Working Papers

Optimal Policy Reforms, with Katy Bergstrom and William Dodds 

This paper develops a general framework to construct optimal policy reforms starting from a status quo set of policies. We show that if a policymaker can control how fiscal externalities are spent, then the welfare-weighted marginal value of public funds (WMVPF) is the relevant sufficient statistic for determining optimal policy reforms. If a policymaker cannot control how fiscal externalities are spent, then the welfare-weighted net social benefit (WNSB) is the relevant sufficient statistic. If a policymaker can control how a fraction of fiscal externalities are spent, then the relevant sufficient statistic is an "internal WMVPF" plus an "external correction" term. We provide a number of stylized examples to illustrate when in practice to use the WMVPF vs. the WNSB to determine optimal policy reforms.

Estimating the Welfare Impact of Frictions and Misperceptions Using Observable Elasticities, with Katy Bergstrom and William Dodds (Revision Requested at the Journal of Public Economics)

This paper quantifies how much people would be willing to pay to remove frictions that impede them from working their ideal number of hours using two sufficient statistics: (1) the percentage difference between ideal (i.e., frictionless) and actual hours, and (2) the Hicksian elasticity of ideal hours with respect to the after-tax wage rate. We implement this method to construct estimates of the willingness-to-pay to remove frictions in the United States and Germany. There are three core findings: (1) the cost of adjustment frictions (an omnibus measure encompassing, for example, fixed costs of adjustment, discrete choice sets, and search costs) is large for any reasonable value of the Hicksian ideal hours elasticity, even when accounting for endogenous wages, multiple labor supply decisions, and dynamic decisions; (2) the cumulative cost of adjustment frictions and tax misperceptions is even larger: individuals would be willing to pay at least 10% of their income on average to remove these two frictions in hours worked; and (3) adjustment frictions appear to be much more costly than tax misperceptions.

Publications

Welfare Analysis of Changing Notches: Evidence from Bolsa Família, with Katy Bergstrom and William Dodds (AEJ Policy) 

Online Appendix (link)

Slides and Tex Files (link)

Video Summary (link)

We analyze the welfare impacts of a reform that expanded an eligibility notch in one of the world's largest cash transfer programs, Bolsa Família. We develop a novel framework to bound the welfare impacts of reforms to transfer programs featuring notches using two sufficient statistics: (1) the number of households bunching at the old notch who move toward the new notch, and (2) the number of households who "jump" down to the new notch. We estimate these two statistics using longitudinal administrative data and a difference-in-difference strategy. Despite strong evidence of behavioral responses to this reform, we find that the corresponding efficiency costs are small relative to the equity benefits: the reform's MVPF is between 0.90 and 1.12. Because the Bolsa Família eligibility threshold is based on self-reported income, our findings suggest that the efficiency costs of targeting based on self-reported income can be relatively small even in high-informality settings.

Optimal Tax Mix with Income Tax Non-compliance, with Jason Huang (Journal of Public Economics) 

Although developing countries face high levels of income inequality, they rely more on consumption taxes, which tend to be linear and are less effective for redistribution than a non-linear income tax. One explanation for this pattern is that the consumption taxes are generally more enforceable in these economies. This paper studies the optimal combination of a linear consumption tax with a non-linear income tax for redistributive purposes. In our model, households might not comply with the income tax code by reporting income levels that differ from their true income. However, the consumption tax is fully enforceable. We derive a formula for the optimal income tax schedule as a function of the consumption tax rate, the recoverable elasticities, and the moments of the taxable income distribution. Our equation differs from those of Mirrlees (1971) and Saez (2001) because households face a consumption tax and they respond to income tax not only through labor supply but also through mis-reporting their incomes. Both aspects are empirically relevant to our calibration of the optimal top rate in the Russian economy. We then characterize the optimal mix between a linear consumption tax rate and a non-linear income tax schedule. Finally, we find that the optimal consumption tax rate is non-increasing in the redistributive motives of the social planner.

Older Projects

Political Dynasties and the Quality of Government, with Arthur Bragança and Claudio Ferraz

This paper examines whether dynastic politicians -- politicians that had relatives in office in the past-- affect the quality of government. We use a regression discontinuity design with electoral data for mayors in Brazil and examine whether dynastic politicians implement different policies compared to non-dynastic politicians. We find that dynastic politicians spend more resources, specially in investment in urban infrastructure, health and sanitation. However, we do not find improvements in economic growth and changes in the quality of public services.