoveries examination of the probabilistic elements of the decision model indicates that changes in firm expectations associated with the distribution of deposits cannot be totally offset by changes in economic variables

relative prices as aggregate supply shocks with trend inflation ball and mankiw 1995 use a static menu cost model to explain the historical behavior of the first and higher moments of commodity price changes in u s producer prices we show that when appropriately modified for a world of positive trend inflation and forward looking behavior by firms the menu cost model predicts a much weaker possibly zero correlation between the mean and the skewness of price changes than that found in the data

inflation and the distribution of price changes this paper reconsiders the empirical evidence connecting inflation to its higher order moments in particular we examine the statistical properties of the observed positive correlation between the sample mean and the sample cross sectional skewness of price changes this correlation has attracted substantial attention over the years and has recently been the focal point of a debate among macroeconomists we show that the sample mean skewness correlation suffers from a small sample bias that accounts for the entirety of the observed correlation in other words we establish that one of the stylized facts in the literature on aggregate price behavior need not be a fact at all

how should capital be taxed this survey discusses how capital should be taxed in advanced economies we review the theoretical optimal tax literature survey empirical studies on the distribution of capital and the distortion

the relationship between relative prices and the general price level it is very nearly a truismi amaong neoclassical economists that the public is wont to confuse changes in the general price level with relative price changes correspondingl y one might speak of the independence between the two as one of the central postulates of the neoclassical tradition william stanley jevons was aml ong the first to identify this basic dichotomin economic life as well as to attempt to explain the ordinary citizen s seenming incapacity to understand it

the dynamics of health in the british household panel survey this paper considers the dynamics of a categorical indicator of self assessed health using eight waves 1991 1998 of the british household panel survey bhps our analysis has three focal points the relative contributions of state dependence and heterogeneity in explaining the dynamics of health the existence and consequences of health related sample attrition and the investigation of the effects of measures of socioeconomic status with a particular focus on educational attainment and income to investigate these issues we use dynamic panel ordered probit models there is clear evidence of health related attrition in the data but this does not distort the estimates of state dependence and of the socioeconomic gradient in health the models show strong positive state dependence and heterogeneity accounts for around 30 of the unexplained variation in health copyright 2004 john wiley sons ltd

an equilibrium analysis of relative price changes and aggregate inflation abstract inflation is positively correlated with the variability of relative prices as measured by the standard deviation of the cross section distribution of prices and also with the third moment skewness of the cross section distribution of prices the conventional interpretation of these relationships is that they reflect sluggishness in the adjustment of individual prices in response to shocks in this paper we question this interpretation first we show that similar correlations among the moments exist in alternative measures of underlying technology shocks second when these shocks are fed into a general equilibrium model with multiple sectors and flexible prices the resulting prices also display a positive correlation between aggregate inflation and skewness of the cross section distribution

the effect of pensions on longevity evidence from union army veterans this study uses changes in pension laws for union army veterans as a natural experiment to estimate the causal effect of pensions on longevity and to examine potential pathways underlying such a relationship we examine the effects of the pension laws of 1907 and 1912 which granted old age pensions to union army veterans life expectancy for veterans who received such a pension increased by 0 5 years and 2 7 years respectively the effect of veteran pensions on longevity was large across wealth groups and size of city pensions reduced mortality for both acute and non acute causes of death

estate taxation with intended and accidental bequests abstract in this paper we examine the properties of the optimal estate tax in the presence of a complete set of tax instruments available to the social planner we allow for both types of bequest motives namely altruistic and accidental we examine the case for estate taxation which seems to be the strongest but not impeccable with accidental bequests in general the estate tax is highly sensitive to the relative importance of the two bequest motives

oil exploration and perceptions of scarcity the fallacy of early success abstract it has been suggested that oil exploration may lead to false perceptions of decreasing scarcity we perform a simulation of the exploration process using bayesian updating the approach enables us to isolate the information effect on the success rate and also to quantify the subjective expectation of the total resource size the area under exploration consists of a number of regions which may differ in their oil content exploration is performed with the goal to maximize the expected success rate the resulting information about the distribution of oil and the total resource size is assumed public knowledge a number of scenarios with variations in the dimensions of the area under exploration the oil distribution and initial beliefs are considered the results indicate that the information effect on the success rate is significant but brief it might have a considerable impact on price but is an unlikely mechanism behind a long term declining price trend however the information effect on expectations is gradual and persistent since exploration is performed in regions where the expected success rate is the highest the historical success rate will not be representative of the area as a whole an explorer will tend to overestimate the total resource size thereby suggesting an alternative mechanism for false perceptions of decreasing scarcity a mechanism that could be called the fallacy of early success

wealthier is healthier we estimate the effect of income on health using cross country timeseries data on health infant and child mortality and life expectancy and income per capita we use instrumental variables estimates using exogenous determinants of income growth to identify the pure income effect on health isolated from reverse causation or incidental association the long run income elasticity of infant and child mortality in developing countries lies between 0 2 and 0 4 using these estimates we calculate that over a half a million child deaths in the developing world in 1990 alone can be attributed to the poor economic performance in the 1980s

health and income a robust comparison of canada and the us abstract this paper uses sequential stochastic dominance procedures to compare the joint distribution of health and income across space and time it is the first application of which we are aware of methods to compare multidimensional distributions of income and health using procedures that are robust to aggregation techniques the paper s approach is more general than comparisons of health gradients and does not require the estimation of health equivalent incomes we illustrate the approach by contrasting canada and the us using comparable data canada dominates the us over the bottom part of the bi dimensional distribution of health and income though not generally over the uni dimensional distributions of health or income the paper also finds that welfare for both canadians and americans has not unambiguously improved during the last decade over the joint distribution of income and health in spite of the fact that the uni dimensional distributions of income have clearly improved during that period

aggressive oil extraction and precautionary saving coping with volatility the effects of stochastic oil demand on optimal oil extraction paths and tax spending and government debt policies are analyzed when the oil demand schedule is linear and preferences quadratic without prudence optimal oil extraction is governed by the hotelling rule and optimal budgetary policies by the tax and consumption smoothing principle volatile oil demand brings forward oil extraction and induces a bigger government surplus with prudence the government depletes oil reserves even more aggressively and engages in additional precautionary saving financed by postponing spending and bringing taxes forward especially if it has substantial monopoly power on the oil market gives high priority to the public spending target is very prudent and future oil demand has high variance uncertain economic prospects induce even higher precautionary saving and if non oil revenue shocks and oil revenue shocks are positively correlated even more aggressive oil extraction in contrast prudent governments deliberately underestimate oil reserves which induce less aggressive oil depletion and less government saving but less so if uncertainty about reserves and oil demand are positively correlated

interpreting the correlation between inflation and the skewness of relative prices a comment on bryan and cecchetti large literature in macroeconomics has examined how the inflation rate is related to the distribution of relative price changes this work has established a striking fact there is a strong correlation between inflation and the skewness of this distribution when inflation is high the distribution of relative price changes is typically skewed to the right when inflation is low it is skewed to the left the oil shocks of the 1970s are one example of this phenomenon inflation rose while a few goods oil products experienced especially large relative price increases but the inflationskewness correlation is not just a result of oil shock years this fact holds for many time periods and many countries e g vining elwertowski 1976 and ball mankiw 1995 for the united states amano macklem 1997 for canada de abreu lourenco and gruen 1995 for australia bryan and cecchetti 1999 argue that this fact need not be a fact at all because of small sample bias if true this is an important claim it would eliminate an apparently robust stylized fact that might otherwise hold a clue to understanding the causes or effects of inflation we are not however convinced by bryan and cecchetti s assertion our goal in this note is to explain why on its face bryan and cecchetti s claim is puzzling their paper presents a model in which there is an underlying true distribution of price changes and the observed distribution is obtained by sampling a subset of these price changes they show that the skewness of the sample distribution may be correlated with the sample mean even if there is no skewness in the population distribution this model however does not capture the reality of how price indices are constructed it is not the case that there are a large number of sectors and the government computes the cpi by sampling a small number of them instead the government measures prices in all sectors of which there may be a small or large number depending on the level of disaggregation the observed correlation of the mean and skewness is based on the full population of sectors so small sample bias does not appear to be possible because the data used to construct price indices are comprehensive one cannot avoid the conclusion that the inflation skewness correlation is a fact 1 if the idea of small sample bias is not relevant here how should one interpret the numerical simulations presented by bryan and cecchetti the substance of their argument we believe is that it is easy to explain the correlation between inflation and skewness previous authors have worked hard to explain this fact ball and mankiw 1995 propose that this correlation can be explained with menu cost models of price adjustment while balke and wynne 1996 argue that it can be explained by a multisector real business cycle model by contrast bryan and cecchetti generate the inflation skewness correlation in a much simpler model although it would be wrong to interpret their results as showing that the correlation doesn t exist one could plausibly interpret them as showing that this correlation doesn t prove anything as they put it such statistics are not useful in distinguishing sticky from flexible price setting behavior in macroeconomic models to evaluate this argument it helps to step back and review the motivation behind the ball mankiw and balke wynne theories the starting point for these authors is the classical theory of price determination central to this theory is the classical dichotomy relative prices are determined by real factors and the aggregate price level is determined by monetary factors specifically if there are n sectors in the economy there are n 1 relative prices real variables such as shifts in demand and costs in the various sectors determine these n 1 prices using any good or combination of goods as the numeraire the aggregate price level is determined by the supply and demand for money this idea is summarized by the quantity equation mv 5 py the n 1 relative prices and the price level which equals the average of all nominal prices together determine the n nominal prices in this classical model there is no obvious reason that the behavior of the aggregate price level is related to the distribution of relative prices if m v and y remain constant then p is constant and any shifts in the distribution of relative prices do not influence the price level to explain the observed inflation skewness correlation one must explain how the economy differs from this classical baseline balke and wynne offer one story for the inflationskewness correlation in their model certain shocks to the economy generate both skewness in the relative price distribution and changes in aggregate output for instance when opec raised oil prices relative prices in energy related sectors rose by 50 or more balanced by smaller relativeprice decreases in the rest of the economy this generated

accidental bequests a curse for the rich and a boon for the poor when accidental bequests signal otherwise unobservable individual characteristics such as productivity and longevity the population should be partitioned into two groups those who do not receive an inheritance and those who do the first tagged group receives a mirrlees second best tax schedule the second group when its type is fully revealed faces a first best tax schedule receiving an inheritance makes high ability types worse off and low ability types better off high ability individuals face a bequest tax of more than 100 percent while low ability types face a bequest tax that can be smaller as well as larger than 100 percent and it might even be negative

the desirability of commodity taxation under non linear income taxation and heterogeneous tastes abstract this paper revisits the atkinson stiglitz result on uselessness of commodity taxation in the presence of optimal non linear income taxation in a more general setup namely when tastes are heterogeneous this general analysis displays the key economic assumptions under which the atkinson stiglitz result is robust a small tax on a given commodity is desirable if high income earners have a relatively higher taste for this commodity or if consumption of this commodity increases with leisure an application to the case of savings suggests that even in the presence of optimal non linear earnings taxation there is a role for a supplemental capital income tax in the standard overlapping generation model

uncertainty optimal taxation and the direct versus indirect tax controversy this paper examines how the presence of uncertainty affects the design of tax policy when both indirect taxes and a general income tax are available to the government there are two categories of goods the consumption levels in one group are committed to before the resolution of uncertainty and those of the other after the paper proves that contrary to a b atkinson and j e stiglitz s 1976 result differential commodity taxation remains a useful instrument of optimal tax policy even if preferences are separable between labor and produced goods copyright 1995 by royal economic society

relative price changes as aggregate supply shocks this paper proposes a theory of supply shocks or shifts in the short run phillips curve based on relative price changes and frictions in nominal price adjustment when price adjustment is costly firms adjust to large shocks but not to small shocks and so large shocks have disproportionate effects on the price level therefore aggregate inflation depends on the distribution of relative price changes inflation rises when the distribution is skewed to the right and falls when the distribution is skewed to the left we show that this theoretical result explains a large fraction of movements in postwar u s inflation moreover our model suggests measures of supply shocks that perform better than traditional measures such as the relative prices of food and energy

production and investment in natural resource industries there has been a recent tendency for economists to view natural resource scarcity as a diminishing threat to man s existence and his ability to produce an abundant supply of worldly goods see john v krutilla this change in view has emanated from the world s experience of the last few decades with technological development and the absence of any evidence that this rapid accumulation of technical knowledge will cease in some respects one might think that modern technology has removed the need for an economic theory of conservation temporal allocation of natural resources on the other hand conservation of natural resources can now be looked upon with less emotion since the dire consequences of too rapid exploitation are no longer a threat the question of conservation is thus a cold economic problem removed from many of its older value connotations there is indeed considerable effort taking place in the economics profession to fill this need for a quantitative economic theory of conservation however with one exception vernon smith focus has been limited to specific resources earlier works by lewis c gray and harold hotelling concerning the theory of the mine have recently been extended in numerous papers see r cummings and 0 burt richard l gordon anthony scott 1967 problems associated with petroleum production are considered in paul davidson and the fishery is considered in j a crutchfield and arnold zellner h scott gordon james quirk and vernon smith anthony scott 1955 and ralph turvey an extensive literature exists on the temporal allocation of groundwater two recent contributions are gardner brown and charles b mcguire and burt a logical problem has been encountered however in efforts to examine the optimum allocation of a natural resource over time without explicitly considering the rate of investment associated with resource use this difficulty stems from the long life of many capital items used in the process of exploiting the natural resource earlier studies have either tacitly or explicitly amortized costs of investment associated with resource use and proceeded as though all costs of production were essentially variable smith was the first to explicitly bring capital investment into a production model for natural resources and his work was followed by the authors where only exhaustible resources were considered more recently quirk and smith have introduced a dynamic model of the fishery in which capital investment is treated explicitly it seems then that there is a need for a comprehensive model for simultaneously optimizing the rate of resource use and investment in natural resource industries

capital income taxation when inherited wealth is not observable this paper extends the atkinson stiglitz model of direct and indirect taxation to a dynamic setting with two unobservable characteristics productive ability and inherited wealth bequests are motivated by the joy of giving a child s inheritance is a random variable with a probability distribution that depends on his parent s investment in a bequest technology public borrowing is assumed and implies the modified golden rule we study the optimal tax policy when two instruments are available a non linear wage income tax and a proportional tax on capital income we show that the second instrument ought in general to be used but that the tax rate is not necessarily positive however a positive tax rate is more likely when there is a positive correlation between inherited wealth and innate ability

uncertain lifetime and intertemporal choice risk aversion as a rationale for time discounting this article makes explicit the links between preferences over lotteries on length of life and intertemporal choice it shows that the approach used by traditional life cycle models to account for uncertain survival corresponds to a strong assumption of risk neutrality with respect to length of life relaxing such an assumption leads us to develop a more general formulation of lifetime utility in which time discounting is directly related to preferences over length of life exponential and hyperbolic discounting are found to result in a first approximation from constant and hyperbolic risk aversion with respect to length of life