London School of Economics EOPP: Economic Organisation and Public Policy Programme LSE
EOPP: Economic Organisation and Public Policy Programme

Recent Publications



EOPP: Recent Publications
Can Basic Entrepreneurship Transform the Economic Lives of the Poor?

Abstract

The world’s poorest people lack capital and skills and toil for others in occupations that others shun. Using a large-scale and long-term randomized control trial in Bangladesh this paper demonstrates that sizable transfers of assets and skills enable the poorest women to shift out of agricultural labor and into running small businesses. This shift, which persists and strengthens after assistance is withdrawn, leads to a 38% increase in earnings. Inculcating basic entrepreneurship, where severely disadvantaged women take on occupations which were the preserve of non-poor women, is shown to be a powerful means of transforming the economic lives of the poor.

Keywords: asset transfers, capital constraints, vocational training, occupational
choice, structural change, poverty.

Link to the paper


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Recent Publication: The Lesser Evil: Executive Accountability with Partisan Supporters
Gerard Padro i Miguel

Abstract
We develop a model of electoral accountability with primaries. Prior to the general election, the supporters of each of two parties decide which candidates to nominate. We show that supporters suffer from a fundamental tension: while they want politicians who will faithfully implement the party's agenda in office, they need politicians who can win elections. Accountability to supporters fails when supporters fear that by punishing or rewarding their incumbent for her loyalty or lack thereof, they unintendedly increase the electoral prospects of the opposing party. Therefore, accountability decreases with the importance that supporters assign to the elections, and it breaks down in two cases. First, a popular incumbent safely defects as she knows she will be re-nominated. Second, an unpopular incumbent defects because she knows she will be dismissed even if she follows the party line. These behaviors are labeled impunity and damnation respectively, and are illustrated with case studies.

"The Lesser Evil: Executive Accountability with Partisan Supporters" (with Erik Snowberg), forthcoming in Journal of Theoretical Politics.

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Recent Publications: Policy Papers: The Land Acquisition Bill: A Critique and a Proposal
Maitreesh Ghatak

The paper is joint work with Parikshit Ghosh and was published in Economic and Political Weekly of India, October 8, 2011, Vol. XLVI, No 41, it is available here. A shorter version can be accessed here.

Abstract: The 2011 Land Acquisition and Rehabilitation and Resettlement Bill on land acquisition recently tabled in Parliament is well-intentioned but seriously flawed. Its principal defect is that it attaches an arbitrary mark-up to the historical market price to determine compensation amounts. This will guarantee neither
social justice nor the efficient use of resources. The Bill also places unnecessary and severe conditions on land acquisition, such as restrictions on the use of multicropped land and insistence on public purpose, all of which are going to stifle the pace of development without promoting the interests of farmers.

We present an alternative approach that will allow farmers to choose compensation in either land or cash, determine their own price instead of leaving it to the government’s discretion, and also reallocate the remaining farmland in the most efficient manner. Our proposed method involves a land auction covering not only the project site but also the surrounding agricultural land.

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Recent Publications
Tim Besley, Konrad Buchardi, Maitreesh Ghatak

Incentives and the de Soto Effect

The paper is forthcoming in Quarterly Journal of Economics and can be found here.

Abstract: This paper explores the consequences of improving property rights to facilitate the use of fixed assets as collateral, popularly attributed to the influential policy advocate Hernando de Soto. We use an equilibrium model of a credit market with moral hazard to characterize the theoretical effects, and also develop a quantitative analysis using data from Sri Lanka.
We show that the effects are likely to be non-linear and heterogeneous by wealth group. They also depend on the extent of competition between lenders. There can be significant increases in profts and reductions in interest rates when credit markets are competitive. However, since these are due to reductions in moral hazard, i.e. increased effort, the welfare gains tend to be modest when cost of effort is taken into account. Allowing for an extensive margin where borrowers gain access to the credit market, can make these effects larger depending on the underlying wealth distribution.

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Recent Publications
Maitreesh Ghatak: Implementing Health Insurance for the Poor: The Rollout of RSBY in Karnataka


This paper joint with D. Rajasekhar, Erlend Berg, R. Manjula, and Sanchari Roy is forthcoming in the Economic and Political Weekly of India

Abstract:

The National Health Insurance Scheme (Rashtriya Swasthya Bima Yojana, RSBY) aims to improve poor people’s access to quality health care in India. This paper looks at the implementation of the scheme in Karnataka, drawing on a large survey of eligible households and interviews with empanelled hospitals in the state. Six months after initiation, an impressive 85% of eligible households in the sample were aware of the scheme, and 68% had been enrolled. However, the scheme was hardly operational and utilisation was virtually zero. A large proportion of beneficiaries were yet to receive their cards, and many did not know how and where to obtain treatment under the scheme. Moreover, hospitals were not ready to treat RSBY patients. Surveyed hospitals complained of a lack of training and delays in the reimbursement of their expenses. Many were refusing to treat patients under the scheme until the issues were resolved, and others were asking cardholders to pay cash. As is typical for the implementation of a government scheme, many of the problems discussed can be related to a misalignment of incentives.


Link to article.


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Recent Publications
Johannes Spinnewijn: Capital Income Taxes with Heterogeneous Discount Rates (with Peter Diamond)


This paper is forthcoming in AEJ: Economic Policy

Abstract:

With heterogeneity in both skills and discount factors, the Atkinson-Stiglitz theorem that savings should not be taxed does not hold. In a model with heterogeneity of preferences at each earnings level, introducing a savings tax on high earners or a savings subsidy on low earners increases welfare, regardless of the correlation between ability and discount factor. Extending Saez (2002), a uniform savings tax increases welfare if that correlation is sufficiently high. Key for the results is that types who value future consumption less are more tempted by a lower paid job. Some optimal tax results and empirical evidence are presented.


Link to article.

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EOPP: Recent Publications
Tim Besley: The Logic of Political Violence


This paper (joint with Torsten Persson) is forthcoming in The Quarterly Journal of Economics

Abstract:

This paper offers a unified approach for studying political violence whether it emerges as repression or civil war. We formulate a model where an incumbent or opposition can use violence to maintain or acquire power to study which political and economic factors drive one-sided or two-sided violence (repression or civil war). The model predicts a hierarchy of violence states from peace via repression to civil war, and suggests a natural empirical approach. Exploiting only within-country variation in the data, we show that violence is associated with shocks that can affect wages and aid. As in the theory, these effects are only present where political institutions are non-cohesive.


Link to article.

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EOPP: Recent Publication
Henrik Kleven: Unwilling or Unable to Cheat? Evidence from a Tax Audit Experiment in Denmark


This paper is forthcoming in Econometrica

Abstract:

This paper analyzes a tax enforcement field experiment in Denmark. In the base year, a stratified and representative sample of over 40,000 individual income tax filers was selected for the experiment. Half of the tax filers were randomly selected to be thoroughly audited, while the rest were deliberately not audited. The following year, threat-of-audit letters were randomly assigned and sent to tax filers in both groups. We present three main empirical findings. First, using baseline audit data, we find that the tax evasion rate is close to zero for income subject to third-party reporting, but substantial for self-reported income. Since most income is subject to third-party reporting, the overall evasion rate is modest. Second, using quasi-experimental variation created by large kinks in the income tax schedule, we find that marginal tax rates have a positive impact on tax evasion for self-reported income, but that this effect is small in comparison to legal avoidance and behavioral responses. Third, using the randomization of enforcement, we find that prior audits and threat-of-audit letters have significant effects on self-reported income, but no effect on third-party reported income. All these empirical results can be explained by extending the standard model of (rational) tax evasion to allow for the key distinction between self-reported and third-party reported income.


Link to article.

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EOPP Recent Publications
Henrik Kleven: Transfer Program Complexity and the Take Up of Social Benefits


This paper is forthcoming in the American Economic Journal: Economic Policy

Abstract:

This paper models complexity in social programs as a byproduct of efforts to screen between deserving and undeserving applicants. While a more rigorous screening technology may have desirable effects on targeting efficiency, the associated complexity introduces transaction costs into the application process and may induce incomplete take up. The paper integrates the study of take up with the study of classification errors of type I and type II, and argues that incomplete take up can be seen as a form of type I error. We consider a government interested in ensuring a minimum income level for as many deserving individuals as possible, and characterize optimal programs when policy makers can choose the rigor of screening (and associated complexity) along with a benefit level and an eligibility criterion. It is shown that optimal program parameters reflect a trade-off at the margin between type I errors (including non-takeup) and type II errors. Optimal programs that are not universal always feature a high degree of complexity. Although it is generally possible to eliminate take up by the undeserving (type II errors), policies usually involve eligibility criteria that make them eligible and rely on complexity to restrict their participation. Even though the government is interested only in ensuring a minimum benefit level, the optimal policy may feature benefits that are higher than this target minimum. This is because benefits generically screen better than either eligibility criteria or complexity.


Link to article.

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EOPP: Recent Publications
Maitreesh Ghatak: Thanks for Nothing? Not-for-Profits and Motivated Agents.


This paper (joint with Hannes Mueller) has been published in the Journal of Public Economics.

Abstract:

We re-examine the labor donation theory of not-for-profits and show that these organizations may exist not necessarily because motivated workers prefer to work in them, or that they dominate for-profits in terms of welfare, but because the excess supply of motivated workers makes the non-profit form more attractive to managers. We show that if Firms had to compete for motivated workers then not-for-profit would be competed out by for-profit Firms. Therefore, in the choice between not-for-profit and for-profit provision, other than incentive problems, the distribution of rents between management and workers, and consequently, the relative scarcity of motivated workers may play an important role.


Link to article.

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EOPP: Recent Publications
Gerard Padro-i-Miquel: Conflict and Deterrence under Strategic Risk

A paper by Gerard Padro-i-Miquel (joint with Sylvain Chassang) entitled 'Conflict and Deterrence under Strategic Risk' will be published in Quarterly Journal of Economics.

The authors examine the determinants of cooperation and the effectiveness of deterrence when fear is a motive for conflict. They contrast results obtained in a complete information setting to those obtained in a setting with strategic risk, where players have different information about their environment. These two strategic settings allow them to identify and distinguish the role of predatory and pre-emptive incentives as determinants of cooperation and conflict. In their model, weapons unambiguously facilitate peace under complete information. In contrast, under strategic risk, the authors show that increases in weapon stocks can have a non-monotonic effect on the sustainability of cooperation. They also show that under strategic risk, asymmetry in military strength can facilitate peace, and that anticipated peace-keeping interventions may improve incentives for peaceful behaviour.


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EOPP: Recent Publications
Robin Burgess: Can Openness Mitigate the Effects of Weather Shocks? Evidence from India's Famine Era

A paper by Robin Burgess (joint with Dave Donaldson (MIT)) entitled 'Can Openness Mitigate the Effects of Weather Shocks? Evidence from India's Famine Era' is forthcoming in the American Economic Review Papers and Proceedings.

Rural citizens of developing countries are often highly exposed to weather shocks that affect the incomes they earn and the food they eat, often resulting in widespread hunger and loss of life. There exists intense debate over what role openness to trade in food might play in mitigating or exacerbating the mortality impact of weather and death. However there exists a fundamental ambiguity in this regard as openness makes nominal incomes more responsive to production shocks (due to both increased specialization and dampened offsetting price movements), but consumer prices less volatile, such that the net effect on real incomes is unclear. This paper employs a colonial era Indian district-level database for the period 1875 to 1919 to provide some preliminary insights into the weather-trade-death relationship. The results suggest that the arrival of railroads in Indian districts dramatically constrained the ability of rainfall shocks to cause famines in colonial India.


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EOPP: Recent Publications
Oriana Bandiera: Heterogeneous Class Size Effects: New Evidence from a Panel of University Students

A paper by Oriana Bandiera (joint with Valentino Larcinese (LSE) and Imran Rasul (UCL) 'Heterogeneous Class Size Effects: New Evidence from a Panel of University Students' is forthcoming in the Economic Journal.

Over the last decade, many countries have experienced dramatic increases in university enrolment, which, when not matched by compensating increases in other inputs, have resulted in larger class sizes. Using administrative records from a leading UK university, this paper presents evidence on the effects of class size on students' test scores. The authors observe the same student and faculty members being exposed to a wide range of class sizes from less than 10 to over 200. They therefore estimate non-linear class size effects controlling for unobserved heterogeneity of both individual students and faculty. The authors find that -(i) at the average class size, the effect size is -.108; (ii) the effect size is however negative and significant only for the smallest and largest ranges of class sizes and zero over a wide range of intermediate class sizes from 33 to 104; (iii) students at the top of the test score distribution are more affected by changes in class size, especially when class sizes are very large. This paper presents evidence to rule out class size effects being due solely to the non-random assignment of faculty to class size, sorting by students onto courses on the basis of class size, omitted inputs, the difficulty of courses, or grading policies. The evidence also shows the class size effects are not mitigated for students with greater knowledge of the UK university system, this university in particular, or with greater family wealth.


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EOPP: Recent Publications
Oriana Bandiera, Robin Burgess, Selim Gulesci and Munshi Sulaiman: Participation in Adolescent Training Programs

A paper by Oriana Bandiera, Robin Burgess, Selim Gulesci and Munshi Sulaiman (joint with Markus Goldstein (World Bank) and Imran Rasul (UCL)) entitled 'Participation in Adolescent Training Programs: New Evidence from Uganda' is forthcoming in the Journal of the European Economic Association, Papers and Proceedings.

Almost one third of the population in less developed countries is under age 15. Hence improving the effectiveness of policy interventions that target adolescents might be especially important. This paper analyzes the intention to participate in training programs of adolescent girls in Uganda, a country with perhaps the most skewed age distribution anywhere in the world. The training program the authors focus on is BRAC's Adolescent Development Program, which emphasizes the provision of life skills training, entrepreneurship training, and microfinance. The paper presents evidence on the individual and household determinants of the intention to participate of adolescent girls into this program. In particular, it is shown how: (i) individual demographics, skills, beliefs, and life satisfaction; and, (ii) household resources and experiences with NGOs in the past, determine the intent to participate. We discuss how these factors vary across and within villages, and whether and how they affect the likelihood to attend per se, and the intended frequency of attendance. The results have implications for the design, management, and evaluation of similar programs throughout East Africa.


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EOPP: Recent Publications
Tim Besley, Daniel Sturm and Torsten Persson: Political Competition, Policy and Growth: Theory and Evidence from the United States

A paper by Tim Besley, Daniel M. Sturm and Torsten Persson (IIES) entitled 'Political Competition, Policy and Growth: Theory and Evidence from the United States' is forthcoming in the Review of Economic Studies.

This paper develops a simple model to analyze how a lack of political competition may lead to policies that hinder economic growth. The authors test the predictions of the model on panel data for the US states. In these data, the authors find robust evidence that lack of political competition in a state is associated with anti-growth policies: higher taxes, lower capital spending and a reduced likelihood of using right-to-work laws. The paper also documents a strong link between low political competition and low income growth.


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Recent Publications
Tim Besley: Estimating the Peace Dividend: The impact of violence on house prices in Northern Ireland


This paper joint with Hannes Mueller is forthcoming in the American Economic Review


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Recent Publications: The Financial Express
What crisis has taught economics

In his latest article for the Financial Express, Maitreesh Ghatak looks at the legacy of Paul Samuelson, who pioneered the use of formal models in economics.

Read the articles:
What crisis has taught economics, published Jan 09, 2010

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Recent Publications
Tim Besley: State Capacity, Conflict and Development

A paper by Tim Besley entitled "State Capacity, Conflict and Development"(joint with Torsten Persson) will be published in Econometrica.

In this paper, the authors point out that the absence of state capacities to raise revenue and to support markets is a key factor in explaining the persistence of weak states. They report on an on-going project to investigate the incentive to invest in such capacities. The paper sets out a simple analytical structure in which state capacities are modelled as forward looking investments by government. The approach highlights some determinants of state building including the risk of external or internal conflict, the degree of political instability, and dependence on natural resources. Throughout, the authors link these state capacity investments to patterns of development and growth.


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Recent Publications: The Financial Express
Buying Land and Selling Kidneys

In two articles for the Financial Express Maitreesh Ghatak, looks at the legal and ethical limits of economic transactions by analysing the trade in human organs and finding parallels in coercive land acquisition.

Read the articles:
Buying land and selling kidneys, published Nov 09, 2009
Why would you sell your heart?, published Nov 16, 2009


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Recent Publications: Policy Papers
Maitreesh Ghatak

Maitreesh Ghatak, joint with Sanjay Banerji (Essex), analyses the issues of land transfer from agriculture to industry in the context of industrialization in West Bengal, India in this Financial Express piece entitled "No Way Out of This Plot", published on Sep 30, 2009.

To read the full article, click here.


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Recent Publications: Policy Papers
Maitreesh Ghatak - Small is smart

Maitreesh Ghatak analyses the effectiveness of microfinance in this article "Small is Smart" published in the Financial Express, August 24, 2009. He argues that while microfinance is no magic bullet for solving all the problems of poverty, it does relax credit constraints faced by the poor.

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Recent Publications:
Gerard Padró i Miquel

A paper by Gerard Padró i Miquel entitled "Defensive Weapons and Defensive Alliances" (joint with Sylvain Chassang) has been published in the American Economic Review Papers and Proceedings in May 2009. The paper provides a careful formal analysis of how the unilateral acquisition of defensive weapons may affect the sustainability of peace.

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Recent Publications: Policy Papers
Anger in the Wake of Aila

Maitreesh Ghatak's latest article in Financial Express is on the role of media in democracy.

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Recent Publications
Oriana Bandiera: Social Incentives in the Workplace

A paper by Oriana Bandiera entitled "Social Incentives in the Workplace" (joint with Iwan Barankay and Imran Rasul) is forthcoming in Review of Economic Studies.

In this paper, the authors present evidence on social incentives in the workplace, namely on whether workers’ behavior is affected by the presence of those they are socially tied to, even in settings where there are no externalities among workers due to either the production technology or the compensation scheme in place. To do so the authors combine data on individual worker productivity from a firm’s personnel records with information on each worker’s social network of friends in the firm. They find that compared to when she has no social ties with her co-workers, a given worker’s productivity is significantly higher when she works alongside friends who are more able than her, and significantly lower when she works with friends who are less able than her. As workers are paid piece rates based on individual productivity, social incentives can be quantified in monetary terms and are such that — (i) workers who are more able than their friends are willing to exert less effort and forgo 10% of their earnings; (ii) workers who have at least one friend who is more able than themselves are willing to increase their effort and hence productivity by 10%. The distribution of worker ability is such that the net effect of social incentives on the firm’s aggregate performance is positive. The results suggest that firms can exploit social incentives as an alternative to monetary incentives to motivate workers.

For more details, click here.


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Recent Publications: Policy Papers
Maitreesh Ghatak - Poor Man's Capitalism

Property rights are accepted as central to economic development. But in this article published in the Financial Express on 23 March 2009, Maitreesh Ghatak shows that property reforms alone cannot solve the problems of the poor who do not have any assets at all. He highlights the importance of financial sector reforms to make property rights effective, rather than nominal .

For more details click here


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Recent Publications:
Tim Besley and Maitreesh Ghatak

"Property Rights and Economic Development" by Tim Besley and Maitreesh Ghatak is forthcoming as one of the chapters in the Volume V of the Handbook of Development Economics edited by Dani Rodrik and Mark Rosenzweig. The chapter develops a unified analytical framework for studying the role of property rights in economic development. It addresses two fundamental and related questions concerning the relationship between property rights and economic activity. (i) What are the mechanisms through which property rights affect economic activity? (ii) What are the determinants of property rights? In answering these, the chapter surveys some of the main empirical and theoretical ideas from the extensive literature on the topic.

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Recent Publications: Policy Papers
Maitreesh Ghatak: ''Barefoot Businessmen''

Maitreesh Ghatak, in this article in the Financial Express, looks at detailed poverty studies and demolishes some conventional wisdom. The poor, he shows, are doughty entrepreneurs and small improvement in physical infrastructure and well-designed cash incentives can make dramatic improvements in their quality of life

for further details click here


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Recent Publications:
Timothy Besley (joint with Neil Meads and Paulo Surico) ''Insiders versus Outsiders in Monetary Policymaking'' forthcoming American Economic Review (Papers and Proceedings)

A paper by Timothy Besley (joint with Neil Meads and Paulo Surico) “Insiders versus Outsiders in Monetary Policymaking” is forthcoming in  American Economic Review(Papers and Proceedings)


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Recent Publications:
Oriana Bandiera (joint with Iwan Barankay and Imran Rasul) ''Social Connections and Incentives in the Workplace: Evidence from Personnel Data'' forthcoming Econometrica

A paper by Oriana Bandiera (joint with Iwan Barankay and Imran Rasul) “Social Connections and Incentives in the Workplace: Evidence from Personnel Data” is forthcoming in Econometrica

The authors present evidence on the effect of social connections between workers and managers on productivity in the workplace. To evaluate whether the existence of social connections is beneficial to the firm’s overall performance, they explore how the effects of social connections vary with the strength of managerial incentives and worker’s ability. To do so, they combine panel data on individual worker’s productivity from personnel records with a natural field experiment in which we engineered an exogenous change in managerial incentives, from fixed wages, to bonuses based on the average productivity of the workers managed. The authors find that when managers are paid fixed wages, they favor workers to whom they are socially connected irrespective of the worker’s ability, but when they are paid performance bonuses, they target their effort towards high ability workers irrespective of whether they are socially connected to them or not. Although social connections increase the performance of connected workers, they find that favoring connected workers is detrimental for the firm’s overall performance.


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EOPP Recent Publications: Policy Papers
Maitreesh Ghatak 'Where is Credit Due?'

Maitreesh Ghatak, in this article in Financial Express, analyses the role and functioning of credit markets in developing countries, a subject that evokes much dispute among economists. Are firms credit-constrained? How does one best measure returns to firms: as return to ability of entrepreneur or return to capital stock?

For further details see

http://www.financialexpress.com/news/where-is-credit-due/378205/


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Forthcoming Publications
Henrik Kleven (joint with Claus Thustrup Kreiner and Emmanuel Saez): ''The Optimal Taxation of Couples,'' forthcoming Econometrica

A paper by Henrik Kleven (joint with Claus Thustrup Kreiner and Emmanuel Saez) The Optimal Income Taxation of Couples is forthcoming in Econometrica.

This paper explores the optimal income taxation of couples, where each couple is modeled as a unitary agent supplying labor along two dimensions: the labor supply of a primary earner and the labor supply of a secondary earner. The authors show that, if second-earner labor force participation is a signal of the couple being better off (as when second-earner entry reflects high labor market opportunities), optimal tax schemes display positive tax rates on secondary earnings along with negative jointness whereby the tax rate on one person decreases with the earnings of the spouse. Conversely, if second-earner participation is a signal of the couple being worse off (as when second-earner entry reflects low home production ability), they obtain a negative tax rate on the secondary earner along with positive jointness: the second-earner subsidy is being phased out with primary earnings. These results imply that, in either case, the tax distortion on the secondary earner is declining in primary earnings, which is therefore a general property of an optimum. The authors also prove that the second-earner tax distortion tends to zero asymptotically as primary earnings become large.

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Recent Publications
Timothy Besley (joint with Torsten Persson): 'The Origins of State Capacity: Property Rights, Taxation and Politics', forthcoming in the American Economic Review.

A paper by Timothy Besley (joint with Torsten Persson) The Origins of State Capacity: Property Rights, Taxation and Politics is forthcoming in the American Economic Review.

Economists generally assume that the state has sufficient institutional capacity to support markets and levy taxes, assumptions which cannot be taken for granted in many states, neither historically nor in today's developing world. In this paper the authors develop a framework where "policy choices" in market regulation and taxation are constrained by past investments in the legal and fiscal capacity of the state. They study the economic and political determinants of such investments and find that legal and fiscal capacity are typically complements. Their theoretical results show that, among other things, common interest public goods, such as fighting external wars, as well as political stability and inclusive political institutions, are conducive to building state capacity of both forms. Their preliminary empirical results uncover a number of correlations in cross-country data which are consistent with the theory.

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Recent Publications
Oriana Bandiera and Andrea Prat (joint with Tommaso Valletti): 'Active and Passive Waste in Government Spending: Evidence from a Policy Experiment', forthcoming in the American Economic Review.

A paper by Oriana Bandiera and Andrea Prat (joint with Tommaso Valletti) Active and Passive Waste in Government Spending: Evidence from a Policy Experiment is forthcoming in the American Economic Review.

The authors propose a distinction between active waste and passive waste as determinants of the cost of public services. Active waste entails utility for the public decision maker (as in the case of bribery) whereas passive waste does not (as in the case of inefficiency due to red tape). To assess the empirical relevance of both forms of waste, the authors analyze purchases of standardized goods by Italian public bodies and exploit a policy experiment associated with a national procurement agency. A revealed preference argument implies that if public bodies with higher costs are more likely to buy from the procurement agency rather than from traditional suppliers, cost differences are more likely to be due to passive waste. The authors find that: (i) Some public bodies pay systematically more than others for observationally equivalent goods and such price differences are sizeable; (ii) Differences are correlated with governance structure: the central administration pays at least 22 per cent more than semi-autonomous agencies (local government is at an intermediate level); (iii) The variation in prices across public bodies is principally due to variation in passive rather than active waste; (iv) Passive waste accounts for 83 per cent of total estimated waste.

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Recent publication
Andrea Prat (joint with Amil Dasgupta) ''Information aggregation in financial markets with career concerns'', forthcoming in the Journal of Economic Theory.

A paper by Andrea Prat (joint with Amil Dasgupta) Information aggregation in financial markets with career concerns, is forthcoming in the Journal of Economic Theory.

Abstract: What are the equilibrium features of a dynamic financial market in which traders care about their reputation for ability? The authors modify a standard sequential trading model to include traders with career concerns. They show that this market cannot be informationally efficient: there is no equilibrium in which prices converge to the true value, even after an infinite sequence of trades. They characterize the most revealing equilibrium of this game and show that an increase in the strength of the traders’ reputational concerns has a negative effect on the extent of information that can be revealed in equilibrium but a positive effect on market liquidity.

 


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Recent publication
Oriana Bandiera (joint with Iwan Barankay and Imran Rasul) ''Social Capital in the Workplace: Evidence on its Formation and Consequences'', forthcoming in Labour Economics

A paper by Oriana Bandiera (joint with Iwan Barankay and Imran Rasul) "Social Capital in the Workplace: Evidence on its Formation and Consequences" is forthcoming in Labour Economics.

Abstract: The existence of social ties between co-workers affect many aspects of firm and worker behavior, such as how workers respond to a given set of incentives, the optimal compensation structures for workers at different tiers of the firm hierarchy, and the optimal organizational design for the firm. This paper presents evidence on the social capital in one particular firm, as embodied in the friendship ties among its workers. The authors describe the structure of the friendship network as a whole and present evidence on the determinants of social ties. Finally, they review evidence from a field experiment they conducted in the firm to highlight one particular mechanism through which social capital significantly affects worker performance.


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Recent Publications
Status Incentives by Timothy Besley and Maitreesh Ghatak

"Status Incentives" by Tim Besley and Maitreesh Ghatak will be published in the American Economic Review, Papers and Proceedings, in May 2008.

Abstract: When economists study incentives in organizations, the main focus has been on using monetary payments in exchange for performance on specific measurable dimensions. But organizations use a wide variety of means to motivate their workers. One such method which has not been studied much to date, is the explicit creation of status rewards attached to good performance. In this paper, the authors consider the role of such status awards as an incentive device.

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Recent Publications
Robin Burgess (joint with Philippe Aghion, Stephen Redding and Fabrizio Zilibotti): ''The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India'', forthcoming American Economic Review 2008

A paper by Robin Burgess (joint with Philippe Aghion, Stephen Redding and Fabrizio Zilibotti) "The Unequal Effects of Liberalization: Evidence from Dismantling the License Raj in India," has recently been accepted for publication in the American Economic Review 2008

The authors study whether the effects on registered manufacturing output of disman- tling the License Raj - a system of central controls regulating entry and production activity in this sector - vary across Indian states with different labor market reg- ulations. The effects are found to be unequal across Indian states with different labor market regulations. In particular, following delicensing, industries located in states with pro-employer labor market institutions grew more quickly than those in pro-worker environments.

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Recent Publications
Henrik Kleven: 'Evaluation of Four Tax Reforms in the United States: Labour Supply and Welfare Effects for Mothers', Journal of Public Economics, 92, 2008, pp.795-816

A paper by Henrik Kleven, (joint with Nada Eissa and Claus Thustrup Kreiner) "Evaluation of Four Tax Reforms in the United States: Labour Supply and Welfare Effects for Mothers," has recently been published in the Journal of Public Economics, 2008

Summary:
An emerging consensus is that labor force participation is more responsive to taxes and transfers than hours worked. To understand the implications of participation responses for the welfare analysis of tax reform, this paper embeds this margin of labor supply in an explicit welfare theoretic framework. We apply the framework to examine the welfare effects on single mothers in the United States following four tax acts passed in 1986, 1990, 1993, and 2001.We propose a simulation method combining features of fully structural microsimulation studies and simple deadweight loss calculations. Our approach accounts for the observed heterogeneity in the microdata, but is simple to implement because we do not need to specify utility functions and estimate utility parameters.We find that each of the four tax acts created substantial welfare gains, and that the gains were concentrated almost exclusively on the participation margin. Our results imply that standard approaches not modeling the participation decision can make large errors.

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Recent Publications
Gerard Padro-i-Miquel: The Control of Politicians in Divided Societies: The Politics of Fear, Review of Economic Studies, October 2007

A paper by Gerard Padró-i-Miquel, "The Control of Politicians in Divided Societies: The Politics of Fear," has recently been published in The Review of Economic Studies, October 2007

Autocrats in many developing countries have extracted enormous personal rents from power. In addition, they have imposed ineficient policies including pervasive patronage spending. The author presents a model in which the presence of ethnic identities and the absence of institutionalized succession processes allow the ruler to elicit support from a sizeable share of the population despite large reductions in welfare. The fear of falling under an equally ineficient and venal ruler that favors another group is enough to discipline supporters. The model predicts extensive use of patron- age, ethnic bias in taxation and spending patterns and unveils a new mechanism through which economic frictions translate into increased rent extraction by the leader. These predictions are consistent with the experiences of bad governance, ethnic bias, wasteful policies and kleptocracy in post-colonial Africa.

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Recent Publications
Tim Besley and Maitreesh Ghatak: Retailing public goods: The economics of corporate social responsibility

A paper by Tim Besley and Maitreesh Ghatak entitled 'Retailing public goods: The economics of corporate social responsibility' has been published in the Journal of Public Economics, Vol. 91, No. 9, p. 1645–1663, September 2007 [Lead article]. This paper explores the feasibility and desirability of Corporate Social Responsibility (CSR). The authors identify CSR with creation of public goods or curtailment of public bads. Using a model with profitmaximizing firms, the paper shows that there is a direct parallel between CSR and traditional models of private provision of public goods. Indeed, firms that use CSR will produce public goods at exactly the same level as predicted by the standard voluntary contribution equilibrium for public goods. The authors compare CSR with government provision and charitable provision, discussing when CSR by private for-profit firms could have a comparative advantage in dealing with public goods provision.

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Recent Publications
Maitreesh Ghatak (joint with Pranab Bardhan and Alexander Karaivanov): ''Wealth Inequality and Collective Action''

A paper by Maitreesh Ghatak (joint with Pranab Bardhan and Alexander Karaivanov) titled 'Wealth Inequality and Collective Action' has been published in the Journal of Public Economics, Vol. 91, No. 9, p. 1843–1874, September 2007. The authors analyze the effect of inequality in the distribution of endowment of a private input (briefly, wealth) that is complementary in production with a collective input on efficiency. The collective input is the outcome of a collective action problem (e.g., contribution to pure or impure public goods and extraction from common-property resources). In an environment where transactions costs prevent the efficient allocation of the private input across individuals, and the collective action problem is resolved in a decentralized manner, they characterize the optimal second-best distribution of wealth.They show that while efficiency increases with greater equality within the group of contributors and non-contributors, in some situations there is an optimal degree of inequality between the groups, thereby locating Olson’s original insight in a more general framework.

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Recent Publications
Maitreesh Ghatak (joint with Massimo Morelli and Tomas Sjostrom): 'Entrepreneurial Talent, Occupational Choice, and Trickle Up Policies' Journal of Economic Theory, vol.137, no.1, November 2007

A paper by Maitreesh Ghatak (joint with Massimo Morelli and Tomas Sjostrom) entitled Entrepreneurial Talent, Occupational Choice, and Trickle Up Policies has been published in the Journal of Economic Theory, Volume 137, No. 1, November 2007. The authors study market inefficiencies and policy remedies when agents choose their occupations, and entrepreneurial talent is subject to private information. Untalented entrepreneurs depress the returns to entrepreneurship because of adverse selection. The severity of this problem depends on the outside option of entrepreneurs, which is working for wages. This links credit, product and labour markets. A rise in wages reduces the adverse selection problem. These multimarket interactions amplify productivity shocks and may generate multiple equilibria. If it is impossible to screen entrepreneurs then all agents unani mously support a tax on entrepreneurs that drives out the less talented ones. However, if screening is possible, e.g., if wealthy entrepreneurs can provide collateral for their loans, then wealthy entrepreneurs do not support surplus enhancing taxes.


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Recent Publications
Oriana Bandiera: 'Contract Duration and Investment Incentives: Evidence from Land Tenancy Agreements' Journal of the European Economic Association, September 2007

A paper by Oriana Bandiera titled "Contract Duration and Investment Incentives: Evidence from Land Tenancy Agreements" has been published in Journal of the European Economic Association, September 2007. The paper analyses the empirical determinants of contract length, a key and yet neglected dimension of contractual structure. The author estimates contract length and contract type jointly using original data on tenancy agreements signed between 1870 and 1880 in the district of Siracusa, Italy. The findings indicate that the choice of contract length is driven by the need to provide incentives for non observable investment, taking into account transaction costs and imperfections in the credit markets that make incentive provision costly. The results also illustrate that since both length and the compensation scheme are used to provide incentives within the same contract, joint analysis is important for a correct interpretation of the evidence.


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Recent Publications
Oriana Bandiera (joint with Iwan Barankay and Imran Rasul): 'Incentives for Managers and Inequality Among Workers: Evidence from a Firm-Level Experiment' Quarterly Journal of Economics Vol 122:2, May 2007

A paper by Oriana Bandiera (joint with Iwan Barankay and Imran Rasul), "Incentives for Managers and Inequality Among Workers; Evidence from a Firm-Level Experiment " has been published in the Quarterly Journal of Economics, vol.122, no.2, May 2007.

Abstract: The authors present evidence from a firm level experiment in which they engineered an exogenous change in managerial compensation from fixed wages to performance pay based on the average productivity of lower-tier workers. They find that the introduction of managerial performance pay raises both the mean and dispersion of worker productivity. Analysis of individual level productivity data shows that managers target their effort towards high ability workers, and the least able workers are less likely to be selected into employment.


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Recent Publications
Andrea Prat (joint with Cremer and Luis Garicano): ''Language and Theory of the Firm'', Quarterly Journal of Economics 122(1): 373-407, February 2007

A paper by Andrea Prat (joint with Jacques Cremer and Luis Garicano) titled "Language and Theory of the Firm" has been published in the Quarterly Journal of Economics 122(1): 373-407, February 2007. The authors characterize efficient technical languages and study their interaction with the scope and structure of organizations. Efficient languages use precise words for frequent events and vague words for unusual ones. A broader organizational scope allows for more synergies to be captured, but reduces within-unit efficiency, since it requires a more generic language. A manager working as specialized translator may also be used to achieve between-unit coordination while maintaining separate languages. Their theory reconciles two recent well-documented phenomena within organizations: the recent increase in information centralization and the reduction in hierarchical centralization.

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