Public Economics:

Recent Papers

 

Tax Evasion at the Top of the Income Distribution: Theory and Evidence

John Guyton, Patrick Langetieg, Daniel Reck, Max Risch, Gabriel Zucman

March 2021

This paper studies tax evasion at the top of the U.S. income distribution using IRS micro-data from (i) random audits, (ii) targeted enforcement activities, and (iii) operational audits. Drawing on this unique combination of data, we demonstrate empirically that random audits underestimate tax evasion at the top of the income distribution. Specifically, random audits do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top. We provide a theoretical explanation for this phenomenon, and we construct new estimates of the size and distribution of tax noncompliance in the United States. In our model, individuals can adopt a technology that would better conceal evasion at some fixed cost. Risk preferences and relatively high audit rates at the top drive the adoption of such sophisticated evasion technologies by high-income individuals. Consequently, random audits, which do not detect most sophisticated evasion, underestimate top tax evasion. After correcting for this bias, we find that unreported income as a fraction of true income rises from 7% in the bottom 50% to more than 20% in the top 1%, of which 6 percentage points correspond to undetected sophisticated evasion. Accounting for tax evasion increases the top 1% fiscal income share significantly.

 

The Welfare Economics of Reference Dependence

Daniel Reck, Arthur Seibold

January 2021

Empirical evidence suggests that in many contexts, individuals evaluate options relative to a reference point, placing disproportionate weight on losses. In this paper, we analyze welfare under reference dependence. We explicitly model the central normative ambiguity over whether the influence of the reference point on choices reflects a bias or a normative preference, and we describe how judgments regarding this ambiguity affect welfare calculations. We find that policies that decrease the reference point generally improve welfare. In contrast, the welfare effect of price or tax changes in the presence of reference dependence depends strongly on normative judgments. We illustrate our findings with an empirical application to reference dependence exhibited in retirement decisions of German workers. Simulation results lend some support to increasing the Normal Retirement Age rather than using financial incentives in order to induce workers to postpone retirement.

 

Do family policies reduce gender inequality? Evidence from 60 years of policy experimentation

Henrik Kleven, Camille Landais, Johanna Posch, Andreas Steinhauer, Josef Zweimuller

November 2020

Do family policies reduce gender inequality in the labor market? We contribute to this debate by investigating the joint impact of parental leave and child care, using administrative data covering the labor market and birth histories of Austrian workers over more than half a century. We start by quasi-experimentally identifying the causal effects of all family policy reforms since the 1950s on the full dynamics of male and female earnings. We then map these causal estimates into a decomposition framework building on Kleven, Landais and Søgaard (2019) to compute counterfactual gender inequality series. Our results show that the enormous expansions of parental leave and child care subsidies have had virtually no impact on gender convergence.

 

Risk-based Selection in Unemployment Insurance: Evidence and Implications

Camille Landais, Arash Nekoei, Peter Nilsson, David Seim, Johannes Spinnewijn

November 2020

This paper studies whether adverse selection can rationalize a universal mandate for unemployment insurance (UI). Building on a unique feature of the unemployment policy in Sweden, where workers can opt for supplemental UI coverage above a minimum mandate, we provide the first direct evidence for adverse selection in UI and derive its implications for UI design. We find that the unemployment risk is more than twice as high for workers who buy supplemental coverage. Exploiting variation in risk and prices, we show how 25-30% of this correlation is driven by risk-based selection, with the remainder driven by moral hazard. Due to the moral hazard and despite the adverse selection we find that mandating the supplemental coverage to individuals with low willingness-to-pay would be sub-optimal. We show under which conditions a design leaving choice to workers would dominate a UI system with a single mandate. In this design, using a subsidy for supplemental coverage is optimal and complementary to the use of a minimum mandate.

Keywords: Adverse Selection, Unemployment Insurance, Mandate, Subsidy

 

What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models

Xavier Jaravel, Eric Sager

August 2020

This paper finds that U.S. consumer prices fell substantially due to trade with China. With comprehensive price micro-data and two complementary identification strategies, we estimate that a 1pp increase in import penetration, stemming from supply shocks in China, causes a 1.9% decline in consumer prices. This price response is one order of magnitude larger than in standard trade models that abstract from strategic price-setting. We find a large fall in domestic prices, driven by intensified competition and declining markups. The estimates imply that trade with China increased U.S. consumer surplus by about $400,000 per displaced job.

 

Real-Time Price Indices: Inflation Spike and Falling Product Variety during the Great Lockdown

Xavier Jaravel, Martin O'Connell

August 2020

We characterize inflation dynamics during the Great Lockdown using scanner data covering millions of transactions for fast-moving consumer goods in the United Kingdom. We show that there was a significant and widespread spike in inflation. First, aggregate month-to-month inflation was 2.4% in the first month of lockdown, a rate over 10 times higher than in preceding months. Over half of this increase stems from reduced frequency of promotions. Consumers’ purchasing power was further eroded by a reduction in product variety. Second, 96% of households have experienced inflation in 2020, while in prior years around half of households experienced deflation. Third, there was inflation in most product categories, including those that experienced output falls. Only 13% of product categories experienced deflation, compared with over half in previous years. While market-based measures of inflation expectations point to disinflation or deflation, these findings indicate a risk of stagflation should not be ruled out. We hope our approach can serve as a template to facilitate rapid diagnosis of inflation risks during economic crises, leveraging scanner data and appropriate price indices in real-time.

Keywords: Inflation, Great Lockdown

 

Job Seekers' Perceptions and Employment Prospects: Heterogeneity, Duration Dependence and Bias

Andreas I Mueller, Johannes Spinnewijn, Giorgio Topa

July 2020

This paper uses job seekers’ elicited beliefs about job finding to disentangle the sources of the decline in job-finding rates by duration of unemployment. We document that beliefs have strong predictive power for job finding, but are not revised downward when remaining unemployed and are subject to optimistic bias, especially for the long-term unemployed. Leveraging the predictive power of beliefs, we find substantial heterogeneity in job finding with the resulting dynamic selection explaining most of the observed negative duration dependence in job finding. Moreover, job seekers’ beliefs under-react to heterogeneity in job finding, distorting search behavior and increasing long-term unemployment.

 

The value of unemployment insurance

Camille Landais, Johannes Spinnewijn

July 2020

Due to the absence of unemployment insurance (UI) choices, the traditional approach to estimating the value of UI is to infer it from the observed consumption response to job loss under some assumption on risk preferences. Exploiting the rich data and unique policy context in Sweden, we propose two alternative approaches that relax this assumption and we implement all three methods on the same sample of workers. The first approach considers the difference in marginal propensity to consume (MPC) when unemployed vs. employed, which allows to identify the difference in prices to smooth consumption in the respective states. The second approach exploits UI choices embedded in the Swedish UI system in a Revealed Preference approach. While the drop in consumption expenditures is relatively small (∼ 13 percent), we find that the MPC is around 25 percent higher when unemployed than employed, translating into a marginal value of transfers that is at least 60 percent higher when unemployed than employed. This high value of UI is confirmed by our RP estimates and indicates substantial risk aversion given the relatively small drop in consumption expenditures.

Keywords: Keywords: Unemployment Insurance, Consumption Smoothing, Reveal

 

The Social Determinants of Choice Quality: Evidence from Health Insurance in the Netherlands

Benjamin Handel, Jonathan Kolstad, Thomas Minten, Johannes Spinnewijn

June 2020

In markets where regulators consider choice-oriented policies, consumer choice errors introduce a trade-off between generating match benefits and avoiding consumer mis-allocation. If lower SES consumers make worse choices, these issues may be especially pertinent to regulators concerned about inequality. We study these issues in the health insurance market in the Netherlands, where the regulator specifies what deductible levels private insurers can offer consumers. We observe granular and comprehensive data on all consumers in the Netherlands including data on (i) health insurance choices (ii) health utilization (iii)rich socio-demographic factors and (iv) peers’ choices on a number of dimensions. We model deductible choice as a function of multiple factors, including ex ante predicted health risk, and find that choice quality is low on average, with many predictably healthy people foregoing high deductible options that deliver substantive value, even accounting for classical risk aversion. Those with higher education levels and more analytic degrees or professions make markedly better decisions, conditional on predicted health and a collection of detailed financial factors. We exploit panel variation in exposure to peers and show that peer effects, within firms, locations and families, have substantive impacts on choice quality. We leverage these results to study the consumer surplus effects of several counterfactual scenarios. We find that, while consumers leave substantial surplus on the table when faced with the existing choice menu, the choice mandates we consider reduce consumer welfare relative to the status quo. Overall, the equity implications of choice-based policies depend critically on (i) choice quality by socio-demographic group conditional on health risk and (ii) the correlation between health risk and socio-demographic characteristics.

 

Inflation Spike and Falling Product Variety during the Great Lockdown

Xavier Jaravel and Martin O'Connell

June 2020

We characterize inflation dynamics during the Great Lockdown using scanner data covering millions of transactions for fast-moving consumer goods in the United Kingdom. We show that there was a significant and widespread spike in inflation. First, aggregate month-to-month inflation was 2.4% in the first month of lockdown, a rate over 10 times higher than in preceding months. Over half of this increase stems from reduced frequency of promotions. Consumers’ purchasing power was further eroded by a reduction in product variety, leading to a further 85 basis points increase in the effective cost of living. Second, 96% of households have experienced inflation in 2020, while in prior years around half of households experienced deflation. Third, there was inflation in most product categories, including those that experienced output falls. Only 13% of product categories experienced deflation, compared with over half in previous years. While market-based measures of inflation expectations point to disinflation or deflation, these findings indicate a risk of stagflation should not be ruled out. We hope our approach can serve as a template to facilitate rapid diagnosis of inflation risks during economic crises, leveraging scanner data and appropriate price indices in real-time.

Keywords: Inflation, Great Lockdown

 

Subsidizing Labor Hoarding in Recessions: The Employment and Welfare Effects of Short Time Work

Camille Landais and Giulia Giupponi

May 2020

Short time work (STW) policies provide subsidies for hour reductions to workers in firms experiencing temporary shocks. They are the main policy tool used to support labor hoarding during downturns, and have been used aggressively since the start of the COVID-19 pandemic. Yet, very little is known about their employment and welfare consequences. This paper leverages unique administrative social security data from Italy during the Great Recession and quasi-experimental variation in STW policy rules to offer evidence of the effects of STW on firms’ and workers’ outcomes. Our results show large and significant negative effects of STW treatment on hours, but large and positive effects on headcount employment. We then analyze whether these positive employment effects are welfare enhancing, distinguishing between temporary and more persistent shocks. We first provide evidence that liquidity constraints and bargaining frictions make labor hoarding inefficiently low absent STW. Then, we show that adverse selection of low productivity firms into STW creates significant negative reallocation effects when the shock is persistent.

 

Does Biology Drive Child Penalties? Evidence from Biological and Adoptive Families

Henrik Kleven, Camille Landais, Jakob Egholt Søgaard

May 2020

This paper investigates if the impact of children on the labor market trajectories of women relative to men — child penalties — can be explained by the biological links between mother and child. We estimate child penalties in biological and adoptive families using event studies around the arrival of children and almost forty years of adoption data from Denmark. Long-run child penalties in earnings and its underlying determinants are virtually identical in biological and adoptive families. This implies that biology is not important for child-related gender gaps. Based on additional analyses, we argue that our results speak against the importance of specialization based on comparative advantage more broadly.

 

Job Seekers' Perceptions and Employment Prospects: Heterogeneity, Duration Dependence and Bias

Andreas Mueller, Johannes Spinnewijn, and Giorgio Topa

May 2020

This paper analyses job seekers’ perceptions and their relationship to unemployment outcomes to study heterogeneity and duration dependence in both perceived and actual job finding. Using longitudinal data from two comprehensive surveys, we document that elicited beliefs are (1) strongly predictive of actual job finding, (2) subject to an optimistic bias that is larger for the long-term unemployed, and (3) not revised downward when job seekers remain unemployed. We exploit the joint observation of beliefs and ex-post realizations, to disentangle heterogeneity and duration dependence in true job finding rates. To this purpose, we estimate non-parametric bounds as well as a reduced-form statistical framework that allows for elicitation errors and systematic biases in beliefs. We find a substantial amount of heterogeneity in true job finding rates, accounting for most of the observed decline in job finding rates over the spell of unemployment. We also find that job seekers’ beliefs systematically under-react to these differences in job finding rates. We show theoretically and quantify in a calibrated model of job search how these biased beliefs contribute to the slow exit out of unemployment and can explain more than 10 percent of the incidence of long-term unemployment.

 

The Value of Unemployment Insurance

Camille Landais and Johannes Spinnewijn

March 2020

In the absence of unemployment insurance (UI) choices, the standard approach to estimating the value of UI is to infer it from the observed consumption response to job loss in combination with some assumptions on preferences. Exploiting the unique data and policy context in Sweden, we propose two alternative approaches and compare the results to the standard consumption-based approach on the same sample of workers. While the drop in consumption expenditures upon job loss is relatively small (∼ 13 percent), we find that the marginal propensity to consume (MPC), estimated using variation in local government transfers, is around 25 percent higher when unemployed than when employed. We show that this wedge in MPCs reveals a high relative price of smoothing consumption, confirmed by direct evidence on the limited consumption smoothing means available during unemployment. The relative price provides a lower-bound on the value of UI, which is substantially higher than the consumption-based estimate under standard preference assumptions. Exploiting the UI choices embedded in the Swedish UI system in a Revealed Preference approach, we confirm the high average value, but also find substantial heterogeneity in the valuation of UI.

Keywords: Unemployment Insurance, Consumption Smoothing, Revealed Preference, MPC

 

What Are the Labor and Product Market Effects of Automation? New Evidence from France

Philippe Aghion, Céline Antonin, Simon Bunel, and Xavier Jaravel

March 2020

We use comprehensive micro data in the French manufacturing sector between 1994 and 2015 to document the effects of automation technologies on employment, wages, prices and profits. Causal effects are estimated with event studies and a shift-share IV design leveraging pre-determined supply linkages and productivity shocks across foreign suppliers of industrial equipment. At all levels of analysis — plant, firm, and industry — the estimated impact of automation on employment is positive, even for unskilled industrial workers. We also find that automation leads to higher profits, lower consumer prices, and higher sales. The estimated elasticity of employment to automation is 0.28, compared with elasticities of 0.78 for profits, -0.05 for prices, and 0.37 for sales. Consistent with the importance of business-stealing across countries, the industry-level employment response to automation is positive and significant only in industries that face international competition. These estimates can be accounted for in a simple monopolistic competition model: firms that automate more increase their profits but pass through some of the productivity gains to consumers, inducing higher scale and higher employment. The results indicate that automation can increase labor demand and can generate productivity gains that are broadly shared across workers, consumers and firm owners. In a globalized world, attempts to curb domestic automation in order to protect domestic employment may be self-defeating due to foreign competition.

 

Risk-based Selection in Unemployment Insurance: Evidence and Implications

Camille Landais, Arash Nekoei, Peter Nilsson, David Seim, and Johannes Spinnewijn

January 2020

This paper studies whether adverse selection can rationalize a universal mandate for unemployment insurance (UI). Building on a unique feature of the unemployment policy in Sweden, where workers can opt for supplemental UI coverage above a minimum mandate, we provide the first direct evidence for adverse selection in UI and derive its implications for UI design. We find that the unemployment risk is more than twice as high for workers who buy supplemental coverage. Exploiting variation in risk and prices to control for moral hazard, we show how a substantial share of this correlation (25-30%) is driven by risk-based selection. Despite the severe adverse selection, mandating the supplemental coverage would be dominated by a design leaving the choice to workers. In this design, using a subsidy for supplemental coverage is optimal and complementary to the use of a minimum mandate. Our findings raise questions about the desirability of the universal mandate of generous UI in other countries.

Keywords: Adverse Selection, Unemployment Insurance, Mandate, Subsidy

 

Quasi-Experimental Shift-Share Research Designs

Kirill Borusyak, Peter Hull, and Xavier Jaravel

December 2019

Many studies use shift-share (or “Bartik”) instruments, which average a set of shocks with exposure share weights. We provide a new econometric framework for such designs in which identification follows from the quasirandom assignment of shocks, allowing exposure shares to be endogenous. This framework is centered around a numerical equivalence: conventional shift-share instrumental variable (SSIV) regression coefficients are equivalently obtained from a transformed regression where the shocks are used directly as an instrument. This equivalence implies a shock-level translation of the SSIV exclusion restriction, which holds when shocks are asgood-as-randomly assigned and large in number, with sufficient dispersion in their average exposure. We discuss and illustrate several practical insights delivered by this framework.

 

How to Improve Tax Compliance? Evidence from Population-wide Experiments in Belgium

Jan-Emmanuel De Neve, Clement Imbert, Johannes Spinnewijn, Teodora Tsankova, and Maarten Luts

December 2019

We study the impact of simplification, deterrence and tax morale on tax compliance. We ran five natural field experiments varying the communication of the tax administration with the universe of income taxpayers in Belgium throughout the tax process. A consistent picture emerges across experiments: (i) simplifying communication substantially increases compliance, (ii) deterrence messages have an additional positive effect, (iii) invoking tax morale is not effective, and often backfires. A discontinuity in enforcement intensity, combined with the experimental variation, allows us to compare simplification with standard enforcement measures. We find that simplification is far more cost-effective, allowing for substantial savings on enforcement costs.

Keywords: Tax Compliance, Field Experiments, Simplification, Enforcement

 

Children and Gender Inequality: Evidence from Denmark

Henrik Kleven, Camille Landais, Jakob Egholt Søgaard

October 2019

Using Danish administrative data, we study the impacts of children on gender inequality in the labor market. The arrival of children creates a long-run gender gap in earnings of around 20% driven by hours worked, participation and wage rates. We identify mechanisms driving these “child penalties” in terms of occupation, sector, and firm choices. We find that the fraction of gender inequality caused by child penalties has featured a dramatic increase over the last three-four decades. Finally, we show that child penalties are transmitted through generations, from parents to daughters, suggesting an influence of childhood environment on gender identity.

 

The Value of Registry Data for Consumption Analysis: An Application to Health Shocks

Jonas Kolsrud, Camille Landais, and Johannes Spinnewijn

October 2019

This paper measures consumption expenditures using registry data on income and asset holdings in Sweden. We show how a registry-based measure complements traditional survey measures of consumption and can alleviate some critical limitations. We describe the construction of our measure, which builds on prior work and exploits the identity coming from the household budget constraint between consumption expenditures and income net of savings. We demonstrate the value of the registry-based measure to study consumption responses to shocks, also relative to surveyed consumption. In our application to health shocks, we find that Swedish household experience permanent earning drops, but generous social transfers provide substantial consumption smoothing. We document important heterogeneity in consumption responses and the limited role for private means.

Keywords: Consumption Measurement, Registry Data, Inequality and Smoothing

 

What are the Price Effects of Trade? Evidence from the U.S. and Implications for Quantitative Trade Models

Xavier Jaravel and Erick Sager

August 2019

This paper finds that U.S. consumer prices fell substantially due to increased trade with China. With comprehensive price micro-data and two complementary identification strategies, we estimate that a 1pp increase in import penetration from China causes a 1.91% decline in consumer prices. This price response is driven by declining markups for domestically-produced goods, and is one order of magnitude larger than in standard trade models that abstract from strategic price-setting. The estimates imply that trade with China increased U.S. consumer surplus by about $400,000 per displaced job, and that product categories catering to low-income consumers experienced larger price declines.

 

Job Displacement Insurance and (the lack of) consumption-smoothing

François Gerard and Joana Naritomi

June 2019

The most common forms of government-mandated job displacement insurance are Severance Pay (SP; lump-sum payments at layoff) and Unemployment Insurance (UI; periodic payments contingent on nonemployment). While there is a vast literature on UI, SP programs have received much less attention, even though they are prevalent across countries and predominant in developing countries. In particular, little is known about their insurance value, which critically relies on workers’ ability to dissave the lump-sum progressively to smooth consumption after layoff. Using de-identified high-frequency expenditure data and matched employee-employer data from Brazil, we find that displaced workers eligible for both UI and SP increase consumption at layoff by 35% despite experiencing a 17% consumption loss after they stop receiving any benefits. Moreover, this sensitivity of consumer spending to cash-on-hand is present across spending categories and sources of variation in UI benefits and SP amounts. We show that a simple structural model with present-biased workers can rationalize our findings, and we use it to illustrate their implications for the incentive-insurance trade-off between SP and UI. Specifically, the insurance value of SP programs – or of other policies that provide liquidity to workers at layoff – can be severely reduced when consumption is over-sensitive to the timing of benefit disbursement, undermining their advantage in terms of job-search incentives. Our findings highlight the importance of the difference between SP and UI in their disbursement policy, and shed new light on the need for job displacement insurance in a developing country context.

 

Child Penalties across Countries: Evidence and Explanations

Henrik Kleven, Camille Landais, Johanna Posch, Andreas Steinhauer, and Josef Zweimüller

May 2019

Despite considerable gender convergence over time, substantial gender inequality persists in all countries. Recent work highlights the importance of parenthood for the persistence of gender inequality in labor market outcomes. Kleven, Landais, and Søgaard (forthcoming) estimate the impact of children on the labor market outcomes of women relative to men — child penalties — in Denmark. They show that the long-run child penalty in earnings is about 20 percent and that this can explain most of the remaining gender inequality. Research on other countries suggests that this is a pervasive phenomenon.
The main contribution of this paper is to estimate child penalties in different countries using the same empirical approach, specification, and sample selection. We consider six countries that span a wide range of policies and norms: two Scandinavian countries (Denmark and Sweden), two German-speaking countries (Germany and Austria), and two English-speaking countries (United Kingdom and United States). The analysis reveals some striking similarities in the qualitative effects of children, but also some sharp differences in the magnitude of the effects. We end the paper with a discussion of likely explanations for these differences.

 

Taxation and Migration: Evidence and Policy Implications

Henrik Kleven, Camille Landais, Mathilde Munoz, and Stefanie Stantcheva

April 2019

In this article, we review a growing empirical literature on the effects of personal taxation on the geographic mobility of people and discuss its policy implications. We start by laying out the empirical challenges that prevented progress in this area until recently, and then discuss how recent work have made use of new data sources and quasi-experimental approaches to credibly estimate migration responses. This body of work has shown that certain segments of the labor market, especially high-income workers and professions with little location-specific human capital,maybe quite responsive to taxes in their location decisions. When considering the implications for tax policy design, we distinguish between uncoordinated and coordinated tax policy. We highlight the importance of recognizing that mobility elasticities are not exogenous, structural parameters. They can vary greatly depending on the population being analyzed, the size of the tax jurisdiction, the extent of tax policy coordination, and a range of non-tax policies. While migration responses add to the efficiency costs of redistributing income, we caution against over-using the recent evidence of (sizeable) mobility responses to taxes as an argument for less redistribution in a globalized world.

 

Optimal Taxation and Demand-Led Productivity

Xavier Jaravel and Alan Olivi

March 2019

How do productivity dynamics affect optimal taxation? This paper investigates this question theoretically and quantitatively by introducing Increasing Returns to Scale (IRS) and heterogeneous spending patterns (non-homothetic preferences) into the canonical tax problem of Mirrlees (1971). In this environment, any change in tax policy induces a change in labor supply, hence a change in market size, which translates endogenously into a change in productivity; this productivity response affects consumer prices and sets off another round of labor supply changes, market size changes, productivity changes, further labor supply changes, and so on. We show theoretically how to characterize these general equilibrium effects and we quantify their importance for the optimal tax schedule. The calibrated model matches empirical evidence on IRS as well as the tax schedule, earnings distribution and spending patterns observed in the United States. We establish three main results: (1) the optimal average tax rate is substantially lower on average, falling from about 45% under Constant Return to Scale (CRS) to about 35% with IRS (because IRS increase the efficiency cost of taxation); (2) with IRS and homothetic utility, optimal marginal tax rates are much less progressive than under CRS, and they become regressive above the 65th percentile of the income distribution (because IRS increase the efficiency cost of taxation relatively more for the rich); (3) with IRS and non-homothetic utility, optimal marginal tax rates become more progressive (intuitively, the planner internalizes that the productivity increase that could result from a tax break to the rich has low social value if the rich spend their marginal dollar on products that the poor do not consume much of). These findings indicate the importance of endogenous productivity and non-homotheticities for optimal taxation.

 

Revealed Preference Analysis with Framing Effects

Jacob Goldin and Daniel Reck

March 2019

In many settings, decision-makers’ behavior is observed to vary based on seemingly arbitrary factors. Such framing effects cast doubt on the welfare conclusionsdrawnfromrevealedpreferenceanalysis. Werelaxtheassumptions underlying that approach to accommodate settings in which framing effects are present. Plausible restrictions of varying strength permit either partial- or point-identification of preferences for the decision-makers who choose consistently across frames. Recovering population preferences requires understanding the empirical relationship between decision-makers’ preferences and their sensitivity to the frame. We develop tools for studying this relationship and illustrate them with data on automatic enrollment into pension plans.

 

Do Lower Minimum Wages for Young Workers Raise their Employment? Evidence from a Danish Discontinuity

Claus Thustrup Kreiner, Daniel Reck, and Peer Ebbesen Skov

November 2018

We estimate the impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18, using monthly payroll records for the Danish population. The hourly wage jumps up by 40 percent at the discontinuity. Employment falls by 33 percent and total input of hours decreases by 45 percent, leaving the aggregate wage payment almost unchanged. We show theoretically how the discontinuity may be exploited to evaluate policy changes. The relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is in the range 0.6-1.1.

Keywords: Minimum Wage Policy, Employment, Regression Discontinuity

 

The Distributional Effects of Trade: Theory and Evidence from the United States

Kirill Borusyak and Xavier Jaravel

October 2018

We quantify the distributional effects of trade shocks in the U.S. through consumer prices (expenditure channel) and wages (earnings channel). A quantitative trade model links these channels to compositional differences in expenditures and earnings across household groups. New data reveal that spending shares on imports are similar across education and income groups, implying a neutral expenditure channel. Estimated differences in workers’ exposure to import competition, exporting, and income effects indicate that the earnings channel favors college graduates. Overall, a uniform trade cost reduction generates welfare gains that are 25% larger for college graduates. Similar results apply to trade with China.

Keywords: Trade liberalization, Inequality, Non-homothetic preferences, Skill premium

 

Optimal Defaults with Normative Ambiguity

Jacob Goldin and Daniel Reck

October 2018

Default effects are pervasive, but the reason they arise is often unclear. We study optimal policy when it is ambiguous whether an observed default effect reflects a welfare-relevant preference or a mistake by decision-makers. Within a broad class of models, determining optimal policy is impossible without resolving this normative ambiguity. Depending on the resolution, optimal policy tends in opposite directions: either minimizing the number of non-default choices or promoting active choices. We illustrate our results using data on pension contribution defaults. When selecting a non-default option reduces employee welfare by less than $160, the optimal policy promotes active choices

 

The Unequal Gains from Product Innovations: Evidence from the US Retail Sector

Xavier Jaravel

October 2018

This paper examines how product innovations led to inflation inequality in the United States from 2004 to 2015. Using scanner data from the retail sector, I find that annual inflation for retail products was 0.661 (s.e. 0.0535) percentage points higher for the bottom income quintile relative to the top income quintile. When including changes in product variety over time, this difference increases to 0.8846 (s.e. 0.0739) percentage points per year. In CEX-CPI data covering the full consumption basket, the annual inflation difference is 0.368 (s.e. 0.0502) percentage points. I then investigate the following hypothesis: (1) the relative demand for products consumed by high-income households increased because of growth and rising inequality; (2) in response, firms introduced more new products catering to such households; (3) as a result, the prices of continuing products in these market segments fell due to increased competitive pressure. Using a shift-share research design, I find causal evidence that increasing relative demand leads to increasing product variety and lower inflation for continuing products. A calibration indicates that the hypothesized channel accounts for a large fraction (over 50%) of observed inflation inequality.

 

Consumers as Tax Auditors

Joana Naritomi

October 2018

Access to third-party information trails is widely believed to be critical to the development of modern tax systems, but there is limited direct evidence of the effects of changes in information trails. This paper investigates the enforcement effect of an increased availability of third-party information,and sheds light on how governments can harness this information despite collusion opportunities. I exploit unique administrative data on firms and consumers from an anti-tax evasion program in Sao Paulo, Brazil(Nota Fiscal Paulista)that created monetary rewards for consumers to ensure that firms report final sales transactions, and establishes an online verification system that aids consumers in whistle-blowing firms. Using variation in intensity of exposure to the policy, I estimate that firms’ reported revenue increased by at least 21% over four years. Heterogeneous effects across firms shed light on mechanisms: the results are consistent with fixed costs to conceal collusive deals and positive shifts in detection probability from whistle-blower threats. I also investigate the effect of whistle-blowers directly: firms report 7% more receipts and 3% more revenue after receiving the first consumer complaint. To study the role of the value of rewards in improving enforcement, I show evidence consistent with the possibility that lottery incentives amplify consumer responses due to behavioral biases, which would make it more costly for firms to try to match government incentives in a collusive deal. Finally, I find that although firms significantly adjusted reported expenses, there was an increase in tax revenue net of rewards of 9.3%.

 

Who Becomes an Inventor in America? The Importance of Exposure to Innovation

Alex Bell, Raj Chetty, Xavier Jaravel, Neviana Petkova, and John Van Reenen

August 2018

We characterize the factors that determine who becomes an inventor in the United States, focusing on the role of inventive ability ("nature") vs. environment ("nurture"). Using deidentified data on 1.2 million inventors from patent records linked to tax records, we first show that children's chances of becoming inventors vary sharply with characteristics at birth, such as their race, gender, and parents’ socioeconomic class. For example, children from high-income (top 1%) families are ten times as likely to become inventors as those from below-median income families. These gaps persist even among children with similar math test scores in early childhood – which are highly predictive of innovation rates – suggesting that the gaps may be driven by differences in environment rather than abilities to innovate. We then directly establish the importance of environment by showing that exposure to innovation during childhood has significant causal effects on children’s propensities to invent.Children whose families move to a high-innovation area when they are young are more likely to become inventors. These exposure effects are technology-class and gender specific. Children who grow up in a neighborhood or family with a high innovation rate in a specific technology class are more likely to patent in exactly the same class. Girls are more likely to invent in a particular class if they grow up in an area with more women (but not men) who invent in that class. These gender- and technology class-specific exposure effects are more likely to be driven by narrow mechanisms such as role model or network effects than factors that affect general human capital accumulation, such as the quality of schools. Consistent with the importance of exposure effects in career selection, women and disadvantaged youth are as under-represented among high-impact inventors as they are among inventors as a whole. These findings suggest that there are many "lost Einsteins" – individuals who would have had highly impactful inventions had they been exposed to innovation in childhood – especially among women, minorities, and children from low-income families.

 

Heterogeneous Price Rigidities and Monetary Policy

Christopher Clayton, Xavier Jaravel, and Andreas Schaab

August 2018

This paper investigates the implications of heterogeneous price rigidities across sectors for the distributional and aggregate effects of monetary policy. First, we identify and characterize analytically a new set of earnings and expenditure channels of monetary policy that emerge in the presence of sectoral heterogeneity. Second, we establish empirically that (i) prices are more rigid in sectors selling to college-educated households, (ii) prices are more rigid in sectors employing college-educated households, and (iii) sectors that employ college-educated households also sell more to these households. These new facts suggest that monetary policy stabilizes sectors that matter relatively more for college-educated households, due to an expenditure channel (from (i)), an earnings channel (from (ii)), and their amplification by feedback loops (from (iii)). Finally, we develop a multi-sector incomplete-markets Heterogeneous Agent New Keynesian model, in which households of different education levels work and consume in different sectors. We quantify the aggregate and distributional effects from heterogeneous price rigidities using this model. In the baseline calibration, we find that the consumption of college-educated households is 22% more sensitive to monetary policy shocks as that of non-college households, while the aggregate real effect of monetary policy is 5% stronger than with homogeneous price rigidities.

 

Value Added Tax in developing countries: Lessons from recent research

François Gerard and Joana Naritomi

June 2018

The Value Added Tax has become one of the most important instruments of revenue mobilisation in the developing world. A recent and growing body of research highlights its strengths and some of the challenges it faces.

 

Education and Military Rivalry

Philippe Aghion, Xavier Jaravel, Torsten Persson, and Dorothée Rouzet

June 2018

What makes countries engage in reforms of mass education? Motivated by historical evidence on the relation between military threats and expansions of primary education, we assemble a panel dataset from the last 150 years in European countries and from the post war period in a large set of countries. We uncover three stylized facts: (i) investments in education are associated with military threats, (ii) democratic institutions are negatively correlated with education investments, and (iii) education investments respond more strongly to military threats in democracies. These patterns continue to hold when we exploit rivalries in a country’s neighborhood as an alternative source of variation. We develop a theoretical model that rationalizes the three empirical findings.The model has an additional prediction about investments in physical infrastructures, which finds support in the data.

 

What is the Impact of Food Stamps on Prices and Product Variety? The Importance of the Supply Response

Xavier Jaravel

May 2018

Comparing US states that implemented policies generating state-specific variation in the take-up rate for food stamps, I find that food stamp eligible households experienced lower inflation and a faster increase in product variety in states with a larger increase in take-up (i.e., with increasing demand from the eligible population). Consistent with a causal interpretation, the effects are driven by food products with strong local brands and there is no comparable pattern for ineligible households across the income distribution. Thus, the long-run supply response to changes in demand from food stamp recipients has a first-order impact on the program's cost-benefit analysis.

 

A Macroeconomic Approach to Optimal Unemployment Insurance II: Applications

Camille Landais, Pascal Michaillat, and Emmanuel Saez

May 2018

In the United States, unemployment insurance (UI) is more generous when unemployment is high. This paper examines whether this policy is desirable. The optimal UI replacement rate is the Baily-Chetty replacement rate plus a correction term measuring the effect of UI on welfare through labor market tightness. Empirical evidence suggests that tightness is inefficiently low in slumps and inefficiently high in booms, and that an increase in UI raises tightness. Hence, the correction term is positive in slumps but negative in booms, and optimal UI is indeed countercyclical. Since there remains some uncertainty about the empirical evidence, the paper provides a thorough sensitivity analysis.

 

A Macroeconomic Approach to Optimal Unemployment Insurance I: Theory

Camille Landais, Pascal Michaillat, and Emmanuel Saez

May 2018

This paper develops a theory of optimal unemployment insurance (UI) in matching models. The optimal UI replacement rate is the conventional Baily-Chetty replacement rate, which solves the tradeoff between insurance and job-search incentives, plus a correction term, which is positive when an increase in UI pushes the labor market tightness toward its efficient level. In matching models, most wage mechanisms do not ensure efficiency, so tightness is generally inefficient. The effect of UI on tightness depends on the model: increasing UI may raise tightness by alleviating the rat race for jobs or lower tightness by increasing wages through bargaining.

 

Taxing Hidden Wealth: The Consequences of US Enforcement Initiatives for Evasive Foreign Accounts

Niels Johannesen, Patrick Langetieg, Daniel Reck, Max Risch, and Joel Slemrod

May 2018

In 2008, the IRS initiated efforts to curb the use of offshore accounts to evade taxes. This paper uses administrative microdata to examine the impact of enforcement efforts on taxpayers’ reporting of offshore accounts and income. We find that enforcement caused approximately 50,000 individuals to disclose offshore accounts with a combined value of about $100 billion. Most disclosures happened outside offshore voluntary disclosure programs, by individuals who never admitted prior noncompliance. Disclosed accounts were concentrated in countries often characterized as tax havens. Enforcement-driven disclosures increased annual reported capital income by $2-$4 billion, corresponding to $0.6-$1.2 billion in additional tax revenue.

 

Team-Specific Capital and Innovation

Alex Bell, Xavier Jaravel, and Neviana Petkova

April 2018

We establish the importance of team-specific capital in the typical inventor’s career. Using administrative tax and patent data for the population of US patent inventors from 1996 to 2012, we find that an inventor’s premature death causes a large and long-lasting decline in their co-inventor’s earnings and citation-weighted patents (−4 percent and −15 percent after 8 years, respectively). After ruling out firm disruption, network effects, and top-down spillovers as main channels, we show that the effect is driven by closeknit teams and that team-specific capital largely results from an “experience’’ component increasing collaboration value over time.

 

The Optimal Timing of Unemployment Benefits: Theory and Evidence from Sweden

Jonas Kolsrud, Camille Landais, Peter Nilsson, and Johannes Spinnewijn

April 2018

This paper provides a simple, yet robust framework to evaluate the time profile of benefits paid during an unemployment spell. We derive sufficient-statistics formulae capturing the marginal insurance value and incentive costs of unemployment benefits paid at different times during a spell. Our approach allows us to revisit separate arguments for inclining or declining profiles put forward in the theoretical literature and to identify welfare-improving changes in the benefit profile that account for all relevant arguments jointly. For the empirical implementation, we use administrative data on unemployment, linked to data on consumption, income, and wealth in Sweden. First, we exploit duration-dependent kinks in the replacement rate and find that, if anything, the moral hazard cost of benefits is larger when paid earlier in the spell. Second, we find that the drop in consumption affecting the insurance value of benefits is large from the start of the spell, but further increases throughout the spell. In trading off insurance and incentives, our analysis suggests that the flat benefit profile in Sweden has been too generous overall. However, both from the insurance and the incentives side, we find no evidence to support the introduction of a declining tilt in the profile.

Keywords: Unemployment, Dynamic Policy, Sufficient Statistics, Consumption Smoothing

 

Inferring Risk Perceptions and Preferences using Choice from Insurance Menus: Theory and Evidence

Keith Marzilli Ericson, Philipp Kircher, Johannes Spinnewijn, and Amanda Starc

January 2018

Demand for insurance can be driven by high risk aversion or high risk. We show how to separately identify risk preferences and risk types using only choices from menus of insurance plans. Our revealed preference approach does not rely on rational expectations, nor does it require access to claims data. We show what can be learned non-parametrically about the type distributions from variation in insurance plans, o⁄ered separately to random cross-sections or o⁄ered as part of the same menu to one cross-section. We prove that our approach allows for full identication in the textbook model with binary risks and extend our results to continuous risks. We illustrate our approach using the Massachusetts Health Insurance Exchange, where choices provide informative bounds on the type distributions, especially for risks, but do not allow us to reject homogeneity in preferences

 

Information Frictions and Adverse Selection: Policy Interventions in Health Insurance Markets

Benjamin Handel, Jonathan Kolstad, and Johannes Spinnewijn

January 2018

Despite evidence that many consumers in health insurance markets are subject to information frictions, approaches used to evaluate these markets typically assume informed, active consumers. This gap between actual behavior and modeling assumptions has important consequences for positive and normative analysis. We develop a general framework to study insurance market equilibrium in the presence of choice frictions and evaluate key policy interventions, designed to combat adverse selection or to combat poor choices. We identify sufficient relationships between the underlying distributions of consumer (i) costs, (ii) surplus from risk protection and (iii) choice frictions that determine whether friction-reducing policies will be on net welfare increasing, due to improved consumer matching, or welfare reducing, due to increased adverse selection. We show that the impact of insurer risk-adjustment transfers, a supply-side policy designed to combat adverse selection, depends crucially on how effective consumer choices are, and is generally complementary to choice-improving policies. We implement our approach empirically, show how these key sufficient objects can be measured in practice, and illustrate the theoretically-motivated link between these objects and key policy outcomes.

 

Revisiting Event Study Designs, with an Application to the Estimation of the Marginal Propensity to Consume

Kirill Borusyak and Xavier Jaravel

May 2017

A broad empirical literature uses “event study” research designs for treatment effect estimation, a setting in which all units in the panel receive treatment but at random times. We make four novel points about identification and estimation of causal effects in this setting and show their practical relevance. First, we show that in the presence of unit and time fixed effects, it is impossible to identify the linear component of the path of pre-trends and dynamic treatment effects. Second, we propose graphical and statistical tests for pre-trends. Third, we consider commonly-used “static” regressions, with a treatment dummy instead of a full set of leads and lags around the treatment event, and we show that OLS does not recover a reasonable weighted average of the treatment effects: long-run effects are weighted negatively, and we introduce different estimators robust to this issue. Fourth, we show that equivalent problems of under-identification and negative weighting arise in difference-in-differences settings when the control group is allowed to be on a different time trend or in the presence of unit-specific time trends.
We show the practical relevance of these issues in a series of examples from the existing literature. We focus on the estimation of the marginal propensity to consume out of tax rebates: according to our preferred specification, the marginal propensity to consume is much lower than (about half of) the main estimates in the literature.
The main message for practitioners is that because of identification issues and negative weighting in event study designs, results from common specifications are likely to seem non-robust. These problems can be alleviated in a principled way by using parametric and semi-parametric estimators and tests.

 

Heterogeneity, Demand for Insurance and Adverse Selection

Johannes Spinnewijn

April 2016

Recent evidence underlines the importance of demand frictions distorting insurance choices. Heterogeneous frictions cause the willingness to pay for insurance to be biased upward (relative to value) for those purchasing insurance, but downward for those who remain uninsured. The paper integrates this nding with standard methods for evaluating welfare in insurance markets and demonstrates how welfare conclusions regarding adversely selected markets are a⁄ected. The demand frictions framework also makes qualitatively di⁄erent predictions about the desirability of policies like insurance subsidies and mandates, commonly used to tackle adverse selection.

Keywords: Heterogeneity, Adverse Selection, Demand Frictions, Insurance Market Interventions