Public Economics

March 29 and 30, 2012
Amy Finkelstein of MIT and Karl Scholz of the University of Wisconsin, Organizers

Henrik Kleven and Mazhar Waseem, London School of Economics

Behavioral Responses to Notches: Evidence from Pakistani Tax Records

Using administrative tax records from Pakistan, Kleven and Waseem investigate behavioral responses to notches created by discontinuous jumps in income tax liability. Notches introduce very strong incentives for bunching on the low-tax side and density holes on the high-tax side of cutoff points. The authors develop a method for estimating structural earnings elasticities with respect to the marginal tax rate using moments of the density distribution around notch points, and show that notches offer an ideal opportunity to estimate structural elasticities in a world where optimization frictions are important. They provide evidence of large and sharp bunching below notch points along with missing mass above notch points. Moreover, observed bunching is strongly attenuated by frictions as a large share of individuals are unresponsive even in strictly dominated regions above notches. The evidence of bunching and frictions is used to estimate long-run responses not attenuated by frictions. The implied earnings responses to notches are very large, but the underlying structural elasticities driving those responses are small. This finding shows the strongly distortionary nature of notched incentive schemes. The authors also present evidence on income shifting between wage income and self-employment income using notches, and consider a tax reform that facilitates a comparison between notches and kinks.

Liran Einav and Jonathan D. Levin, Stanford University and NBER; Dan Knoepfle, Stanford University; and Neel Sundaresan, eBay Research Labs

Sales Taxes and Internet Commerce

Einav, Knoepfle, Levin, and Sundaresan estimate the sensitivity of Internet retail purchasing to sales taxes using data from the eBay marketplace. Their first approach exploits the fact that seller locations are revealed only after buyers have expressed interest in an item by clicking on its listing. They use millions of location "surprises" to estimate price elasticities with respect to the effective sales tax. They then use aggregated data to estimate cross-state substitution parameters, and substitution between offline and online purchases, relying both on cross-sectional variation in state and local sales taxes, and on changes in these rates over time. They find substantial sensitivity to sales taxes. Using an item-level approach, they find a price elasticity of around -2 for interested buyers. Using an aggregate approach, they find that a single percentage point increase in a state's sales tax increases online purchases by state residents by just under 2 percent, but decreases their online purchases from home-state retailers by 3-4 percent.

Justine S. Hastings, Brown University and NBER, and Ali Hortacsu and Chad Syverson, University of Chicago and NBER

Advertising and Competition in Privatized Social Security: The Case of Mexico

Hastings, Hortacsu, and Syverson present evidence on how advertising affects competition and equilibrium prices in the context of a privatized pension market. They use detailed administrative data on fund manager choices and worker characteristics at the inception of Mexico's privatized social security system, when fund managers had to set prices (management fees) at the national level but could select sales force levels by local geographic area. The researchers develop a model of fund manager choice, price, and advertising competition (in terms of sales force deployment) to examine how exposure to advertising shaped demand and its effect on overall management fees. Their model nests informative and persuasive advertising and the authors find evidence in favor of the persuasive view: exposure to the sales force lowered price sensitivity and increased brand loyalty, leading to inelastic demand and high equilibrium fees. The researchers then use these estimates to simulate potential policy solutions, including a government firm that provides service at marginal cost and increased investor financial literacy. They conclude that policies aimed at increasing sensitivity of investors are likely to be the most effective at fostering competition and efficient pricing.

Jonathan T. Kolstad, University of Pennsylvania and NBER, and Amanda E. Kowalski, Yale University and NBER

Mandate-Based Health Reform and the Labor Market: Evidence from the Massachusetts Reform (NBER Working Paper No. 17933)

Kolstad and Kowalski model the labor market impact of the three key provisions of the recent Massachusetts and national "mandate-based" health reforms: individual and employer mandates and expansions in publicly-subsidized coverage. They characterize the compensating differential for employer-sponsored health insurance (ESHI) -- the causal change in wages associated with gaining ESHI. They also characterize the welfare impact of the labor market distortion induced by health reform. They show that the welfare impact depends on a small number of "sufficient statistics" that can be recovered from labor market outcomes. Relying on the reform implemented in Massachusetts in 2006, they estimate the empirical analog of our model. They find that jobs with ESHI pay wages that are lower by an average of $6,058 annually, indicating that the compensating differential for ESHI is only slightly smaller than the average cost of ESHI to employers. Because the newly-insured in Massachusetts valued ESHI, they were willing to accept lower wages, and the deadweight loss of mandate-based health reform was less than 5 percent of what it would have been if the government had instead provided health insurance by levying a tax on wages.

Aviva Aron-Dine, MIT; Liran Einav; Amy Finkelstein; and Mark R. Cullen, Stanford University and NBER

Moral Hazard in Health Insurance: How Important is Forward Looking Behavior? (NBER Working Paper No. 17802)

Aron-Dine, Einav, Finkelstein, and Cullen investigate whether individuals exhibit forward looking behavior in their response to the non-linear pricing common in health insurance contracts. The empirical strategy here exploits the fact that employees who join an employer-provided health insurance plan later in the calendar year face the same initial ("spot" price of medical care but a higher expected end-of-year ("future" price than ) ) employees who join the same plan earlier in the year. The results reject the null of completely myopic behavior: medical utilization appears to respond to the future price, with a statistically significant elasticity of medical utilization with respect to the future price of -0.4 to -0.6. To try to quantify the extent of forward looking behavior, the authors develop a stylized dynamic model of individual behavior and calibrate it using our estimated behavioral response and additional data from the RAND Health Insurance Experiment. The result suggests that the elasticity estimate may be substantially smaller than what is implied by fully forward-looking behavior, yet it is sufficiently high to have an economically significant effect on the response of annual medical utilization to a non-linear health insurance contract. Overall, the results point to the empirical importance of accounting for dynamic incentives in analyses of the impact of health insurance on medical utilization.

David Albouy, University of Michigan and NBER

Metropolitan Land Values and Housing Productivity

Albouy presents the first nationwide index of directly-measured land values by metropolitan area and investigates their relationship to housing costs. He finds that regulatory and geographic constraints, as well as construction costs, increase the cost of housing relative to land. On average, approximately 22 percent of housing costs are attributable to land, with an increasing fraction in higher value areas, implying an elasticity of substitution between land and other inputs of about 0.6. Conditional on land and construction costs, housing productivity is relatively low in larger cities, where productivity in tradeables is high. Areas where regulations lower housing productivity have noticeably higher quality-of-life.

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