Optimum Taxation of Each Year's Income

In this paper, a two‐type, two‐period model of optimum income taxation is investigated. I assume full commitment and that current income determines the agents' tax burden in each period. It is shown that such a tax system does not allow one to implement the optimal long‐term tax contract and that it implies positive marginal tax rates at the upper end of the income distribution.     

Illegitimacy,paternal financial responsibility,and the 1834 Poor Law Commission Report: the myth of the old poor law and the making of the new

The new poor law's bastardy clauses were amongst the most contested of the 1834 Act, and their unpopularity led to their (partial) reversal by 1844. The issue of paternal financial responsibility for the maintenance of illegitimate children was central to the reforms, and this article uses the Rural and Town Queries to show how parishes could enforce this responsibility effectively. This evidence could have been used as an alternative model of reform; instead, the Poor Law Commissioners misrepresented the operation of the law and recommended the abolition of affiliation. Rooted in the writings of Malthus, their proposals proved ultimately impracticable.     

Bank Credit Cards: Consumer Irrationality versus Market Forces

Why are bank card interest rates sticky? One explanation is bank card consumer irrationality, a potentially significant market failure requiring government intervention. Alternate explanations focus on efficient market forces. The 1989 Federal Reserve Survey of Consumer Finances data are not consistent with the consumer irrationality hypothesis. The data are consistent with a market-based model of demand for balances and suggest that consumers may rationally eschew search because small outstanding balances imply low returns to search.     

Optimal Aggregation of Money Supply Forecasts: Accuracy,Profitability and Market Efficiency

We present a general procedure for aggregating expert forecasts which exploits regularities in the structure of information within the forecaster population. Specific information structures lead to aggregation methods which adjust for additive bias, differences in individual accuracy, and correlation among forecasts. As an application, we construct composite predictions of the weekly change in the money supply from forecasts made by twenty major securities dealers, for which high positive correlation is found to be a significant characteristic. Due to instability in the information structure, our methods cannot improve on the accuracy of a simple average in this case. However, they do capture information about the correlation among money supply forecasts which is not fully impounded in short-term interest rates. Forecasts from our models accurately predict the direction of price changes for Treasury bills and Treasury bill futures after a money supply announcement.     

Testing Rationality in the Point Spread Betting Market

This paper presents empirical tests of market rationality using data from the point spread betting market on National Football League games. Data from this market avoid many common pitfalls of tests of rationality in conventional financial markets. The authors test for rationality with two types of tests, statistical and economic. Results of the tests reveal that the statistical tests cannot reject market rationality while the economic tests do reject market rationality.     

How Do Firms Respond to Political Uncertainty? Evidence from U.S. Gubernatorial Elections

We examine the joint response to political uncertainty along two margins: changes in real activity and voluntary disclosure. We focus on within-firm variation in exposure to ex ante competitive U.S. gubernatorial elections using data on preelection poll margins and firms’ state exposures. Despite real activity falling in the years leading up to a close election, we find that voluntary disclosure increases both in frequency and content, including mentions of risk in filings that reference states holding elections. Our tests use a decomposition of 8-K filings into real activity and voluntary disclosure to address the endogenous complementarity between these two responses. These results hold when using alternative ex ante measures of political uncertainty based on term-limited incumbents, historically competitive offices, or state legislature gridlock. Both effects of political uncertainty are stronger for firms in highly regulated industries and weaker for those least exposed to the local market, linking the real activity and disclosure responses to uncertainty.     

Management by the Numbers: A Formal Approach to Deriving Informational and Distributional Properties of “Unmanaged” Earnings

We explore the theoretical relation between earnings and market returns as well as the properties of earnings frequency distributions under the assumption that managers use unbiased accounting information to sequentially decide on real options their firms have and report generated earnings truthfully, with the market pricing the firm based on those reported earnings. We generate benchmarks against which empirically observed earnings‐returns relations and aggregate earnings distributions can be evaluated. This parsimonious model shows a coherent set of results: reported losses are less persistent than reported gains, decision making diminishes the S‐shaped market response to earnings and earnings relate to returns asymmetrically in the way documented by Basu [1997]. Furthermore, the implied frequency distribution of aggregate earnings is neither symmetric nor necessarily single‐peaked. Instead, it may exhibit a kink at zero and look similar to the plots reported by Burgstahler and Dichev [1997]. However, within our model, none of these phenomena are due to reporting noise, bias, or some undesirable strategic managerial behavior. They are the natural consequences of using past earnings as the basis for value increasing managerial decision making that in turn generates the future earnings on which future decisions will be based.     

Robustness and U.S. Monetary Policy Experimentation

We study how a concern for robustness modifies a policymaker's incentive to experiment. A policymaker has a prior over two submodels of inflation‐unemployment dynamics. One submodel implies an exploitable trade‐off, the other does not. Bayes' law gives the policymaker an incentive to experiment. The policymaker fears that both submodels and his prior probability distribution over them are misspecified. We compute decision rules that are robust to misspecifications of each submodel and of the prior distribution over submodels. We compare robust rules to ones that Cogley, Colacito, and Sargent (2007) computed assuming that the models and the prior distribution are correctly specified. We explain how the policymaker's desires to protect against misspecifications of the submodels, on the one hand, and misspecifications of the prior over them, on the other, have different effects on the decision rule.