Estate tax and lifetime income inequality

This paper constructs a heterogeneous, intertemporal general equilibrium framework which integrates both intended and unintended bequest motives to examine the long-run effects of an estate tax on the inequality of lifetime income. The results are ambiguous in general and sensitive to the type of transfer motive involved. We find that in the purely intended bequest case, an estate tax increases the steady-state inequality of net lifetime income in the case where people's elasticity of intertemporal substitution is greater than one. However, in the purely unintended bequest case, the effect of an estate tax on inequality is dependent on the probability of survival.     

Risky human capital and deferred capital income taxation

We study the structure of optimal wedges and capital taxes in a dynamic Mirrlees economy with endogenous distribution of skills. Human capital is a private, stochastic state variable that drives the skill process of each individual. Building on the findings of the labor literature, we construct a tractable life-cycle model of human capital evolution with risky investment and stochastic depreciation. In this setting, we demonstrate the optimality of (a) a human capital premium, i.e., an excess return on human capital relative to physical capital, (b) a large intertemporal wedge early in the life-cycle, and (c) a non-zero intratemporal wedge even at the top of the skill distribution at all dates except the last date in the life-cycle. The main implication for the structure of optimal linear capital taxes is the necessity of deferred taxation of physical capital. The average marginal tax rate on physical capital held in every period is zero in present value. However, expected capital tax payments do not equal zero in every period. Necessarily, agents face negative expected capital tax payments early in the life-cycle and positive expected capital tax payments late in the life-cycle.     

Redistributive effects of minimal equal sacrifice taxation

We examine the circumstances under which minimal equal sacrifice taxation reduces income inequality. Focusing on absolute sacrifice and relative inequality, we show that after tax incomes are more equally distributed than before tax incomes and that after tax inequality decreases with the revenue to be raised if and only if the elasticity of the marginal utility of income is decreasing. However, other things equal, after tax inequality is shown to decline as the utility function becomes more concave. We investigate next how these conclusions extend when one takes the absolute inequality view and considers that it is the relative loss in utility that has to be equalized across individuals.     

The public and private provision of pure public goods and the distortionary effects of income taxation: a political economy approach

Abstract .  A pure public good is provided by the government and the voluntary contributions of two types of households. The government finances its contribution by means of income taxation. The latter has distortionary effects. A third type of household never makes contributions. We analyse the effects of changes in the income tax rate on (a) the provision of the public good, (b) the private contributions of the households, and (c) changes in the distribution of income and welfare between contributing and non-contributing households. We derive a simple and testable condition under which the lowering of the income tax entails a Pareto improvement.     

On the optimality of optimal income taxation

The Mirrleesian model of income taxation restricts attention to simple allocation mechanism with no strategic interdependence, i.e., the optimal labor supply of any one individual does not depend on the labor supply of others. It has been argued by Piketty (2009) [12] that this restriction is substantial because more sophisticated mechanisms can reach first-best allocations that are out of reach with simple mechanisms. In this paper, we assess the validity of Piketty?s critique in an independent private values model. As a main result, we show that the optimal sophisticated mechanism is a simple mechanism, or, equivalently, a Mirrleesian income tax system.     

Efficiency in Crime Prevention: A Case Study of the Lisbon Precincts

This paper analyzes the technical efficiency of the Lisbon police precincts in order to investigate its performance. A stochastic cost frontier model is used to generate efficiency scores, assuming that efficiency is time varying. It investigates its efficiency and finds that the results are, at best, mixed since the efficient scores are low and not time varying. Therefore, an alteration of management procedures is proposed in order to enable efficiency to be increased based on a governance–environment framework.Financial support from Fundação para a Ciência e Tecnologia/MCT under FCT/POCTI partially funded by FEDER is gratefully appreciated. The authors also thank the participants at the International Atlantic Economic Conference in Lisbon, Portugal, March 10–13, 2004 for helpful comments. For our mistakes, the usual disclaimer applies.     

Cooperators and reciprocators: A within-subject analysis of pro-social behavior

We perform a within-subject analysis of pro-social behavior in the public-good and gift-exchange game. We find that participants classified as cooperators in the public-good game tend to reciprocate higher wages in the gift-exchange game with higher levels of effort. Non-cooperators do not exhibit such tendency. Both types offer similar wages.     

Theories of behavior in principal-agent relationships with hidden action

In a laboratory experiment, we investigate behavior in a principal-agent situation with moral hazard. We evaluate the predictive success of two theories. One is the standard agency theory, which assumes that the agent will accept any contract offer that satisfies his participation constraint, typically requiring zero expected utility. The other is the “fair-offer” theory suggested by Keser and Willinger [2000. Principals’ principles when agents’ actions are hidden. International Journal of Industrial Organization 18 (1), 163-185], which requires that the principal provide full insurance against losses to the agent and leave him a share of at most 50% of the generated surplus. The treatment variable of our experiment is the cost of effort. As effort costs increase, expected net surplus of a contract decreases. We observe that fair-offer theory generally predicts observed contract offers better than standard agency theory. However, the predictive success of the fair-offer theory decreases, while the one of standard agency theory increases with decreasing expected net surplus.     

Fair wages survive multiple sources of income inequality

When an employee in a gift exchange game earns significantly less than the employer, the source of employer income does not affect effort choices. However, to induce one unit of effort, the employer has to pay higher wages than in a game without payoff inequality.     

Are corruption and taxation really harmful to growth? Firm level evidence

Exploiting a unique data set containing information on the estimated bribe payments of Ugandan firms, we study the relationship between bribery payments, taxes and firm growth. Using industry-location averages to circumvent potential problems of endogeneity and measurement errors, we find that both the rate of taxation and bribery are negatively correlated with firm growth. A one-percentage point increase in the bribery rate is associated with a reduction in firm growth of three percentage points, an effect that is about three times greater than that of taxation. This provides some validation for firm-level theories of corruption which posit that corruption retards the development process to an even greater extent than taxation.     

Bidding behavior in asymmetric auctions: An experimental study

We review an asymmetric auction experiment. Based on Plum (Int. J. Game Theory 20 (1992) 393) private valuations of the two bidders are independently drawn from distinct but commonly known distributions, one of which first-order stochastically dominates the other. We test the qualitative properties of that model of asymmetric auctions, in particular whether the weak bidder behaves more aggressively than the strong, and then test bidders’ preference for first- vs. second-price auctions.     

Fiscal rules of income transformation

Summary. The purpose of this paper is to characterize the class of fiscal rules of income transformation which are equity improving and, at the same time, preserve the ranking of existing distributions. Contrary to the related literature individual well-being depends not just on income but also on prices. We show that, when the environment is restricted such that a general transformation class still can be defined, the only “desirable” fiscal rule is the simple redistributive linear taxation schedule, of the same type that is the rule in practice in most economies. Received: May 8, 1997; revised version: September 15, 1997     

Group play in games and the role of consent in network formation

We study games played between groups of players, where a given group decides which strategy it will play through a vote by its members. When groups consist of two voting players, our games can also be interpreted as network-formation games. In experiments on Stag Hunt games, we find a stark contrast between how groups and individuals play, with payoffs playing a primary role in equilibrium selection when individuals play, but the structure of the voting rule playing the primary role when groups play. We develop a new solution concept, robust-belief equilibrium, which explains the data that we observe. We provide results showing that this solution concept has application beyond the particular games in our experiments.     

Cooperation under the threat of expulsion in a public goods experiment

In a public goods experiment with the opportunity to vote to expel members of a group, we found that contributions rose to nearly 100% of endowments with significantly higher efficiency compared with a no-expulsion baseline. Our findings support the intuition that the threat of expulsion or ostracism is a device that helps some groups to provide public goods.     

Optimal nonlinear taxation of income and savings without commitment

When a government is unable to commit to its future tax policies, information about taxpayers' characteristics revealed by their behavior may be used to extract more taxes from them in the future. We examine the implications of this ratchet effect for the design of redistributive income and savings tax policies in a two‐period model with two types of individuals who only differ in their skill levels. When commitment is not possible, it may be optimal to separate, pool, or partially pool different types in period one. The nature of the distortions to labor supplies and savings are investigated for each of these three regimes. The identification of the optimal regime is investigated numerically.     

An experimental investigation of wage taxation and unemployment in closed and open economies

We investigate experimentally the economic effects of wage taxation to finance unemployment benefits for a closed economy and an international economy. The main findings are the following. (i) There is clear evidence of a vicious circle in the dynamic interaction between the wage tax and unemployment. (ii) Employment is boosted by budget deficits but subsequent tax rate adjustments to balance the budget lead to employment levels substantially lower than theoretically predicted. (iii) A sales risk for producers due to price uncertainty on output markets appears to cause a downward pressure on factor employment. For labor the wage tax exacerbates this adverse effect.     

Not just babble: Opening the black box of communication in a voluntary contribution experiment

We let subjects in a voluntary contribution experiment make non-binding numerical announcements about their “possible” contributions and, in some treatments, send written promises to contribute specific amounts. We find that announcements were responded to both by others’ announcements and by real play, for example announcements led to costly punishment when found to be misleading. We also find that adding pre-play announcements to treatments with punishment can increase efficiency by letting cost-free warnings substitute for costly punishment. The threat of punishing false announcements and promises helps reduce false signals, but only when promise statements can be sent is the effect sufficient for achieving greater efficiency.     

Self-control in peer groups

Social influences on self-control underlie both self-help groups and many peer interactions among youths. To understand these phenomena, we analyze how observing each other's behavior affects individuals’ ability to deal with their own impulses. These endogenous informational spillovers lead to either a unique “good news” equilibrium that ameliorates behavior, a unique “bad news equilibrium” that worsens it, or to the coexistence of both. A welfare analysis shows that people will find social interactions valuable only when they have enough confidence in their own and others’ ability to resist temptation. The ideal partner, however, is someone with a slightly worse self-control problem than one's own: this makes his successes more encouraging, and his failures less discouraging.     

HIV testing,subjective beliefs and economic behavior

This paper examines the effects of learning HIV status on economic behavior among rural Malawians. According to economic life-cycle models, if learning HIV results is informative about additional years of life, being diagnosed HIV-positive or negative should predict changes in consumption, investment and savings behavior with important micro and macro-economic implications. Using an experiment that randomly assigned incentives to learn HIV results, I find that while learning HIV results had short term effects on subjective belief of HIV infection, these differences did not persist after two years. Consistent with this, there were relatively few differences two years later in savings, income, expenditures, and employment between those who learned and did not learn their status.     

The taxation of trades in assets

When the asset market is incomplete, there typically exist taxes on trades in assets that are Pareto improving. This fiscal policy is anonymous, it is fully and correctly anticipated by traders, and it results in ex post Pareto optimal allocations; as such, it improves over previously proposed constrained interventions.