In a recent paper on behavior in experimental securities markets, Plott and Sunder ( 1982) concluded that the rational expectations (RE) model was superior to the traditional prior information (Pl) model in predicting equilibrium prices and holdings. In particular, given a market with one commodity, three possible states of the world, and three groups of trader "types," each with differing valuations on the commodity per state, initially uninformed traders were able to infer the underlying state from the current market price and act accordingly. In a related paper, Friedman, Harrison, and Salmon (1984) observed that, given the existence of a futures market, the RE model outperformed the PI model in multiperiod, single-commodity markets as well. One source of potential misinterpretation, however, comes from the fact that, although one-half of the traders of each type were informed of the true state at the beginning of each period in Plott and Sunder (1982) and one-third of the traders of each type in Friedman, Harrison, and Salmon (1984), the same traders were informed in almost every period. In a more recent paper, Plott and Sunder (1983) constructed markets where all traders received partial information (i.e., given possible states X, Y, and Z, a trader's private information would be either "not X" or "not Y" if the state were Z), yet the combinations of traders receiving a certain message in any period were determined randomly.

This paper examines the transitional losses that may follow conversion from an income tax to a consumption tax, even when conversion eventually raises steady-state lifetime welfare. Two recent studies have left the impression that the transitional losses would be large. Using a life-cycle growth model, this paper examines two reasons why these studies have probably overestimated the transitional losses. The model computes the welfare gains and losses of each age cohort along the transition path. It is shown that the greater the bequest motive and subjective discount rate generating the particular initial income tax steady state, the smaller would be the transitional losses. Similarly, a policy of age phasing would reduce the losses. The results demonstrate the importance of examining the transition path whenever a policy change alters capital accumulation.

Both economic theory and casual empirical observation of the U.S. economy suggest that spending propensities from temporary tax changes are smaller than those from permanent ones, but neither provides much guidance about the magnitude of this difference. This paper offers new empirical estimates of this difference and finds it to be quite substantial. The analysis is based on an amendment of the standard distributed lag version of the permanent income hypothesis that distinguishes temporary taxes from other income on the grounds that the former are "more transitory." This amendment, which is broadly consistent with rational expectations, leads to a nonlinear consumption function. Though the standard error is unavoidably large, the point estimate suggests that a temporary tax change is treated as a 50-50 blend of a normal income tax change and a pure windfall. Over a 1-year planning horizon, a temporary tax change is estimated to have only a little more than half the impact of a permanent tax change of equal magnitude, and a rebate is estimated to have only about 38 percent of the impact.

Both economic theory and casual empirical observation of the U.S. economy suggest that spending propensities from temporary tax changes are smaller than those from permanent ones, but neither provides much guidance about the magnitude of this difference. This paper offers new empirical estimates of this difference and finds it to be quite substantial. The analysis is based on an amendment of the standard distributed lag version of the permanent income hypothesis that distinguishes temporary taxes from other income on the grounds that the former are "more transitory." This amendment, which is broadly consistent with rational expectations, leads to a nonlinear consumption function. Though the standard error is unavoidably large, the point estimate suggests that a temporary tax change is treated as a 50-50 blend of a normal income tax change and a pure windfall. Over a 1-year planning horizon, a temporary tax change is estimated to have only a little more than half the impact of a permanent tax change of equal magnitude, and a rebate is estimated to have only about 38 percent of the impact.