Knowledge that Transforms

Suppose that engineers can demonstrate that air bags will reduce the risk of death in an automobile by 25 percent for any given frequency and severity of accidents. Would the installation of these devices necessarily reduce the fatality rate by 25 percent? The answer depends upon the response of drivers to the increased protection from dangerous accidents. If they increase their (speed, recklessness, driving while intoxicated, driving in unsafe conditions, etc.), they may realize substantially less than a 25 percent reduction in expected fatalities. Such offsetting behavior is not irrational: it merely represents a substitution of the marginal benefits of driving intensity for the reduced marginal cost of risk. If offsetting behavior actually occurs, it may be realized in increased risks for bicyclists, motorcyclists, and pedestrians. These externalities could be substantial unless there is a reduction in risk taking among these groups. As a result, the net effect of mandating air bags or any other safety device is far from obvious. There may be no net reduction in fatalities or serious injuries. These theoretical considerations are at the core of Sam Peltzman's classic study (1975) of automobile safety regulation. For policymakers, however, the key question is how much offsetting behavior actually occurs. As Peltzman (1977) acknowledges, offsetting behavior could be trivial or substantial. In this paper, we explore this issue, providing new empirical estimates of the effects of crashworthiness standards established for automobiles over the past fifteen years. These standards have required the installation of lapshoulder belts, energy-absorbing steering columns, head restraints, padded dashboards, crush-resistant passenger compartments, safer windshield mounting, more secure locks, and a variety of other features.

Many writers subscribe to Joseph Schumpeter's view that, while perfectly competitive firms allocate resources efficiently in a static sense, they perform poorly when it comes to innovation. From this point of view, the optimal form of market structure is unlikely to be perfect competition, but some other type of dynamic competition which includes significant elements of monopoly. Recently, considerable effort has been focused on modelling Schumpeter's notion of competition. Perhaps best exemplified by the 1980 work of Partha Dasgupta and Joseph Stiglitz (hereafter D-S),2 this approach views free entry to the RD see Nelson and Winter (1977). 3Readers will recognize a similarity of this approach with the notion of contestable markets discussed most recently by William Baumol (1982) and by Baumnol, John Panzar, and Robert Willig (1982). For an interesting comparison of the Schumpeterian with the Marxian notion of competition, see John Elliott (1980). 4This was noted, for example, by Robert Wilson (1975). 5In such industries, the long-term gains from dynamically efficient innovation become of paramount importance; consequently, the optimal market structure would consist of a small number of firms. The driving force behind such a result is what Scherer (1972) has called the Lebensraum effect. Firms performing R&D must at least break even. They derive their profits from

for successive values of the endogenous variables y,, with the x, treated as deterministic forcing variables. Here 0 is a parameter vector and the Et are random shocks. Lucas correctly observed that such a formulation is inconsistent with a view of agents as optimizers: except in special cases in which the future is irrelevant to present decisions, it makes no sense to think of agents as optimizing if they know that their budget constraints are liable to shift arbitrarily (i.e., in a way which is not characterized probabilistically) as government policy changes. Lucas was led to augment the foregoing equation by adding to the system a government policy function

This paper reports a set of lifetime tax incidence calculations using a life cycle simulation model for Canada due to Davies (1979a, 1982). A repeatedly stated qualification to annual calculations in the empirical tax incidence literature is that it would be more satisfactory to make calculations on a lifetime basis. Even though it is acknowledged that lifetime tax incidence could well differ from annual, it is widely believed that data and other difficulties make such calculations next to impossible. Indeed, the widespread acceptance of the data problems of lifetime calculations seems also to have inhibited speculation about how lifetime tax incidence might differ from annual. As a result, redistributive tax policy judgments continue to be based on annual incidence calculations in spite of the reservations many have about their usefulness. Our paper is intended to reorient discussion towards lifetime tax incidence by providing some initial null hypotheses about the shape of lifetime tax profiles. Our main finding is that under the standard competitive assumptions common in the incidence literature, lifetime and annual incidence calculations both produce mild progression in tax rates across household deciles (ignoring the bottom decile in the annual calculation). While the income tax is less progressive in lifetime than in annual calculations, other taxes are for the most part less regressive. Also, lifetime incidence calculations are much more robust to alternative shifting assumptions than annual calculations. In the lifetime context, key distributions such as earnings, transfer payments, and consumption are less heavily concentrated in particular percentiles of the population than is true in annual data. As a result, changing the allocative series for any particular tax does not have the large effect on incidence results found in annual calculations.' Each component of the tax system is allocated to households grouped by lifetime income using particular distributive series following a procedure similar to that employed in annual incidence calculations (for example, Richard Musgrave et al., 1974; Joseph Pechman and Benjamin Okner, 1974; Edgar Browning and William Johnson, 1979; W. Irwin Gillespie, 1980). In the process we are able to compare lifetime and annual incidence calculations using the same data set. In both lifetime and annual calculations, we allocate five groups of taxes among households using distributive series which come partly from the 1971 Statistics Canada Survey of Consumer Finances (SCF) and partly from our life cycle simulation model. The SCF data are used to construct synthetic longitudinal lifetime profiles of earnings and transfer payments for a sample of 500 households. The latter are assigned inheritances by simulating patterns of mortality and bequest. These data are then used in the life cycle model to generate lifetime consumption profiles and bequests. The earnings, transfer, and inheritance data, plus the model output provide the distributive series on which alternative incidence calculations are based. While the incidence calculations presented in this paper use Canadian data, results would likely be similar for the United States

A comment on an article by Viem Kwok and Hayne Leland concerning the relationship between asymmetric information and the brain drain of skilled labor from developing countries is presented. A reply by Kwok and Leland (p. 535) is also included. (ANNOTATION)