How to reduce unemployment: A new policy proposal
Journal of Monetary Economics, forthcoming
Abstract: This paper uses a model with a continuum of equilibrium steady state unemployment rates to explore the effectiveness of fiscal policy. The existence of multiple steady state equilibria is explained by the presence of search and recruiting costs. I use the model to explain the current financial crisis as a shift to a high unemployment equilibrium, induced by the self-fulfilling beliefs of market participants about asset prices. I ask two questions. 1) Can fiscal policy help us out of the crisis? 2) Is there an alternative to fiscal policy that is less costly and more effective? The answer to both questions is yes.
Estimating the Firm’s Labor Supply Curve in a “New Monopsony” Framework:
Schoolteachers in Missouri
Michael Ransom & David Sims
Journal of Labor Economics, April 2010, Pages 331-355
Abstract: In the context of certain dynamic models, it is possible to infer the elasticity of labor supply to the firm from the elasticity of the quit rate with respect to the wage. Using this property, we estimate the average labor supply elasticity to public school districts in Missouri. We leverage the plausibly exogenous variation in prenegotiated district salary schedules to instrument for actual salary. These estimates imply a labor supply elasticity of about 3.7, suggesting that school districts possess significant market power. The presence of monopsony power in this teacher labor market may be partially explained by its institutional features.
The Micro-geography of Tax Avoidance: Evidence from Littered Cigarette Packs
American Economic Journal: Economic Policy, May 2010, Pages 61–84
Abstract: The large tax differentials between Chicago and neighboring jurisdictions provide an incentive for cigarette tax avoidance. Data from a random sample of cigarette packs littered in Chicago reveals a startling degree of tax avoidance: three-quarters did not display a Chicago tax stamp. Also, the $2.68 difference between the tax in Chicago and surrounding counties decreases the probability of a local stamp by almost 60 percent, and a one mile increase in distance to the lower-tax state border increases the probability a pack of a local stamp by about one percent. These results are consistent with the predictions of economic theory.
Build America Bonds
Andrew Ang, Vineer Bhansali & Yuhang Xing
NBER Working Paper, May 2010
Abstract: Build America Bonds (BABs) are a new form of municipal financing introduced in 2009. Investors in BAB municipal bonds receive interest payments that are taxable, but issuers receive a subsidy from the U.S. Treasury. The BAB
program has succeeded in lowering the cost of funding for state and local governments with BAB issuers obtaining finance 54 basis points lower, on average, compared to issuing regular municipal bonds. For institutional investors, BAB issue yields are 116 basis points higher than comparable Treasuries and 88 basis points higher than comparable highly rated corporate bonds. For individual investors, BABs represent poor deals compared to regular municipal bonds. Thus, on average the Federal government subsidy disadvantages individual U.S. taxpayers, who are the main holders of municipal bonds, and benefits new entrants in the municipal bond market.
Public Provision of Private Goods and Nondistortionary Marginal Tax Rates
Sören Blomquist, Vidar Christiansen & Luca Micheletto
American Economic Journal: Economic Policy, May 2010, Pages 1–27
Abstract: Using an optimal taxation model combined with a previously neglected scheme of public provision of private goods, we show that there is an efficiency
gain if public provision of selected goods replaces market purchases and that efficiency requires marginal income tax rates to be higher than if the goods were purchased in the market. Part of the marginal tax serves the same role as a market price and conveys information about a real social cost of working more hours. It might be that economies with higher marginal tax rates have less severe distortions than economies with lower marginal tax rates.
Will Governments Fix What Markets Cannot? Overconfidence and the Demand for
Patrick Warren & Daniel Wood
Clemson University Working Paper, May 2010
Abstract: Market forces will sometimes "fix" consumer biases through competition that improves the welfare of biased consumers, and sometimes will not. Likewise, government regulation will sometimes fix consumer biases by making exploitative transactions difficult, and sometimes will not. We show that in the case of markets for goods with add-ons (Gabaix and Laibson, 2006) the instances where markets or government will fix biases (in our model, consumer overconfidence about add-on services such as overdraft fees) are correlated. In the same cases where markets are inefficient due to the prevalence of biased consumers, voters will not demand efficiency-enhancing regulations. This is because consumer biases have two effects: they produce deadweight losses, and they redistribute from biased consumers to
less-biased consumers. These distributional consequences can both prevent equilibrium competition by firms from enhancing efficiency and prevent equilibrium policy choices by citizens from regulating away inefficient trade.
”Unfunded liabilities” and uncertain fiscal financing
Troy Davig, Eric Leeper & Todd Walker
Journal of Monetary Economics, forthcoming
Abstract: A rational expectations framework is developed to study the consequences of alternative means to resolve the “unfunded liabilities” problem — unsustainable exponential growth in federal Social Security, Medicare, and Medicaid spending with no plan to finance it. Resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century. Beliefs based on that distribution determine the existence of and the nature of equilibrium. We consider policies that in expectation combine reaching a fiscal limit, some distorting taxation, modest inflation, and some reneging
on the government's promised transfers. In the equilibrium, inflation-targeting monetary policy cannot successfully anchor expected inflation. Expectational effects are always present, but need not have large impacts on inflation and interest rates in the short and medium runs.
(Nod to Kevin L)
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