Research

Abstract: This paper examines how optimal education subsidies adjust in the presence of consumption externalities. We derive an optimal education subsidy formula using estimable parameters in a context where individuals exhibit "keeping up with the Joneses" behavior. In a static model where agents invest in their own human capital, we find that a lower education subsidy is warranted when a consumption externality exists and income is insensitive to the subsidy. Conversely, in an intergenerational setup where parents decide on their children's human capital investments while facing consumption externalities, human capital tends to be underaccumulated. In this case, the marginal effect of the consumption externality on the education subsidy depends on long-run elasticities and distributional parameters, which can be estimated using sufficient statistics.

Abstract: This paper documents how racial differences in labor income may account for disparities in crime and wealth across Black and White individuals. Using an overlapping generations model that endogenously determines crime rates alongside consumption and savings decisions, we find that equalizing labor incomes results in a significant decline in both the Black crime rate and the proportion of Black individuals in the lowest wealth quintile. Higher crime and incarceration rates of Black individuals, on the other hand, do not significantly contribute to their low wealth. This is primarily because most crimes are committed by already poor and young individuals who are not saving in any case.

Abstract: In this paper, we study income taxation in a model with entrepreneurial activity. We conduct two types of changes in tax policy: changing the overall progressivity of taxes versus changing the tax rate on the richest 1% of the population. Our results indicate that increasing the tax rate on the richest 1% of the population is more effective in raising revenues than increasing the overall progressivity of taxes as it leads to smaller declines in capital and output. We find that incorporating entrepreneurship in generating a reasonable wealth distribution leads to revenue-maximizing progressivity to be smaller than found previously.