Knowledge that Transforms

In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that in our model the optimal capital income tax rate is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system.

Despite the large amount of private and public resources spent on foreign education, there is no systematic evidence that foreign-educated individuals foster democracy in their home countries. Using a unique panel dataset on foreign students starting in the 1950s, I show that foreign-educated individuals promote democracy in their home country, but only if the foreign education is acquired in democratic countries. The results are robust to several estimation techniques, to different definitions of democracy, and to the inclusion of a variety of control variables, including democracy in trading partners, neighboring countries, level of income, and level and stock of education. (JEL D72, I21, O15, O17, P26)

Can Development Aid Contribute to Social Cohesion after Civil War? Evidence from a Field Experiment in Post-conflict Liberia by James D. Fearon, Macartan Humphreys and Jeremy M. Weinstein. Published in volume 99, issue 2, pages 287-91 of American Economic Review, May 2009

The Integrated Financial and Real System of National Accounts for the United States: Does It Presage the Financial Crisis? by Michael G. Palumbo and Jonathan A. Parker. Published in volume 99, issue 2, pages 80-86 of American Economic Review, May 2009

Adi Brender Allan DrazenDecember 2008When democracy is new it is often fragile or unconsolidated, meaning that importantpolitical groups lack full commitment to the democratic process, so that its survival is notassured. What economic policies can a government use to try to prevent a reversion toautocracy?One answer to this question begins with the argument that the threat to democracycomes from anti-democratic elites Œthe army, groups such as the wealthy who bene–ttedmost under the old regime, the fioligarchsflŒwho are seen as basically anti-democratic andwho have the power to overthrow the new democratic regime. The fimassesflare seen asunambiguously pro-democratic. Under this view, policy to consolidate democracy shouldfocus on placating the anti-democratic elites, or, colloquially but not inaccurately, to fibuythem o⁄.flThis approach has received a superb treatment in Daron Acemoglu and JamesA. Robinson (2005).Targeted economic policy to consolidate democracy can be viewed more generally. Sur-vival of democracy (and policy to enhance that) can be thought of in terms of two fun-damental questions. The –rst is: How does the support of di⁄erent actors a⁄ect theprobability that democracy survives? The second is then: How do these important actorschoose whether or not to support the continuation of democracy or its overthrow? Thedesign of policy to address democratic fragility depends on the answers to these two basicquestions. The policy prescription in the previous paragraph, for example, follows from theanswers: it is the elites alone who are determinate; and, their support depends on givingthem enough that they are content not to overthrow democracy.Our research on the fragility of new democracies focusses on di⁄erent, but complemen-tary issues. While we agree that anti-democratic elites pose a serious threat to fragile1

Every year, millions of pounds of toxic chemicals thought to be linked to developmental problems in fetuses and young children are released into the air. In this paper we estimate the effect of these releases on the health of newborns. Using data from the Toxic Release Inventory Program and Vital Statistics Natality and Mortality files, we find significant negative effects of prenatal exposure to toxicants on gestation and birth weight. We also find that several developmental chemicals increase the probability of infant death. The effect is quite sizeable: the reported reductions in cadmium, toluene, and epichlorohydrin releases during the 90s could account for about 3.9 percent of the overall decrease in infant mortality. Our results are robust to several specification checks, such as comparing developmental to non-developmental chemicals, and fugitive air releases to stack air releases.

In this paper, we analyze a class of models in which there are interjurisdictional spillovers among heterogeneous jurisdictions, as illustrated for instance by CO2 emissions that affect the global environment. Each jurisdiction's emissions depend upon the local stock of private capital. Capital is interjurisdictionally - mobile and may be taxed to help finance local public expenditures. We show that decentralized policymaking leads to efficient resource allocations in important cases, even in the complete absence of corrective interventions by higher - level governments or coordination of policy through Coasian bargaining. In particular, even when the preferences and production technologies differ among the agents, the decentralized system can still result in globally efficient allocation.

The Effects of Population Aging on the Relationship among Aggregate Consumption, Saving, and Income by Karen E. Dynan, Wendy Edelberg and Michael G. Palumbo. Published in volume 99, issue 2, pages 380-86 of American Economic Review, May 2009

Many emerging market economies oscillate between periods of high and low growth (see Aguiar and Gopinath, 2007). These changes in growth regimes generate business cycles that are markedly different from the ones observed in developed countries: consumption and investment are volatile relative to output, and net exports are strongly counter-cyclical. This volatility is often accompanied by sharp changes in the policy environment as well. For example, figure 1 shows the relationship between two measures of expropriation and political risk and real GDP for Argentina between 1984 and 2007. For easy comparison to the GDP series, the risk factors are inverted so that an increase in the index corresponds to a decrease in risk, and all series are normalized to 100 in 1984.1 The risk factor series are highly correlated with output.2 When GDP is higher than average, the institutions and government policies in Argentina foster growth, as measured by increased political stability, enhanced respect for property rights, and stronger contract enforcement. In Aguiar et al. (forthcoming), we develop a framework to understand these policy reversals and the associated economic volatility. In particular, we explore the joint dynamics of sovereign debt, investment, and expropriation risk in a small open economy model. Our departing point from previous work was the introduction of two political economy frictions. ∗Prepared for the January 2009 AEA Annual Meeting. We thank Thomas Sampson for excellent research assistance. 1The measures of risk are taken from Political Risk Services (PRS). The Expropriation Risk Index is a scaled version of the PRS Investment Profile series, which summarizes the government’s attitude toward inward investment based on four risk factors: expropriation, taxation, repatriation, and labor costs. The Political Risk index assigns risk points to a group of factors, of which, the Investment Profile variable is one. Real GDP is from the World Development Indicators. 2The correlation between the inverse measure of expropriation risk and GDP is 0.68, and the political risk and GDP is 0.71.

I elicit causal effects of spousal observability and communication on financial choices of married individuals in the Philippines. When choices are private, men put money into their personal accounts. When choices are observable, men commit money to consumption for their own benefit. When required to communicate, men put money into their wives' account. These strong treatment effects on men, but not women, appear related more to control than to gender: men whose wives control household savings respond more strongly to the treatment and women whose husbands control savings exhibit the same response. Changes in information and communication interact with underlying control to produce mutable gender-specific outcomes. (JEL D13, D14, J12, J16, O15)