The Investment Income Formula of the American Economic Association
Abstract
Economic theory tells us that there is no single best way to treat capital gains in a definition of income. But it is necessary for practical reasons that some policy toward capital gains be adopted by institutions with endowments. This creates a dilemma which can be resolved only by a careful blend of theoretical analysis and judgment. I will attempt to clarify the roles of theory and judgment in this paper, and then to outline their implications for the income formula of the American Economic Association (AEA).
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