Essays in Public Economics

This dissertation explores the impact of government interventions on economic outcomes. In the first chapter, my colleague Juan Carlos Suárez Serrato and I propose a new identification strategy to measure the causal impact of government spending on the economy. Our methodology isolates exogenous cross-sectional variation in government spending using a novel instrument. We use the fact that a large number of federal spending programs depend on local population levels. Every ten years, the Census provides a count of local populations. A different method is used to estimate non-Census year populations and this discontinuous change in methodology leads to variation in the allocation of billions of dollars in federal spending. We use this variation to analyze the effect of exogenous changes in federal spending across counties on local economic outcomes. Our IV estimates imply that government spending has a local income multiplier of 1.88 and an estimated cost per job of $30,000 per year. These estimates are robust to the inclusion of potential confounders, such as local demand shocks. We also show that the local effects of government spending are not larger than aggregate effects at the MSA and state levels. Finally, we characterize the cross-sectional heterogeneity of the impacts of government spending. These results confirm that government spending has a higher impact in low growth areas and leads to reduction of inequality in economic outcomes./nThe second chapter uses timing of childbirth to measure the income effect of taxes on parents' labor supply. The IRS Residency Test states that families can claim a dependent for the entire fiscal year if the child was born at any time during the year. This rule provides an exogenous source of variation in tax liabilities for births that occur late in the year versus those that occur early the following year. By measuring the difference in earnings in the subsequent year for parents of December and January births, I can identify the impact of a one-time non-labor income shock on parents' labor supply since both groups face on average the same future stream of tax schedules after birth. Using data from two large scale household surveys in the United States, I find that a temporary increase in after-tax income leads to a significant decrease in mothers' earnings with an estimated income effect of -0.9. This result demonstrates that the income effect of taxes on labor supply can potentially be very large. It also highlights the crucial role of liquidity constraints in parents' labor supply decisions around the time of birth./nThe third chapter also uses timing of childbirth to measure the income effect of taxes on mothers' labor supply. The analysis is done using Canadian data. Until 1992, various provisions in the Canadian tax code gave important tax reductions to low and middle-income parents of eligible children. Families could claim a child as a dependent for the entire fiscal year if the child was born at any time during the year. In 1992, the last year the Canadian tax code featured these fiscal benefits, a two parent family claiming a dependent could save nearly a thousand dollars in taxes due to the Child Tax Credit, the dependent amount and the GST credit. Using this variation in tax liabilities, it is possible to identify the impact of a one-time non-labor income shock on mothers' labor supply. This important parameter has not been systematically measured in the literature on the effect of taxes on labor supply. Using natural experiments provided by tax reforms in various countries, the literature has mostly focused on changes in earnings due to the price effect of marginal tax rate changes. However, if the income effect of a tax change is large, observed elasticities of income with respect to net-of-tax rates understate the distortions associated with these changes.

Advisor: Saez, Emmanuel