Course Outline ‘Public Economics’ (EC5150) - 2006/07, Spring Term Course Code and Title Public Economics EC5150 Lecturer Dr Dan Anderberg Aims EC5150 Public Economics is suitable for advanced students with knowledge in microeconomics and basic econometric methods. The course aims to provide students with a broad range of the methods and models for analysing government expenditure policies. A key focus is on the link between theory and empirics, specifically the relation between policy design and behavioural responses. In addition to general principles, some specific policies such at pensions, in-work benefits, and unemployment insurance will be considered. Learnings Outcomes Upon completion of the course students should: ?? ?? ??

have an overview of available empirical methods for evaluating public policy; be familiar with standard models of optimal redistribution and social insurance; be able to manipulate these models, and be able to analytically solve problems relating to optimal policy; ?? be familiar with the likely behavioural responses to policies of redistribution, social insurance and welfare; ?? understand some of the limitations of the available theories, e.g. in relation to household behaviour. Course Delivery The course will be delivered through a two-hour lecture each week. A part of the lectures will be spent on the solution of problem sets. The detailed learning outcomes and recommended reading for each week are outlined below. Problem sets will be distributed in the previous week’s lecture. The lecturer is available to students for consultation during advertised office hours or by appointment. Assessment There will be a three-hour unseen examination, which contributes 100% to the final mark. The examination will test students' knowledge and understanding of the material covered in the course. In particular it will test the ability to (i) solve numerical or algebraic versions of the models you have learned;, (ii) apply models to`real-world' economic situations, (iii) appraise critically certain models and their applications. Reading Unfortunately, there is no textbook that closely matches the taught material. However, the following book will serve as a useful introduction.

Gruber, J. (2005) Public Finance and Public Policy, Worth Publishers. Multiple copies will be available on short loan in the Bedford Library. Students are encouraged to buy their own copy (available from the campus bookshop). In addition the course will draw on a number of journal articles (see the Lecture outlines below). Weekly Timetable Lecture 1.

Empirical Tools: Review of Treatment Evaluation Methods

1.1 Background * Blundell, R. and M. Costa Dias (2000), "Evaluation Methods for Non-Experimental Data", Fiscal Studies 21, 427-468. Blundell, R. and M. Costa Dias (2002), "Alternative Approaches to Evaluation in Empirical Microeconomics", Cemmap Working Paper CWP10/02. Heckman, J. J. and J. A. Smith (1995), “Assessing the Case for Social Experiments,” Journal of Economic Perspectives 9, 85-110. 1.2. Randomized Experiments Rubin, D.B. (1974) "Estimating Causal Effects of Treatment in Randomized and on Randomized Studies", Journal of Educational Psychology 66, 688-701. Card, D. and P.K. Robins (1996) "Do Financial Incentives Encourage Welfare Recipients to Work? Evidene from a Randomized Evaluation of the Self-Sufficiency Project", NBER working paper No. 5701. Meyer, B.D. (1995) "Lessons from the U.S. Unemployment Insurance Experiment", Journal of Economic Literature 33, 91-131. Woodbury S. and R. Spiegelman (1987) "Bonuses to Workers and Employers to Reduce Unemployment: Randomized Trials in Illinois", American Economic Review 77, 513-530. 1.3 Propensity Score Matching Rosenbaum, P and D. Rubin (1983) "The Central Role of the Propensity Score in Observational Studies for Causal Effects", Biometrica 70, 41-55 Rosenbaum, P and D. Rubin (1984) "Reducing Bias in Observational Studies Using SubClassification on the Propensity Score", Journal of the American Statistical Assocation 79, 516524. LaLonde, R. (1986) "Evaluating the Econometric Evaluations of Training Programs with Experimental Data", American Economic Review 76, 604-620. Deheija, R. and S. Wahba (2002) "Propensity Score Matching Methods for Non-Experimental Causal Studies", Review of Economics and Statistics 84, 151-161.

Deheija, R. and S. Wahba (1999) "Causal Effects in Non-Experimental Studies: Re-evaluating the Evaluation of Training Programs", Journal of the American Statistical Assocation 94, 105362. Smith, J. and P. Todd (2001) "Reconciling Conflicting Evidene on the Performance of Propensity Score Matching Methods", American Economic Review Papers and Proceedings 91, 112-118. Smith, J. and P. Todd (2005) "Does Matching Overcome LaLonde's Critique of NonExperimental Estimators?", Journal of Econometrics ??, ??-?? Deheija, R. (2005) "Practical Propensity Score Matching (Response to Smith and Todd), Journal of Econometrics ??, ??-?? Lechner, M. (2000) "An Evaluation of Public-Sector Sponsored Continuous Vocational Training Programs in East Germany", Journal of Human Resources 35, 347-375. Heckman, J.J., H. Ichimura, and P. Todd (1997), “Matching as an Econometric Evaluation Estimator: Evidence from Evaluating a Job Training Programme", Review of Economic Studies 64, 605-54. 1.4 Difference-in-Difference Methods * Meyer, B. (1995), "Natural- and Quasi-Experiments in Economics", Journal of the Business and Economic Statistics, 13(2), 151-61 Besley, T. and A. Case (2004) "Unnatural Experiments? Estimating the Incidence of Endogenous Policies", Economic Journal 110, F672-694. Card, D. (1990) "The Impact of the Mariel Boatlift on the Miami Labor Market", Industrial and Labor Relations Review 43, 245-257. Bertrand, M., E. Duflo and S. Mullainathan (2004) "How Much Should We Trust Difference-inDifference Estimates?", Quarterly Journal of Economics 119, 249-275 van Reenen, J (2001) "No More Skivvy Schemes? Active Labour Market Policies and the British New Deal for Young Unemployed in Context", The Institute for Fiscal Studies WP01/09 Eissa, N and J. Liebman (1996) "Labour Supply Response to the Earned Income Tax Credit", Quarterly Journal of Economics 111, 605-637. Corak, M. (2001) "Death and Divorce: The Long-Run Consequences of Parental Loss on Adolescents", Journal of Labor Economics 19, 682-715 1.5 Instrumental Variables Methods * Imbens, G and J. Angrist (1994) "Identification and Estimation of Local Average Treatment Effects", Econometrica 62, 467-475. Angrist, J.D., G. Imbens and D.B. Rubin (1996) "Identification of Causal Effects using Instrumental Variables", Journal of the American Statistical Association 91, 444-455. Angrist J.D. and A.B. Krueger (1991) "Does Compulsory Schooling Attendance Affect Schooling and Earnings?", Quarterly Journal of Economics 106, 979-1014. Angrist, J.D. (2001) "Instrumental Variables and the Search for Identification: From Supply and

Demand to Natural Experiments", Journal of Economic Perspectives 15, 69-85. Angrist, J.D. (1998) "Children and Their Parent's Labor Supply: Evidence from Exogenous Variation in Family Size", American Economic Review 88, 450-77. Currie J. and E. Moretti (2003) "Mothers Education and the Intergenerational Transmission of Human Capital", Quarterly Journal of Economics ??, ??-?? Chevalier, A, C, Harmon and V. O'Sullivan and I. Walker (2005) "The Impact of Parental Income and Education on the Schooling of their Children", Working Paper, Institute for Fiscal Studies, London. Shea, J. (2000) "Does parents' money matter?" Journal of Public Economics 77, 155-184. Gelbach, J. (2002) "Public Schooling for Young Children and Maternal Labor Supply", American Economic Review 92, 307-322. 1.6 Regression Discontinuity Methods Hahn, J., P. Todd and W. Van der Klaauw (2001), “Identification and Estimation of Treatment Effects with a Regression-Discontinuity Design,” Econometrica 69, 201-209. Van der Klaauw, V. (2002) "Estimating the Effect of Financial Aid Offers on College Enrollment: A Regression Discontinuity Approach", International Economic Review 43, 1249-87. Black, S. E. (1999), ‘Do better schools matter? Parental valuation of elementary education’, Quartely Journal of Economics 114(2), 577–599. * Lemieux, T. and K. Milligan (2004) "Incentive Effects of Social Assistance: A Regression Discontinuity Approach", NBER Working Paper No. 10541, May 2004. Black, S.E. (1999) "Do Better Schools Matter? Parental Evaluation of Elementary Education", Quarterly Journal of Economics 114, 577-599. ( To be added: Swiss guy on UI; UCL guy on New Deal) By the end of this topic the student should ?? understand the identification problems of program evaluation ?? have a basic understanding of alternative empirical methods of program evaluation

Lecture 2.

Theoretical Tools, Tax Incidence

2.1 Consumer Theory, Market Equilibrium, Social Welfare MasColell, Whinston and Green (1995) Microeconomic Theory, Oxford University Press, Ch 2, 10, 16, 22. 2.2 Tax Incidence Kotlikoff, L. and L. Summers, “Tax Incidence,” in Alan Auerbach and Martin Feldstein, eds.,

Handbook of Public Economics, Volume 2 (Amsterdam: North Holland, 1987). Fullerton, D. and G. Metcalf (2001) “Tax Incidence,” mimeograph, University of Texas-Austin. 2.3 Expenditure Incidence Summers, L.H. (1989) "Some Simple Economics of Mandated Benefits", American Economic Review 79, 177-183. Gruber, J. (1994) "The Incidence of Mandated Maternity Benefits", American Economic Review 84, 86-102. 2.4 Deadweight Loss and Excess Burden Diamond, P., and D.L. McFadden, “Some Uses of the Expenditure Function in Public Finance,” Journal of Public Economics 3 (1974): 3-21. Hausman, J.A., “Exact Consumer's Surplus and Deadweight Loss,” American Economic Review, September 1981, pp. 662-676. Auerbach A. (1987) "Excess Burden" in Alan Auerbach and Martin Feldstein, eds., Handbook of Public Economics, Volume 2 (Amsterdam: North Holland, 1987). Atkinson, A. B. and J. E. Stiglitz, Lecture on Public Economics, Mcgraw Hill 1980, Ch. 6 2.5 The Theory of the Second Best Boadway (1995) The Role of Second-Best in Public Economics, Mimeo, Queens University, Kingston, Ontario. 2.6 The Unit of Analysis? Intra-Family Allocation Browning, M., F. Bourguignon, P. A. Chiappori and V. Lechene (1994) "Incomes and Outcomes: A Structural Model of Intra-Household Allocation", Journal of Political Economy 102, 1067-1096. Chiappori, P.-A., B. Fortin and G Lacroix (2002) "Marriage Market, Divorce Legislation and Household Labor Supply", Journal of Political Economy 110, 37-72. Lundberg, S., R. Pollak and T.J. Wales (1997) "Do Husbands and Wives Pool their Resources? Evidence from the United Kingdom Child Benefit", Journal of Human Resources 32, 461-480. Kotlikoff, L and A. Spivak (1981) "The Family as an Incomplete Annuities Market", Journal of Political Economy 89, 372-291. By the end of this topic the student should ?? Have refreshed basic consumer theory ?? Have a basic understanding of the concepts of tax incidence, expenditure incidence, excess burden (or deadweight loss) ?? Be aware of the problems modeling the decision making unit as the family versus the individual.

Lecture 3.

Externalities and Public Goods

3.1 Externalities: Theory * MasColell, A., M. Whinston and J.R. Green (1995) "Microeconomic Theory", Oxford University Press, Ch 11. Coase, R. (1960) "The Problem of Social Cost" Journal of Law and Economics 1, 1-44. Pigou, A. (1932) The Economics of Welfare, London: MacMillan. Weitzman, M. (1974) Prices vs. Quantities, Review of Economic Studies 41, 477-491. Laffont, J.-J. (1988) Fundamental of Public Economics, MIT Press. Myerson R. and M. Satterthwaite (1983) "Efficient Mechanisms for Bilateral Trading", Journal of Economic Theory 29, 265-281. Meade, J. (1952) "External Economies and Diseconomies in a Competitive Situation", Economic Journal 62, 54-67. 3.2 Application: Smoking Becker, G.S. and K. Murphy (1988) "A Theory of Rational Addiction", Journal of Political Economy 96, 675-700. Becker, G.S., M. Grossman, and K. Murphy (1994) "An Empirical Analysis of Cigarette Addiction", American Economic Review 84, 396-418. Viscusi, W.K. (1995) "Cigarette Taxation and the Social Consequences of Smoking", in "Tax Policy and the Economy", J. Poterba (ed.) NBER, Vol 9. pp. 51-101. Gruber, J. (2001) "Tobacco at the Cross-Roads: The Past and Future of Smoking Regulation in the U.S.", Journal of Economic Perspectives 15, 193-212. Adda, J. and F. Cornaglia (2006) "Taxes, Cigarette Consumption, and Smoking Intensity", American Economic Review 96, 1013-1028. * Adda, J. and F. Cornaglia (2005) "The Effect of Taxes and Bans on Passive Smoking", Cemmap wp. 20/05. Chaloupka, F.J. (1991) "Rational Addictive Behavior and Cigarette Smoking", Journal of Political Economy 99, 722-742. 3.3 Public Goods: Theory * MasColell, A., M. Whinston and J.R. Green (1995) "Microeconomic Theory", Oxford University Press, Ch 11. Samuelson, P.A. (1954) "The Pure Theory of Public Expenditure", Review of Economics and Statistics 36: 387-389.

Barnett, R.R. (1993) "Preference Revelation and Public Goods", in P.M. Jackson (ed.) Current Issues in Public Sector Economics, pp. 94-131. 3.4. Private Provision of Public Goods Warr, (1983) Andreoni (??) Varian... 3.5 Public Goods: Crowding Out Andreoni, J. (1993) "An Experimental Test of the Public-Good Crowding-Out Hypothesis", American Economic Review 83, 1317-1327. By the end of this topic the student should ?? Understand the Coasian "solution" to the externality problem ?? Be familiar with basic public policy approaches to solving the externality problem ?? Understand the Samuelson rule for optimal provision of a public good ?? Have a basic knowledge of the problem of underprovision when public goods are privately provided Lecture 4.

Welfare Policy: Design

4.1 Background * Moffitt, R. (2002), “Milton Friedman, the Negative Income Tax, and the Evolution of U.S. Welfare Policy”, Johns Hopkins University, mimeo 4.1 Optimal Income Taxation as a Redistributive Device Diamond, P. (1998) “Optimal Income Taxation: An Example with a U-Shaped Pattern of Optimal Marginal Tax Rates,” American Economic Review 88, 83-95. Dixit, A. and Sandmo, A. (1977), “Some Simplified Formulae for Optimal Income Taxation”, Scandinavian Journal of Economics 79, 417-423. Gruber, J. and E. Saez (2000) " The Elasticity of Taxable Income: Evidence and Implications" NBER wp 7512, April. Mirrlees, J. (1971) “An exploration in the Theory of Optimum Income Taxation,” Review of Economic Studies 38, 175-208. Saez, E. (2001) “Using Elasticities to Derive Optimal Income Tax Rates”, Review of Economic Studies 68, 205-229. * Saez, E. (2002) "Optimal Income Transfer Programs: Intensivs vs Extensive Labor Supply Responses," Quarterly Journal of Economics 117, 2002. Stiglitz, J.E. (1982) “Self-Selection and Pareto Efficient Taxation”, Journal of Public Economics

17, 213-240. Stiglitz, J.E. (1987) “Pareto Efficient and Optimal Taxation and the New New Welfare Economics,” in Alan Auerbach and Martin Feldstein, eds., Handbook of Public Economics, Volume 2 (Amsterdam: North Holland, 1987). p. 991-1041.

4.2 The Optimality of “Tagging” and Quantity Constraints * Akerlof, G. (1978), "The Economics of 'Tagging' as Applied to the Optimal Income Tax, Welfare Programs, and Manpower Planning," American Economic Review 68, 8-19. Nichols, A. and R. Zeckhauser (1982), "Targeting Transfers through Restrictions on Recipients", American Economic Review 72, 372-377. Besley, T. and S. Coate (1992) “Workfare versus Welfare: Incentive Arguments for Work Requirements in Poverty-Alleviation Programs”. American Economic Review 82 (1), 249-61 Stiglitz J.E., (1987), “Pareto efficient and optimal taxation and the new new welfare economics”, in A. J. Auerbach and M. Feldstein, editors, Handbook of Public Economics, volume 2, chapter 15, 991-1042, North-Holland Publishing Company, Amsterdam Immonen, R, R. Kanbur, M. Keen and M. Tuomala (1998) "Tagging and Taxing: The Optimal Use of Categorial Information and Income Information in Designing Tax/Transfer Schemes", Economica 65, 179-192. 4.3 The Optimality of In-Kind Transfers * Blackorby, C. and D. Donaldson (1988), “Cash versus Kind, Self-Selection, and Efficient Transfers, American Economic Review 78, 691-700. Blomquist, S. and V. Christiansen (1999) "Price Subsidies Versus Public Provision", International Tax and Public Finance 5, 283-306. Boadway, R. and Marchand, M. (1995), The Use of Public Expenditures for Redistributive Purposes, Oxford Economic Papers 47, 45-59. Cremer, H. and Gahvari, F. (1997), In-Kind Transfers, Self-Selection and Optimal Tax Policy, European Economic Review 41, 97-114. Anderberg, D. (2001) "Social Insurance with In-Kind Provision of Private Goods", Scandinavian Journal of Economics 103, 41-61. 4.4 Implications for the Provision of Public Goods Boadway, R. and M. Keen (1993) “Public Goods, Self-Selection and Optimal Income Taxation”, International Economic Review 34, 463-78. Edwards, J., M. Keen and M. Tuomala (1994) "Income Tax, Commodity Taxes and Public Good Provision: A Brief Guide", FinanzArchiv 51, 472-487.

Lecture 5.

Welfare Policy: Impact on Consumption and Behaviour

5.1 Background Moffitt, R.A. (1992), "Incentive Effects of the U.S Welfare System: A Review", Journal of Economic Literature 30, 1-61. Schoeni, R.F. and R.M. Blank (2000) "What has Welfare Reform Accomplished? Impacts on Welfare Participation, Employment, Income, Poverty and Family Structure." NBER working paper No. 7627. [Hoynes survey paper from 1997] 5.2 Labour Supply and Programme Participation * Lemieux, T. and K. Milligan (2004) "Incentive Effects of Social Assistance: A Regression Discontinuity Approach", NBER Working Paper No. 10541, May 2004. Hoynes, H. and T. MaCurdy (1994), "Has the Decline in Benefits Shortened Welfare Spells?", American Economic Review 84, 43-48. Keane, M. and R. Moffitt (1998) “A Structural Model of Multiple Welfare Program Participation and Labor Supply,” International Economic Review 39(3):553-589. Meyer, B. and D. Rosenbaum (2001) "Welfare, the Earned Income Tax Credit, and the Labor Supply of Single Mothers" Quarterly Journal of Economics ??, ??-?? Meyer, B. and D. Rosenbaum (2001) "Making Single Mothers Work: Recent Tax and Welfare Policy and its Effect", National Tax Journal 53, 1027-1061. Moffitt, R. (2002) "Welfare Programs and Labor Supply," NBER Working Paper 9168. http://www.nber.org/papers/w9168 Card, D., P. Robins, and W. Lin, (???) "Would Financial Incentives for Leaving Welfare Lead Some People to Stay on Welfare Longer? An Experimental Evaluation of .Entry Effects in the Self-Sufficiency Project",. Working Paper, Princeton University. Grogger, J and C. Michalopoulos (2003) "Welfare Dynamics under Time Limits", Journal of Political Economy 111, 530-554. 5.3 Impact on Family Structure Hoynes, H. (1997), "Does Welfare Play Any Role in Female Headship Decisions?", Journal of Public Economics 65. Moffitt, R. (1994), "Welfare Effects on Female Headship with Area Effects", Journal of Human Resources 29, 621-636. Moffitt, R. (1997), "The Effect of Welfare on Marriage and Fertility: What Do We Know and What Do We Need to Know?" Institute for Research on Poverty Discussion Paper no. 1153-97. Rosenzweig, M. (1999), "Welfare, Marital Prospects, and Nonmarital Childbearing", Journal of Political Economy 107, S3-S32. Eissa, N. and H. Hoynes (2003), "Good News for Low-Income Families: Tax-Transfer Schemes

and Marriage," mimeo, UC-Berkeley. Ellwood, D and M. Bane (1985) "The Impact of AFDC on Family Structure and Living Arrangements",. in R. Ehrenberg, ed., Research in Labor Economics 7.

5.4 Securing Living Standards * Gruber, J. (2000), "Cash Welfare as a Consumption Smoothing Mechanism for Single Mothers, Journal of Public Economics 75(2), 157-182. Hoynes, H. (1996), "Welfare Transfers in Two Parent Families: The Case of AFDC-UP", Econometrica 64, 295-332. * Bitler M.P., J. Gelbach and H.W. Hoynes (2006) "What Mean Impacts Miss: Distributional Effects of Welfare Reform Experiments", American Economic Review 96, 988-1012. 5.5 Health- and Child Outcomes Dahl, G. and L. Lochner (2005) "The Impact of Family Income on Child Achievement", Mimeo, University of Rochester. Clark-Kauffman, E., Duncan, G. and Morris, P. (2003), "How welfare policies affect child and adolescent achievement", American Economic Review 93, 299—303. Duncan, G., P. Morris, and C. Rodrigues (2004) "Does Money Really Matter? Estimating Impacts of Family Income on Children's Achievement with Data from Random-Assignment Experiments". Working Paper, 2004. Levy, D. & Duncan, G. (2001), ‘Using siblings to assess the effect of childhood family income on completed schooling’. Joint Centre for Poverty Research Working Paper, North Western University. Blanden, J. and Gregg, P. (2004), "Family income and educational attainment: A review of approaches and evidence for Britain", Oxford Review of Economic Policy 20, 245–263. Blow, L., Goodman, A., Kaplan, G., Walker, I. and Windmeijer, F. (2005), "How important is income in determining children’s outcomes? A methodology review of econometric approaches". Mimeo, Institute for Fiscal Studies, London. [Currie and Cole, AER]

Lecture 6.

Income Taxation and Labour Supply

6.1 Background/Surveys Hausman J., (1987), “Taxes and Labor Supply”, in A. J. Auerbach and M. Feldstein, editors, Handbook of Public Economics, volume 1, chapter 4, pp. 213-263, North-Holland, Amsterdam Blundell, R. and T. MaCurdy (1999) “Labour Supply: A Review of Alternative Approaches” in Handbook of Labor Economics, O. Ashenfelter and D. Card (eds.) Ch. 27. Blundell, R. (1996) “Labour Supply and Taxation”, in “The Economics of Tax Policy”, Devereux, M.P. (ed). Oxford Economic Press.

MaCurdy, T., D. Green and H. Paarsch (1990). “Assessing Empirical Approaches for Analyzing Taxes and Labor Supply”. Journal of Human Resources 25, 415-490. MaCurdy, T. (1992). "Work Disincentive Effects of Taxation: A Re-Examination of the Evidence"". American Economic Review Papers and Proceedings, 243-249. Bernard Fortin and Guy Lacroix (2002) "Assessing the Impact of Tax and Transfer Policies on Labour Supply: A Survey", Mimeo, Cirano, Montreol 6.2 Natural Experiments Approach * Eissa, N., (1995) “Taxation and the Labor Supply of Married Women: The Tax Reform Act of 1986 as a Natural Experiment,” NBER Working Paper 5023. Feldstein, M. (1995). “The Effect of Marginal Tax Rates on Taxable Income: A Panel Study of the 1986 Tax Reform Act.” Journal of Political Economy 103, 551-572. Saez, E. (1999) ‘The effect of marginal tax rates in income: A panel study of ”bracket creep”.’ NBER WP #7367 6.3 Structural Approaches Hausman, J. and J. Poterba (1987). "Household Behaviour and the Tax Reform Act of 1986". Journal of Economic Perspectives, 101-120. Blomquist, S., M. Eklof and W. Newey (2001) . “Tax Reform Evaluation Using Nonparametric Methods: Sweden 1980-1991,” Journal of Public Economics 79, 543-568. Blundell, R., A. Duncan and C. Meghir (1998). “Estimating Labor Supply Responses Using Tax Reforms,” Econometrica 66, 827-862. Moffitt, R. (1990). “The Econometrics of Kinked Budget Constraints”. Journal of Economic Perspectives 4, 119-39. Triest, R. K. (1990). “The Effect of Income Taxation on Labor Supply in the United States.” Journal of Human Resources 25, 491-516. Blomquist, S., Hansson-Brusewitz, U., 1990. The effect of taxes on male and female labor supply in Sweden. Journal of Human Resources 25, 317–357. 6.4 Extensions: Lifecycle Perspective, Family Labour Supply Choices etc. Van Soest, A. (1995) ‘Structural models of family labor supply: A discrete choice approach.’ Journal of Human Resources 30, 63–88 Blundell, R.W. and I. Walker (1986), "A life cycle consistent empirical model of labour supply using cross section data'', Review of Economic Studies 53: 539-558. Guy Laroque and Salanie... 6.5 Implications for Policy Design

* Gruber, J. and E. Saez (2002) "The elasticity of taxable income: evidence and implications", Journal of Public Economics 84 (2002) 1–32 Jakobsen-Kleven, H. and C. Thustrup-Kreiner (2005) Labor Supply Behavior and the Design of Tax and Transfer Policy, Mimeo, Copenhagen. Eissa, N., H. J. Kleven, and C. T. Kreiner (2005). “Welfare Effects of Tax Reform, and Labor Supply at the Intensive and Extensive Margins,” in J. Agell and P. B. Sørensen (eds), Tax Policy and Labour Market Performance, forthcoming at MIT Press, Cambridge, MA. Saez, E. (2002), "Optimal Income Transfer Programs: Intensive vs. Extensive Labor Supply Responses", Quarterly Journal of Economics 117, 1039-1073.

Laroque, G. (2005) "Income Maintenance and Labour Force Participation", Econometrica 73, 341-376,

6.6 The Working Families Tax Credit in the UK Bingley, P. and I. Walker (1997), “The Labour Supply, Unemployment and Participation of Lone Mothers in In-Work Transfer Programmes”, Economic Journal 107, 1375-1390. * Blundell, R. (2001), Welfare-to-Work: Which Policies Work and Why?, Keynes Lecture in Economics, 2001. Blundell, R. A. Duncan, J. McCrae, and C. Meghir (2000) "The Labour Market Impact of the Working Families’ Tax Credit", Fiscal Studies 21 , pp. 75–104. Blundell, R. W, Duncan, A.S., and Meghir, C. (2002), "Evaluating the Working Families Tax Credit", Mimeo, Institute for Fiscal Studies. Blundell, R. and Hoynes, H. (2003), Has In-Work Benefit Reform Helped the Labour Market?, in R. Blundell, D. Card and R.B. Freeman(eds) Seeking a Premiere Economy: The Economic Effects of British Economic Reforms, 1980-2000. Chicago: University of Chicago Press. Download from http://www.nber.org/books/bcf/blundell-hoynes2-3-03.pdf. Blundell, R. and H. Reed (2000) “The Employment Effects of the Working Families’ Tax Credit”, Institute for Fiscal Studies, Briefing Note No. 6. Blundell, R. and I. Walker (2001) “Working Families’ Tax Credit: A Review of the Evidence, Issues and Prospects for Further Research”, Inland Revenue, Research Report No 1. Brewer, M. (2001), Comparing in-work benefits and financial work incentives for low-income families in the US and the UK, Fiscal Studies, 22(1), 41-77. Brewer, M., Clark, T. and Myck, M. (2001), Credit Where It's Due? An Assessment of the New Tax Credits, Commentary 86, London: Institute for Fiscal Studies. Brewer, M., A. Duncan, A. Shephard and M. J. Suarez (2003) "Did Working Families Tax Credit Work? Analysing the Impact of In-Work Support on Labour Supply and Programme Participation", Inland Revenue/Institute for Fiscal Studies. Dilnot, A. and J. McCrae (1999) " The Family Credit System and the Working Families' Tax Credit in the United Kingdom", The Institute for Fiscal Studies, Briefing Note No. 3. Francesconi, M. and W. Van der Klaauw (2004) "The Consequences of 'In-Work' Benefit Reform in Britain: New Evidence from Panel Data", University of Essex, Mimeo.

Gregg, P. and S. Harkness (2003), "Welfare Reform and Lone Parents Employment in the UK", Mimeo, University of Bristol. 6.7 The Earned Income Tax Credit in the US Dickert,S., S. Houser and J.K. Scholz (1995)."The Earned Income Tax Credit and Transfer Programs:A Study of Labor Market and Program Participation."In Tax Policy and the Economy . J. Poterba,ed.Cambridge:MIT Press. Eissa, N. and H.W. Hoynes (2003). "Taxes and the Labor Market Participation of Married Couples: The Earned Income Tax Credit". Mimeo, University of California, Davies. * Eissa, N. and J. Leibman (1996). “Labor Supply Responses to the Earned Income Tax Credit,” Quarterly Journal of Economics 111(2), 605-637. Ellwood,D. (2000).“The Impact of the Earned Income Tax Credit and Social Policy Reforms on Work, Marriage and Living Arrangements,” National Tax Journal 53(4) 1063-1106. Hotz, J. and J. K. Scholz (2001). “The Earned Income Tax Credit,” NBER Working paper No. 8078. (Good survey of policy and empirical findings). Published in Moffitt, R.A. (ed.) "MeansTested Transfer Programs in the United States". Chicago: University of Chicago Press, October 2003. Meyer, B. and D. Rosenbaum (2000), “Making Single Mothers Work: Recent Tax and Welfare Policy and its Effects,” National Tax Journal 53, 1027-1061. Meyer, B. and D. Rosenbaum (2001), "The Earned Income Tax Credit. Welfare and the Labor Supply of Single Mothers," Quarterly Journal of Economics 1063-1114. Scholz, J. K. (1994), “In-Work Benefits in the US: The Earned Income Tax Credit", Economic Journal 106, 156-169. Scholz, J. K. (1994), “The Earned Income Tax Credit: Participation, Compliance and AntiPoverty Effectiveness,” National Tax Journal, 59-81.

6.8. Optimality of In-Work Benefits Saez, E. (2002) "Optimal Income Transfer Programs: Intensivs vs Extensive Labor Supply Responses," Quarterly Journal of Economics 117, 2002. Eissa, N, H. Jacobsen Kleven, C Thustrup Kreiner (2004) "Welfare Effects of Tax Reform, and Labor Supply at the Intensive and Extensive Margins", Mimeo, Economic Policy Research Unit, Copenhagen.

By the end of this topic the student should ?? be familiar with the empirical methods for analysing the labour supply effects of taxation ?? know what the key findings in the literature are ?? be familiar with the in-work benefit policies in the UK and the US ?? be familiar with the key empirical findings regarding the behavioural responses to these policies.

Lecture 7.

Social Insurance and Unemployment Insurance

7.1 Moral Hazard and Adverse Selection Reasons for Failure of Competitive Insurance Markets Akerlof, G. (1970), “The Market for Lemons”, Quarterly Journal of Economics 85, 488-500. Rothschild, M. and J. Stiglitz (1976), “Equilibrium in Competitive Insurance Markets,” Quarterly Journal of Economics 91, 629-649. Atkinson, A. B. (1987), “Income Maintenance and Social Insurance,” in A. Auerbach and M. Feldstein (eds), Handbook of Public Economics Volume 2. Amsterdam: North Holland, pp. 779908. Mirrlees J.A. (1974), "Notes on Welfare Economics, Information and Uncertainty", in M. Balch, D. McFadden and S. Wu, eds, Essay on Economic Behavior Under Uncertainty, Contributions to Economic Analysis, North-Holland Publishing Company, Amsterdam, Chapter 9, 243-261 7.2 Some Aspects of Optimal Design Varian, H. (1980), “Redistributive Taxation as Social Insurance”, Journal of Public Economics 14, 49-68. Diamond, P. and J. Mirrlees (1978) "A Model of Optimal Social Insurance with Variable Retirement", Journal of Public Economics 10, 295-336. Diamond, P. and Sheshinski, E. (1995), "Economic Aspects of Optimal Disability Benefits", Journal of Public Economics 57, 1-23. Parsons, D. (1996), "Imperfect ”Tagging” in Social Insurance Programs", Journal of Public Economics 62, 183-208. Whinston, M. D. (1983), "Moral Hazard, Adverse Selection, and the Optimal Provision of Social Insurance", Journal of Public Economics 22, 49-71. 7.3 Endogenous Incomplete Markets and Crowding Out Krueger, D. and F. Perri (2001). “Risk-Sharing: Private Insurance Markets or Redistributive Taxes? Mimeo, Stanford. * Cutler, D.M. and J. Gruber (1996), “Does Public Insurance Crowd Out Private Insurance?” Quarterly Journal of Economics 111, pp. 391-430, 7.4 Behavioural Effects: Labour Supply Krueger, A. B. and B. D. Meyer (2002) "Labor Supply Effects of Social Insurance" NBER Working Paper No. 9014 Gruber, J. (2000) ‘Disability insurance benefits and labor supply.’ Journal of Political Economy 108(6), 1162–1183

7.5 Unemployment Insurance: General Background Atkinson, A. and J. Micklewright (1991). “Unemployment Compensation and Labor Market Transitions: A Critical Review,” Journal of Economic Literature 29, 1679-1727. Hassler, J. and J V Rodriguez-Mora (1999) "Employment Turnover and the Public Allocation of Unemployment Insurance" Journal of Public Economics 73, 55-83. 7.6 The Consumption Smoothing Effect of Unemployment Insurance * Gruber, J. (1997), "The Consumption Smoothing Benefits of Unemployment Insurance", American Economic Review 87, 192-205. Browning, M and T. Crossley (2001), “Unemployment insurance benefit levels and consumption changes”. Journal of Public Economics 80, 1-23. 7.8 Behavioural Effects of Unemployment Insurance Meyer, B.D. (1995) “Lessons from the U.S. Unemployment Insurance Experiments”. Journal of Economic Literature 33, 91-131. * Woodbury, S. and R. Spiegelman (1987), "Bonuses to Workers and Employers to Reduce Unemployment: Randomized Trials in Illinois", American Economic Review 77, 513-530. Katz, L. and B. Meyer (1990). "The Impact of the Potential Duration of Unemployment Benefits on the Duration of Unemployment". Journal of Public Economics 41, 45-72. Meyer, B.D. (1990) "Unemployment Insurance and Unemployment Spells". Econometrica 58, 757-782. Cullen, J. B. and J. Gruber (2000), “Spousal Labor Supply as Insurance: Does Unemployment Insurance Crowd Out the Added Worker Effect?,” Journal of Labor Economics, 18, 546-572. Engen, E. and J. Gruber (2001), “Unemployment Insurance and Precautionary Saving,” Journal of Monetary Economics 47, 545-579 (or NBER Working Paper 5252). Krueger, A.B. and B.D. Meyer (1999) “Labor Supply Effects of Social Insurance”, Handbook of Labor Economics, Vol. 4, sections 1-3, Ch. 33, [Swiss guy... EALE 2006, Fredriksson P. and Soder// (2006) EALE] 7.9 Design: Optimal Unemployment Insurance Bailey, M. (1978) "Some Aspects of Optimal Unemployment Insurance". Journal of Public Economics 10, 379-402. Davidson, C. and S. Woodbury (1997) "Optimal Unemployment Insurance", Journal of Public Economics 64, 359-387. Shavell, S. and L. Weiss (1979) "The Optimal Payment of Unemployment Insurance Benefits over Time", Journal of Political Economy 87, 1347-1362.

Fredriksson, F. and B. Holmlund (2001). "Optimal Unemployment Insurance in Search Equilibrium", Journal of Labor Economics 19, 370-399. Hopenhayn, H.A. and J.P. Nicolini (1997) "Optimal Unemployment Insurance". Journal of Political Economy 105, 412-438. Hassler, J. and J.V. Rodriguez-Mora (2002), "Should UI benefits really fall over time?", Mimeo, Institute for International Economic Studies (IIES), Stockholm University. Werning, I (2002), "Optimal Unemployment Insurance with Unobservable Savings", University of Chicago, Mimeo. Chetty, R. (2004), "Optimal Unemployment Insurance When Income Effects are Large", NBER Working Paper No. 10500.

By the end of this topic the student should ?? understand the theoretical justification for intervention in insurance markets ?? be familiar with the idea of crowding out of private channels for consumption smoothing ?? understand the measurement of the consumption smoothing effect of unemployment insurance ?? have a basic understanding of the issues involved in the design of optimal unemployment insurance ?? be familiar with the key findings regarding the behavioural responses to publicly provided unemployment insurance.

Lecture 8.

Social Insurance: ALMP and Disability Insurance

8.1 Background Calmfors, L, A. Forslund and M. Hemström (2001) "Does active labour market policy work? Lessons from the Swedish experiences", Swedish Economic Policy Review 85, 61-124. Sianesi, B. (2001a), An evaluation of the active labour market programmes in Sweden, IFAU Working Paper 2001:5, Uppsala University. 8.2 Mandated Search: The New Deal for Young People in the UK * vanReenen, J. (2001) "No More Skivvy Schemes? Active Labour Market Policies and the British New Deal for Young Unemployed in Context, The Institute for Fiscal Studies WP01/09. Blundell, R. M.C. Dias, C. Meghir (2001) "Evaluating the Employment Impact of a Mandatory Job Search Assistance Program", IFS Working Paper 01/20 (www.ifs.org.uk) 8.3 Disability Insurance: Background Bound, J. and R.V. Burkhauser (1999) "Economic Analysis of Transfer Programs Targeted on People with Disabilities" in Ashenfelter, O. and D. Card (eds) Handbook of Labor Economics.

Bound, J., J.B. Cullen, and L Schmidt (2000) "The Welfare Implications of Increasing DI Benefit Generosity", NBER Working paper. 8.4 Disability Insurance: Processes Benitez-Silva, H., M. Buchinsky, M. Chan and S. Sheidvasser (1999) "An Empirical Analysis of the Social Security Disability Application, Appeal and Award Process, Journal of Labor Economics. Benitez-Silva, H., M. Buchinsky, M. Chan and S. Sheidvasser (1999) "How Large is the Bias in Self-Reported Disability Status, Mimeo, Yale University. * Bound, J. (1989) "The Health and Earnings of Rejected Disability Insurance Applicants", American Economic Review 79, 482-503.

8.5 Disability Insurance: Labour Supply Effects * Gruber (2000) "Disability Insurance Benefits and Labor Supply, Journal of Political Economy 108, 1162-1183. Krueger, A. B. and B. D. Meyer (2002) "Labor Supply Effects of Social Insurance" NBER Working Paper No. 9014 Parsons (1984) "Disability Insurance and Male Labor Force Participation: A Response", Journal of Political Economy 92, 542-549. Hoynes, H.W. and R.A. Moffitt (1999) "Tax Rates and Work Incentives in the Social Security Disability Insurance Program: Current Law and Alternative Reforms, NBER Working Paper 6058.

By the end of this topic the student should ?? be familiar with the concept of active labour market policy ?? understand how ALMP can be evaluated and have some familiarity with the empirical evidence on NDYP ?? have a basic understanding on the problem in accurately awarding DI

Lecture 9.

What Can We Learn From Studying Consumption?

9.1 Risk-Sharing * Cochrane, J.H. (1991). “A Simple Test of Consumption Insurance”. Journal of Political Economy 99, 957-976. Mace, B. Attanasio, O.P. (2002). “Consumption and Income Inequality: What We Know and What We Can Learn from It?”. Mimeo, University College London. Attanasio, O.P. and E. Battistin (2004). "What Happened to Consumption and Income Inequality

in the US and what Can We Learn from It?" Notes from Plenary Lecture (http://www.fundacionareces.es/PDF/01Attanasio.pdf) Attanasio, O. and J.-V. Rios-Rull (2000) "Consumption Smoothing in Island Economies: Can Public Insurance Reduce Welfare?". European Economic Review 44, 1225-1258. Attanasio, O. and J.-V. Rios-Rull (2002), “Consumption Smoothing and Extended Families”, mimeo, University College London. Krueger, D. and F. Perri (2003) “Does Income Inequality Lead to Consumption inequality? Evidence and Theory”, Mimeo, Stanford. 9.2 Intergenerational Transfers, Altruism and Ricardian Equivalence Barro, R. (1974) “Are Government Bonds Net Wealth?” Journal of Political Economy 82, 10951117. Altonji, J.G., F. Hayashi and L. Kotlikoff (1997) “Parental Altruism and Inter Vivos Transfers: Theory and Evidence”, Journal of Political Economy 105, 1121-1166. * Altonji, J.G., F. Hayashi and L. Kotlikoff (1992) “Is the Extended Family Altruistically Linked? Direct Tests Using Micro Data”. American Economic Review 82, 1177-1198. Bernheim, B.D., A. Schleifer and L.H. Summers (1985). “The Strategic Bequest Motive”. Journal of Political Economy 93, 1045-1076. Perozek, M.G. (1998) “A Reexamination of the Strategic Bequest Motive”, Journal of Political Economy 106, 423-445. Wilhelm, M.O. (1996) “Bequest Behavior and the Effect of Heirs' Earnings: Testing the Altruistic Model of Bequests”. American Economic Review 86, 874-892. 9.3 Wealth Holding * Hubbard, G. J. Skinner and S. Zeldes (1995) "Precautionary Savings and Social Insurance", Journal of Political Economy 103, 360-399.