Knowledge that Transforms

Do progressive marginal income tax rates discourage self-employment? We assume risk neutrality to construct an implicit surtax on stochastic income relative to steady income, arising from a convex tax schedule. It is computed as part of a structural probit model with earnings equations and a tax simulator. The tax convexity variable and the net-of-tax income difference between self- and paid employment have the predicted signs and high levels of statistical significance for the probability of self-employment. A simulated flat tax reform suggests the tax effects are small.

Abstract This paper explores the effects of consumption-tax and fuel-tax adjustments in the Chinese automobile industry. Applying the model and simulation method of Berry, Levinson, and Pakes (1995), we conduct a comparative static analysis of equilibrium prices and sales, fuel consumption, and social welfare before and after tax adjustments. For the first time, we compare the progressivity of both taxes. Our empirical findings suggest that the fuel tax is effective in decreasing fuel consumption at the expense of social welfare, while the consumption tax does not significantly affect either fuel consumption or social welfare.

We propose an intuitive way of how to measure segregation in social and spatial networks. Using random walks, we define the segregation index as the probability that an individual meets an individual from the same social group. The segregation index is a generalization of the isolation index and a homophily index introduced in Currarini, Jackson, and Pin (2009), and it has a closed-form relation to PageRank that facilitates its computation. We also show that the Spectral Segregation Index proposed by Echenique and Fryer (2007) is not continuous with respect to the network structure. Finally, we apply the measure to Spanish census data and to citations data from economics, and rationalize the index as the equilibrium outcome of a game.

Though common stocks are one of the most important assets in an economy, little is known about their demand curves. I estimate demand curves for 144 NYSE stocks using a unique data set of all orders, including off-equilibrium orders, during three months in 1990 and 1991. Connecting asset pricing with industrial organization, I find that stocks of firms in less competitive industries are more elastic because they have closer substitutes than stocks in more competitive industries. Tests that exploit the 1991 Gulf War shock and S&P 500 Index additions confirm these results.

This note proposes a new decomposition of average treatment effects on nonnegative outcomes. It represents the total effect as a population-weighted sum of the effects for two groups: those induced to participate by the treatment and those participating regardless of it. The usual decomposition into extensive and intensive margins used in the literature is generally incompatible with such a causal interpretation. The difference between decompositions can be substantial and yield diametrically opposed results.

Anderson and van Wincoop (2003) showed the importance of multilateral resistance general equilibrium effects in estimating the response of trade flows to trade costs. We integrate this into Helpman, Melitz, and Rubinstein's (2008) extension of Anderson and van Wincoop's framework, which allows for firm heterogeneity, in order to quantify the different margins of adjustment. For bilateral trade cost changes, the general equilibrium effects are small. Surprisingly, most country pairs reduce their trade after a multilateral fall in trade costs. The global trade response to lower costs is positive, amplified by firm entry, but significantly dampened by multilateral resistance.

Abstract Seasonal migration programs are widely used around the world, yet there is little evidence as to their development impacts. A multiyear prospective evaluation of New Zealand's Recognised Seasonal Employer (RSE) seasonal worker program allows us to measure the impact of participating in this program on households in Tonga and Vanuatu. Using a propensity-score prescreened difference-in-differences analysis based on surveys fielded before, during, and after participation, we find that the RSE has indeed had positive development impacts that dwarf those of other popular development interventions. It has increased income, consumption, and savings of households; durable goods ownership; and subjective standard of living. The results also suggest that child schooling improved in Tonga.

This paper presents a novel stylized fact and analyzes its contribution to the skill bias of technical change in U.S. manufacturing. The share of skilled labor embedded in intermediate inputs correlates strongly with the skill share employed in final production. This finding points towards an intersectoral technology-skill complementarity (ITSC). Together with input-output linkages, the observed complementarity delivers a multiplier that reinforces skill demand along the production chain. Reduced-form estimates suggest that the effect is quantitatively important, explaining about as much skill upgrading as outsourcing. Empirical evidence suggests that one channel through which this complementarity works is product innovation. I also analyze the importance of different drivers of skill upgrading over time. While foreign outsourcing and IT capital is associated with skill demand particularly strongly from the 1980s onwards (a period of rapidly increasing skill premia), R&D contributed stably throughout the period 1958-2005. The same is true for ITSC, which augmented within-sector skill bias in a stable fashion throughout the last 5 decades.

In direct contrast to conventional wisdom and most economic models of marital age gaps, we present robust evidence that men and women who are married to differently-aged spouses are negatively selected. Empirical results show lower cognitive ability, lower educational attainment, lower occupational wages, lower earnings, and less attractive appearance among those married to a differently-aged spouse. These results, obtained using samples of first marriages and controlling for age of marriage, are consistent with a model in which individuals with more schooling and more upwardly-mobile occupations interact more heavily with similarly-aged peers and are ultimately more likely to marry similarly-aged spouses.

We use direct evidence on credit constraints to study their importance for household consumption growth and for welfare. We distentangle the direct effect on consumption growth of a currently binding credit constraint from the indirect effect of a potentially binding credit constraint that generates consumption risk. Our data are focused on job losers. We find that less than 5% of job losers experience a binding credit constraint, but those who do experience significant welfare losses, and consumption growth is 24% higher than for the rest of the population. However, even among those who are unconstrained and are able to borrow if needed, consumption responds to transitory income.