Knowledge that Transforms

The efficient redistribution hypothesis says that no available government policies are Pareto superior to observed government policies. Efficient redistribution from government policy is a central tenet of much recent theoretical and applied political economy literature. In this paper, limitations of previous attempts to test the efficient redistribution hypothesis are discussed, and an alternative test of the efficient redistribution hypothesis that uses vector optimization theory and bootstrap methodology is presented.

Recent estimates of the potential growth effects of tax reform vary wildly, ranging from zero to eight percentage points. Using an endogenous growth model, we assess which model features and parameter values are important for determining the quantitative impact of tax reform. We find that the critical parameters are factor shares, depreciation rates, the elasticity of intertemporal substitution, and the elasticity of labor supply. The elasticities of substitution in production, on the other hand, are relatively unimportant. The quantitative estimates in several recent papers are compared with each other and with some of the evidence from U.S. experience. We find that Robert Lucas's conclusion, that tax reform would have little or no effect on the U.S. growth rate, is theoretically robust and consistent with the evidence.

In this paper we show that some of the predictions of models of consumer intertemporal optimization are in line with the patterns of nondurable expenditure observed in U.S. household-level data. We propose a flexible specification of preferences that allows multiple commodities and yields empirically tractable equations. We estimate preference parameters using the only U.S. micro data set with complete consumption information. We show that previous rejections can be explained by the simplifying assumptions made in previous studies. We also show that results obtained using good consumption or aggregate data can be misleading.

This paper examines the link between property rights and investment incentives. I develop three theoretical arguments based on security of tenure, using land as collateral and obtaining gains from trade. The paper then presents empirical evidence from two regions in Ghana. I investigate the possibility that rights are endogenous, with farmers making improvements to enhance their land rights. Finally, I suggest tests for which of the theories might explain the results.

Household-level panel data from a nationally representative sample of rural Indian households describing the adoption and profitability of high-yielding seed varieties (HYVs) associated with the Green Revolution are used to test the implications of a model incorporating learning by doing and learning spillovers. The estimates indicate that (i) imperfect knowledge about the management of the new seeds was a significant barrier to adoption; (ii) this barrier diminished as farmer experience with the new technologies increased; (iii) own experience and neighbors' experience with HYVs significantly increased HYV profitability; and (iv) farmers do not fully incorporate the village returns to learning in making adoption decisions.

Micro data studies of household saving often find a significant group in the population with virtually no wealth, raising concerns about heterogeneity in motives for saving. In particular, this heterogeneity has been interpreted as evidence against the life cycle model of saving. This paper argues that a life cycle model can replicate observed patterns in household wealth accumulation after accounting explicitly for precautionary saving and asset-based, means-tested social insurance. We demonstrate theoretically that social insurance programs with means tests based on assets discourage saving by households with low expected lifetime income. In addition, we evaluate the model using a dynamic programming model with four state variables. Assuming common preference parameters across lifetime income groups, we are able to replicate the empirical pattern that low-income households are more likely than high-income households to hold virtually no wealth. Low wealth accumulation can be explained as a utility-maximizing response to asset-based, means-tested welfare programs.

In 23 American states, citizens can initiate and approve laws by popular vote; in the other 27 states, laws can be proposed only by elected representatives. This paper compares the fiscal behavior of state and local governments over the last 30 years under these two institutional arrangements. The main finding is that spending is significantly lower, on the order of 4 percent, in states with voter initiatives than in pure representative states. It is also found that local spending is higher and state spending is lower in initiative states. On the revenue side, initiative states rely less on broad-based taxes and more on charges tied to services. Taken together, the evidence indicates that the initiative leads to a reduction in the overall size of the government sector and suggests that it causes a decline in the level of redistributional activity.

A fundamental equilibrium condition underlying most utility-based asset pricing models is the equilibration of intertemporal marginal rates of substitution (IMRS). Previous empirical research, however, has found that the comovements of consumption and asset return data fail to satisfy the restrictions imposed by this equilibrium condition. In this paper, we examine whether market frictions can explain previous findings. Our results suggest that a combination of short-sale, borrowing, solvency, and trading cost frictions can drive a large enough wedge between IMRS so that the apparent violations may not be inconsistent with market equilibrium.

This paper examines the congressional passage of the American minimum wage law, the Fair Labor Standards Act of 1938. Voting on the act is modeled as a function of the concentration of the constituencies for minimum wage legislation, North-South differentials, and legislator ideology. It is shown that the House radically altered the final content of the bill, abandoning a proposed Wages and Hours Board with discretionary powers to determine minimum wages in favor of a flat rate following the objections of several interest groups; North-South divisions over the bill had little influence over congressional voting; and the influence of constituent groups increased relative to legislators' ideology as the bill became an important election issue.

Borrowing on credit cards at high interest rates might appear irrational. However, even low transactions costs can make credit cards attractive relative to bank loans. Credit cards also provide liquidity services by allowing consumers to avoid some of the opportunity costs of holding money. The effect of alternative interest rates on the demand for card debits can explain why credit card interest rates only partially reflect changes in the cost of funds. Credit card interest rates that are inflexible relative to the cost of funds are not inconsistent with a competitive equilibrium that yields zero profits for the marginal entrant.