You will need Acrobat Reader version 5.0 or higher in order to read these files. If you don't have it, you can download the installation software here
March 2009, co-authored with Charles Grant, Alex Michaelides and Mario Padula, forthcoming, Review of Economics and Statistics
Abstract: If households face uninsurable idiosyncratic earnings risk theory predicts that redistributive tax and transfer systems have both an insurance and a distortionary effect. Exploiting the substantial variation of tax and transfer systems across US states and over time we investigate the necessary traces of these two effects in the data: that state-level measures of redistributive taxation should correlate negatively with, (a) the standard deviation, and (b) the mean, of the within-state consumption distribution. We find that the first correlation is robust, supporting strongly the presence of an insurance effect. The distortionary effect can also be detected in the data but it is less precisely estimated.
Keywords: Undiversifiable Earnings Risk, Tax Distortions, Insurance
JEL classification: E21, H20, H31
Download Full Text PDF
See also a previous version, CEPR working paper DP6710 (needs subscription) here
January 2009, co-authored with Leonard J. Mirman and Marc Santugini, Journal of Economic Theory, 144, 280-295
Abstract: We introduce learning in the Brock and Mirman (1972) optimal growth model. Here, the agent makes consumption and investment decisions, while at the same time learning about an unspecified parameter of the distribution of the production shock governing the evolution of output. We then focus on learning in a class of optimal stochastic growth models studied by Mirman and Zilcha (1975) in order to study the effect of learning on optimal consumption. Learning has a profound effect on optimal consumption through increasing the uncertainty of future payoffs. We also analyze the effect of changes in the mean and riskiness of the distribution of the production shock and beliefs on optimal consumption.
Keywords: Bayesian Learning, Optimal Stochastic Growth, Consumption and Saving, Stochastic Orders
JEL classification: D8, D9, E2
Download FullText PDF
January 2009, co-authored with Carsten Schröder and Ulrich Schmidt, Journal of Business and Economic Statistics, 27(1), 42-51.
Abstract: Raising children demands a considerable amount of parental time, obliging working parents either to further reduce their leisure or to buy child-care services in the market. Parents may face additional opportunity costs upon deciding to participate in the labor market, but these are difficult to measure. Using a survey instrument in Belgium and Germany, we estimate the income compensation needed to maintain family well-being when adults work vs. when they do not enter the labor market. In both countries we find that full-time working parents face extra child costs and require higher labor-market-participation compensation compared to childless adults.
Keywords: equivalent income, household well-being, reservation wage, child costs, parental unemployment trap, survey method
JEL classification: D13, J22, J13, C42, I38, H31
Download FullText PDF
See also the supplemental material and download data and codes for this paper from the JBES website of the American Statistical Association here
August 2008, co-authored with Carsten Schröder and Ulrich Schmidt
Abstract: Modern macroeconomics empirically addresses economy-wide incentives behind economic actions by using insights from the way a single representative household would behave. This analytical approach requires that incentives of the poor and the rich are strictly aligned. In empirical analysis a challenging complication is that consumer and income data are typically available at the household level, and individuals living in multimember households have the potential to share goods within the household. The analytical approach of modern macroeconomics would require that intra-household sharing is also strictly aligned across the rich and the poor. Here we have designed a survey method that allows the testing of this stringent property of intra-household sharing and find that it holds: once expenditures for basic needs are subtracted from disposable household income, household-size economies implied by the remainder household incomes are the same for the rich and the poor.
Keywords: Linear Aggregation, Representative Consumer, Equivalence Scales, Survey Method, Household-Size Economies
JEL classification: C42, E21, D12, E01, D11, D91, D31, I32
Download FullText PDF
June 2007, co-authored with Elena Antoniadou and Leonard J. Mirman (Revision invited by Economic Theory)
Abstract: We study the impact of uncertainty on the strategies and dynamics of symmetric noncooperative games among players who exploit a non-excludable resource that reproduces under uncertainty. We focus on a particular class of games that deliver a unique Nash equilibrium in linear-symmetric strategies of resource exploitation. We show that, for this class of games, the tragedy of the commons is always present. For various changes in the riskiness of the random primitives of the model we provide general characterizations of features of the model that explain links between the degree of riskiness and strategic exploitation decisions. Finally, we provide a specific example that demonstrates the usefulness of our general results and, within the specific example, we study cases where increases in risk amplify or mitigate the tragedy of the commons.
Keywords: resource exploitation, stochastic non-cooperative dynamic games, tragedy of the commons, stochastic dominance
JEL classification: C73, C72, C61, Q20, O13, D90, D43
Download FullText PDF
May 2007, co-authored with Carsten Schröder and Ulrich Schmidt
Abstract: Different family types may have a fixed flow of consumption costs related to subsistence needs. We use a survey approach in order to identify and estimate such a fixed component of spending for different families. Our method involves making direct questions about the linkup between aggregate disposable family income and well-being for different family types. Conducting a pilot version of our survey in six countries, Germany, France, Cyprus, China, India and Botswana, we provide evidence that fixed costs of consumption are embedded in welfare evaluations of respondents. More precisely, we find that the relationship between welfare-retaining aggregate family incomes across different family types suggested by Donaldson and Pendakur (2006) and termed "Generalized Absolute Equivalence Scale Exactness" is prevalent and robust in our data. We use this relationship to identify subsistence needs of different family types and discuss potential problems and extensions.
Keywords: subsistence, equivalence scales, survey method, generalized absolute equivalence scale exactness
JEL classification: I31, I32, C42, D31, D12, D63
Download FullText PDF
March 2007, co-authored with Leonard J. Mirman Journal of Economic Theory, Vol. 133, March 2007, pp. 199-218
Abstract: We analyze imperfect competition in dynamic environments where firms use rivalrous but nonexcludable industry-specific capital that is provided exogenously. Capital depreciation depends on utilization, so firms influence the evolution of the capital equipment through more or less intensive supply in the final-goods market. Strategic incentives stem from, (i) a dynamic externality, arising due to the non-excludability of the capital stock, leading firms to compete for its use (rivalry), and, (ii) a market externality, leading to the classic Cournot-type supply competition. Comparing alternative market structures, we isolate the effect of these externalities on strategies and industry growth.
Keywords: Cournot competition, oligopolistic non-cooperative dynamic games, tragedy of the commons
JEL classification: D43, D92, L13, Q20, O12
Download Full Text PDF
Also download the previous version PDF - Department of Economics Working Paper Series, University of Vienna #0501
Also available as: SSRN Working Paper #643794
February 2007
Abstract: This paper provides families of time-separable, twice continuously differentiable, and strictly concave utility functions of a group of consumers that are both sufficient and necessary in order to have linear aggregation of individual demands in a singlecommodity-type deterministic dynamic environment. The analysis allows for consumer wealth-, labor-productivity, and preference heterogeneity, for alternative settings where the rates of time preference can be the same or different across consumers. The employed concept of linear aggregation is tightly linked with the requirement that a ‘representative consumer’ with a time-separable utility function exists. It is proved that when the rates of time preference are choice-independent and heterogeneous across consumers, linear aggregation of demands is possible if, and only if, the momentary utility functions of all consumers are exponential. Comprehensive characterizations of the structure of individual utility functions representing community preference profiles that lead to demand aggregation are also provided for, (i) common across consumers choice-independent rates of time preference, and, (ii) heterogeneous choice-dependent rates of time preference.
Keywords: heterogeneity, linear aggregation, representative consumer
JEL classification: D11, D31, D91
Download FullText PDF
2005, co-authored with Carsten Schröder and Ulrich Schmidt Journal of Public Economics, Vol. 89(5-6), June 2005, pp. 967-996
Abstract: Household consumption exhibits economies of scale as the number of household members increases. We collect survey data from two countries, Germany and France, in order to obtain direct subjective estimates of household consumption economies of scale, and, in particular, to examine an additional dimension: whether household consumption economies of scale change as living standards go up. Our data from both countries indicate strongly that household economies of scale increase as the living standard goes up. We discuss the robustness of our survey method and compare our results to these of alternative estimation methods in the literature.
Keywords: equivalence scales, survey method, independence of base
JEL Classification: C42, C90, D31, D63, I31
Download the Working paper version FullText PDF from this site
Also available as: SSRN Working Paper #419982
Article available from the JPubE site (your institution needs to be a JPubE Subscriber): Download
DATA of Table 2, average equivalence scales, in EXCEL 4.0 worksheet format for:
Germany Download Excel 4.0 worksheet format
France Download Excel 4.0 worksheet format
February 2005, co-authored with Carsten Schröder and Ulrich Schmidt - Short Paper (Complement of the paper "On the Income Dependence of Equivalence Scales"), Journal of Economics, Vol 86, pp. 19-27
Abstract: Recent studies in high-income industrialized countries have shown that equivalence scales are income-dependent. We investigate whether this dependence also holds in poorer, services oriented countries, by considering the example of Cyprus. We also examine whether household economies of scale and relative children costs differ.
Keywords: household economies of scale, equivalence scales, survey method, independence of base
JEL Classification: C42, C90, D31, D63, I31
Download Full Text PDF from this site
Download Full Text PDF - Department of Economics Working Paper Series, University of Vienna #0503
Also available as: SSRN Working Paper #671682
2005, - A revised (shorter) version appears in "Advances in Public Economics: Utility, Choice and Welfare," Schmidt, U., Traub, S. (Eds.), Vol. 38, 2005, ISBN 0-387-25705-5, Hardcover, Springer
Abstract: In this paper I re-examine some classic public-econonomics questions, namely, (i) the role of preferences in the determination of efficient allocations in pure exchange economies, (ii) the determinants and mechanics of allocative efficiency in private economies with production, (iii) reasons for market failures in the private provision of productive public goods, (iv) the extent of internalization of allocative and efficiency distortions by voters in redistributive voting, and, (v) factors and incentives that lead to intertemporal allocative inefficiencies of capital markets in the presence of externalities. I attempt to contribute to the understanding of these classic issues by means of examples. Useful insights show up in some carefully selected parametric frameworks. The suggested models manage to control for most of the complexity and also to shed light into the link between micro primitives and qualitative conclusions.
Keywords: efficient allocations, private markets, voting, externalities and growth
JEL classification: H0
Download Full Text PDF
February 2005, co-authored with Leonard J. Mirman
Abstract: We study the determinants of voting outcomes on the provision of public consumption through marginal income taxes in the context of the simple linear growth model. We provide analytical results on how the dynamic politicoeconomic equilibrium maps the economic fundamentals to policies and long-run growth. We find that in a deterministic growth environment voters internalize, although imperfectly, the deadweight losses of taxation and vote for lower taxes when the productivity of capital is higher. Therefore, the politicoeconomic channel reinforces the positive role of productivity for growth. In a stochastic linear-growth environment where business cycles are driven by productivity shocks, in line with existing evidence, we find that the level of endogenous public consumption is procyclical but its share of GDP is countercyclical.
Keywords: voting, second-best taxation, endogenous growth
JEL classification: C73, D72, E61, E62, O23
Download FullText PDF
Download Full Text PDF - Department of Economics Working Paper Series, University of Vienna #0502
Also available as: SSRN Working Paper #670385
August 2004, co-authored with Leonard J. Mirman
Abstract: We explore the role of firm-size asymmetry in a dynamic oligopoly where the consumption of specific capital is required in order to produce output. We find that when larger firms have a cost advantage due to their size, asymmetry leads to a decline in the supply of all firms, less capital consumption and higher industry growth. We explore an alternative setup without cost advantages due to size and we find no link between the distribution of market power on industry growth, suggesting that cost advantages are an important aspect to the role of asymmetries in oligopolistic markets.
Keywords: non-renewable resource, dynamic games, asymmetry
JEL classification: non-renewable resource, dynamic games, asymmetry
Download FullText PDF
May 2004, co-authored with Leonard J. Mirman
Abstract: We study the politico-economic equilibrium of a parametric version of the neoclassical growth model, uncovering the link between economic fundamentals, and (i) the level of government, and also (ii) the composition of government spending between public consumption and public infrastructure. Public consumption goods enter the utility function of households and public infrastructure enhances the productivity of the private sector. Government spending is financed via marginal income taxes and households vote over both the level of government and its composition. Voters partly internalize the tax wedges on capital accumulation and also the benefits of public infrastructure, so higher capital intensity and more patience of households lead to less government, a more productive composition of fiscal spending and higher steady state capital and income level. We compare our policies with these of a static framework and also with the dynamically efficient policies.
Keywords: voting, public consumption, public infrastructure
JEL classification: C73, D72, E61, E62, O23
Download FullText PDF
November 2003, co-authored with Leonard J. Mirman
Abstract: We study how alternative market structures influence market supply and R&D investment decisions of firms operating in dynamic imperfectly competitive environments. Firms can reduce their future production cost through R&D investment today, which is the engine of endogenous industry growth. Our framework enables us to identify key strategic ingredients in firms' dynamic competitive behavior through analytical characterizations. These ingredients are a static market externality, stemming from the standard oligopolistic Cournot competition, a dynamic externality that arises due to knowledge spillovers, and a dynamic market externality that comes from the interaction of knowledge spillovers with future market oligopolistic competition that firms internalize while making decisions. We isolate the impact of each strategic ingredient by comparing four alternative market structures.
Keywords: R&D investment, Cournot competition, oligopolistic non-cooperative dynamic games
JEL classification: D43, D92, L13, O32
Download FullText PDF
June 2003, co-authored with Charles Grant, Alex Michaelides and Mario Padula
Abstract: Increasing marginal tax rates and making payments to thepoor reduce inequality and introduce savings disincentives. Using aheterogeneous agent model with incomplete markets, we show that higher taxes(and transfers) decrease consumption inequality but also mean savings and meanconsumption. This demonstrates the trade-off between equity and efficiency.These theoretical predictions are tested by exploiting differences in tax ratesacross US states. Using two surveys, the Consumer Expenditure Survey and theCurrent Population Survey, we show that the empirical evidence supports thetheory, and that there is a comparatively small fall in efficiency for a givengain in equity associated with higher taxation
Keywords: Undiversifiable Earnings Risk, Tax Distortions, Equity,Efficiency, Transfers
JEL Classification: E21, H20, H31
Download Full Text PDF
June 2000
Abstract:An analytical characterization for voting outcomes over theprovision of public goods in the neoclassical growth model is provided. Publicgoods enter the utility function of households and they are financed byproportional income taxes. Households differ with respect to their initial assetholdings. It is shown that three knife-edge assumptions on the neoclassical-growth model, namely log-preferences over private and public consumption,capital depreciation equal to one, and non-tax-exempt depreciation, make thetime-inconsistency problem disappear. A common closed-form solution is found forthree different dynamic voting patterns: (a) voting once and for all; (b)sequential voting with perfect memory; and (c) sequential voting withoutremembering previous economic/political states and actions.
Keywords: public goods, dynamic Stackelberg games, informativepattern, time-consistency, tax distrortions, growth.
JEL Classification: C73, D72, E61, E62, O23
Download Full Text PDF
March 2000
Abstract:This study provides analytical characterizations forsequential-voting outcomes over redistribution through lump-sum transfersfinanced by proportional income taxes. A simple version of the neoclassical-growth model with log-preferences and capital depreciation equal to one isstudied. Households differ with respect to their initial asset holdings. Thesimplified setup enables the identification of analytical features of politico-economic outcomes for the case of forward-looking rational voting without memory(feedback Stackelberg equilibrium). It is stressed that the classic single-crossingness property of voters' preferences which is present in the staticframework can fail in this dynamic environment in the steady state. This is dueto voters' considerations concerning distortions on future prices caused bycurrent marginal- income taxation. It is found, however, that singlecrossingness applies in numerical investigations for a wide range of tax ratesfor reasonable calibrating taste and technology parameters.
Keywords: sequential voting, redistribution, feedback Stackelbergequilibrium, inequality, signle crossingness, tax distortions, growth.
JEL Classification: C73, D72, E61, E62, O23
Download Full Text PDF
March 2000
Abstract:This study argues that during skill-biased technologicaltransitions households set personal-resource thresholds below which they do notpursue specific training in new skill vintages that are associated with newtechnologies. This household behavior occurs even without credit-market failuresand it is proposed as a strong factor in explaining the levels and the timing ofappearance of development income/wealth thresholds. Groups of countries inskill-biased transitions are empirically identified by detecting a key dynamicimplication of the model: higher initial per-capita income and lower initialpersonal income inequality are correlated with faster future educationalexpansion.
Keywords: skill-based transitions, specific-training choice,diffusion of technologies, inequality, growth regimes, regression trees.
JEL Classification: O14, O15, O33, O41, D31, D58
Download Full Text PDF
December 1999
Abstract:How do household preferences over public consumption affectthe making of time-consistent fiscal policies? What are the effects of suchpolicies on the macroeconomy? These questions are addressed within aneoclassical growth model, arguing that time-consistent policies capture wellthe process of policy making in the real world. Preferences over publicconsumption are estimated for high-income OECD countries and the model issimulated according to these estimations. The main quantitative implication ofthe model is that different household preferences over public consumption arereflected strongly in the making of policies and can satisfactorily explaincross- country differences in the trajectories of the public-consumption share.However, for cases where the steady-state size of government is the same in thelong run, while preference differences have a large quantitative impact onpublic and private consumption trajectories, they do not trigger significantquantitative differences in the savings rate and income transitional paths.Moreover, for reasonable values of the elasticity of intertemporal substitution,the model with endogenous policy does not exhibit a large and rapid drop in thesavings rate as the economy approaches the steady state from below, correcting acounterfactual quantitative property of the standard neoclassical model.
Keywords: endogenous taxation, feedback Stackelberg equilibrium,information pattern, Markov perfection, time-consistency, cointegration.
JEL classification: O23, E61, E62, C73, C62
Download Full TextPDF
July 2000, co-authored with Ulrich Schmidt
Abstract: We outline the approach of using dynamic general-equilibriummodels for studying the income/wealth distribution. We survey the methodologyand the main findings of this recent research line. We claim that this newliterature sets reasonable methodological foundations for answering to thecrucial question of the responsiveness of inequality and living standards tofiscal policies. We also refer to technical background literature and we discussopen questions and possible key future research orientations.
Key words: inequality, rational expectations, incomplete markets
JEL classification: D31, D52, D58, E13
Download Full TextPDF
Download Abstract andPreface only
--------------------------------------------------------------------------------