Public Economics

April 10 and 11, 2014
Raj Chetty of Harvard University and Emmanuel Saez of University of California, Berkeley, Organizers

Mark Duggan and Amanda Starc, University of Pennsylvania and NBER, and Boris Vabson, The Wharton School of the University of Pennsylvania

Who Benefits when the Government Pays More? Pass-Through in the Medicare Advantage Program

Governments contract with private firms to provide a wide range of services. While a large body of previous work has estimated the effects of those contracts, there has been surprisingly little work on how those effects vary with the generosity of the contract. Duggan, Starc, and Vabson examine this issue in the Medicare Advantage (MA) program through which the federal government contracts with private insurers to coordinate and finance health care for more than 15 million Medicare recipients. To do this, they exploit a substantial policy-induced increase in MA reimbursement in metropolitan areas with a population of 250,000 or more relative to metropolitan statistical areas (MSAs) just below this threshold. Their results demonstrate that the additional reimbursement leads more private firms to enter this market and to an increase in the share of Medicare recipients enrolled in MA plans. Their findings also reveal that only about one-fifth of the additional reimbursement is passed through to consumers in the form of better coverage. A somewhat larger share accrues to private insurers in the form of higher profits, and the authors find suggestive evidence of a large impact on advertising expenditures. Their results have implications for a key feature of the Affordable Care Act that will reduce reimbursement to MA plans by $156 billion from 2013 to 2022.

Marcus Hagedorn, Institute for Advanced Studies; Fatih Karahan, Federal Reserve Bank of New York; Iourii Manovskii, University of Pennsylvania and NBER; and Kurt Mitman, University of Pennsylvania

Unemployment Benefits and Unemployment in the Great Recession: The Role of Macro Effects (NBER Working Paper 19499)

Hagedorn, Karahan, Manovskii, and Mitman exploit a policy discontinuity at U.S. state borders to identify the effects of unemployment insurance policies on unemployment. Their estimates imply that most of the persistent increase in unemployment during the Great Recession can be accounted for by the unprecedented extensions of unemployment benefit eligibility. In contrast with recent literature that mainly focuses on estimating the effects of benefit duration on job search and acceptance strategies of the unemployed - the micro effect - the authors focus on measuring the general equilibrium macro effect that operates primarily through the response of job creation to unemployment benefit extensions. They find that it is the latter effect that is very important quantitatively.

Koichiro Ito, Boston University and NBER, and James Sallee, University of Chicago and NBER

The Economics of Attribute-Based Regulation: Theory and Evidence from Fuel-Economy Standards

In many countries, fuel economy standards mandate that vehicles meet a certain fuel economy, but heavier or larger vehicles are allowed to meet a lower standard. This has the perverse implication of allowing automakers to meet standards either by improving fuel economy or by increasing weight, which lowers fuel economy and increases externalities related to accidents. This is but one example of an attribute-based regulation in which the regulation imposed on a product depends on both the externality it creates and on some other attribute. Attribute basing potentially motivates firms and individuals to strategically alter the attribute, thereby endogenously altering the stringency of the regulation. Ito and Sallee develop a theory of attribute basing to demonstrate the costs and benefits of its use. They empirically examine the consequences of attribute-based fuel economy standards in Japan where fuel economy standards are a notched attribute-based function of vehicle weight. The authors use cross-sectional and panel techniques to demonstrate that attribute-based regulation has significantly altered the distribution of vehicle weight in Japan, where 10 percent of vehicles bunch at weight notches. For cars with weights altered in response to the policy, the authors estimate that the alteration generates a welfare loss from the exacerbation of weight-related externalities of $1,500 per unit sold, which translates into a $700 million annual loss across the Japanese auto market.

Paul Carrillo, George Washington University, and Dina Pomeranz and Monica Singhal, Harvard University and NBER

Tax Me if You Can: Evidence on Firm Misreporting Behavior and Evasion Substitution

Reducing tax evasion is a key priority for many governments, particularly in developing countries. A growing literature has argued that the use of third-party information to verify taxpayer self-reports is critical for tax enforcement and the growth of state capacity. However, there may be limits to the effectiveness of third-party information if taxpayers can substitute misreporting to less verifiable margins. Carrillo, Pomeranz, and Singhal present a simple framework to demonstrate the conditions under which substitution will occur, and provide strong empirical evidence for substitution behavior by exploiting a natural experiment in Ecuador. They find that when firms are notified by the tax authority about detected revenue discrepancies on previously filed corporate income tax returns, they increase reported revenues, matching the third-party estimate when provided. Firms also increase reported costs by 96 cents for every dollar of revenue adjustment, resulting in minor increases in total tax collection.

Stefano Giglio, University of Chicago and NBER; Matteo Maggiori, New York University and NBER; and Johannes Stroebel, New York University

Very Long-Run Discount Rates

Giglio, Maggiori, and Stroebel provide the first direct estimates of how agents trade off immediate costs and uncertain future benefits that occur in the very long run, 100 or more years away. They exploit a unique feature of housing markets in England, Wales, and Singapore where residential property ownership takes the form of either leaseholds or freeholds. Leaseholds are temporary, pre-paid, and tradable ownership contracts with maturities between 50 and 999 years, while freeholds are perpetual ownership contracts. The difference between leasehold and freehold prices represents the present value of perpetual rental income starting at leasehold expiry. The authors estimate the price discounts for varying leasehold maturities compared to freeholds and extremely long run leaseholds via hedonic regressions using proprietary datasets of the universe of transactions in each country. Agents discount very long run cash flows at low rates, assigning high present values to cash flows hundreds of years in the future. For example, 100-year leaseholds are valued up to 15 percent less than otherwise identical freeholds. Given the riskiness of rents, this suggests that both long-term risk-free discount rates and long-term risk premiums are low. Together with the relatively high average return to housing, this also implies a downward-sloping term structure of discount rates. The authors' results provide a new testing ground for asset pricing theories, including the analysis of bubbles, and have direct implications for climate change policy, long-run fiscal policy, and the conduct of cost benefit analyses. The authors find that households are relatively more willing to pay today to ensure reduced climate costs in the distant future, but relatively less willing to pay to only reduce the risk of bad climate outcomes compared to the leading environmental models.

Dayanand Manoli, University of Texas at Austin and NBER, and Nicholas Turner, Department of the Treasury

Nudges and Learning Effects from EITC Notifications

This paper examines the effects of notices from the United States Internal Revenue Service on low-income taxpayers' claiming of Earned Income Tax Credit (EITC) benefits. Using administrative tax data, Manoli and Turner present descriptive statistics on the population of taxpayers who file tax returns but do not claim the EITC despite appearing to meet the eligibility criteria. The descriptive evidence highlights that response rates do not vary by potential benefit amounts, and that individuals in high EITC-knowledge areas are less likely to receive notices, and conditional on receipt, individuals in these areas are also less likely to respond. Next, authors present quasi-experimental evidence on the effects of the notices on EITC take-up in the notice year and the following four years. The results show that the notices substantially increase EITC take-up in the year that taxpayers receive notices. However, these effects fade out quickly in the following years. These results suggest that even though there may be little evidence of learning about the EITC more generally from the notices, the notifications serve as valuable nudges to increase take-up in the year that the notices are sent out.

Robert McClelland and Shannon Mok, Congressional Budget Office, and Kevin Pierce, Statistics of Income, Internal Revenue Service

Labor Force Participation Elasticities of Women and Secondary Earners within Married Couples

Labor supply elasticities are often used to evaluate the effect of changes in tax rates on the total hours worked in the economy. Married women have traditionally been assumed to be the so-called "marginal" workers in their households in the sense of having larger labor supply elasticities. However, those elasticities have fallen sharply in recent decades - a decline that has been attributed to greater participation rates and more generally increased career orientation among married women. Indeed, a growing share of wives earn more than their husbands, raising the question as to whether sex or relative earnings is the relevant factor determining the sensitivity of participation to wage and tax rates. In this paper, McClelland and Mok use administrative data to examine whether the woman or the lower earning spouse is the marginal worker. They present descriptive evidence on the share of women who are the primary earner and the frequency of transitions into and out of employment by sex and relative earnings. Authors find that the lower earning spouse, not the woman, is more likely to start and stop working. McClelland and Mok then model an individual's work decision using a dynamic probit model to isolate the labor supply response to changes in tax rates. They estimate that the participation elasticity with respect to the net-of-tax rate of the secondary earner - the spouse who typically has lower earnings - is higher than that for women, though both of these elasticities are small. Participation elasticities with respect to income for both women and secondary earners are effectively zero. Their estimates are robust to several alternative models, including specifications of secondary earner.

Victoria Bryant and Michael Weber, Statistics of Income, Internal Revenue Service, and David Grusky and Pablo Mitnik, Stanford University

New Estimates of Intergenerational Economic Mobility Using Tax Return Data

This report presents analyses of a new data set, the Statistics of Income Mobility Panel, that has been assembled to provide new evidence on economic mobility and the implications of tax policy for economic mobility. Because the data are of unusually high quality, they provide the foundation for a comprehensive report on intergenerational income and earnings mobility in the United States. Bryant, Grusky, Mitnik, and Weber describe here (a) the rationale for measuring economic mobility and for using intergenerational income and earnings elasticities to do so; (b) the current state of the evidence on the size of intergenerational elasticities; (c) the rationale for assembling the statistics of Income Mobility (SOI-M) Panel and the key features of this new panel; (d) the main reasons why it's necessary to abandon some of the field's long-standing methodological conventions in favor of a new approach for specifying andestimating intergenerational elasticities;(e) the new estimates of average intergenerational elasticities for individual earnings and for family income; (f) the extent to which intergenerational persistence varies across regions of the parental income distribution;(g) the extent of intergenerational persistence among families that are very far apart in the income distribution; (h) the robustness of our estimates to the treatment of nonfilers; (i) the extent to which estimates of after-tax elasticities are consistent with estimates of pre-tax elasticities; (j) the effects of low-income tax credits on economic persistence; and (k) the role of gender and marriage in generating total-income elasticities.

Clemens Fuest, ZEW and the University of Mannheim, and Andreas Peichl and Sebastian Siegloch, IZA and the University of Cologne

Do Higher Corporate Taxes Reduce Wages? Micro Evidence from Germany

Because of endogeneity problems, very few studies have been able to identify the incidence of corporate taxes on wages. Fuest, Peichl, and Siegloch circumvent these problems by using an 11-year panel of data on 11,441 German municipalities' tax rates, 8 percent of which change each year, linked to administrative matched employer-employee data. Consistent with their theoretical model, the authors find a negative effect of corporate taxation on wages: a 1 euro increase in tax liabilities yields a 77 cent decrease in the wage bill. The direct wage effect, arising in a collective bargaining context, dominates while the conventional indirect wage effect through reduced investment is empirically small because of regional labor mobility. High- and medium-skilled workers, who arguably extract higher rents in collective agreements, bear a larger share of the corporate tax burden.

Jeffrey Clemens, University of California at San Diego and NBER, and Joshua Gottlieb, University of British Columbia

Bargaining in the Shadow of a Giant: Medicare's Influence on Private Payment Systems(NBER Working Paper 19503)

Clemens and Gottlieb analyze Medicare's influence on private payments for physicians' services. Using a large administrative change in surgical relative to medical reimbursements, the authors find that private prices follow Medicare's lead. A $1 change in Medicare's relative payments moves private payments by $1.20. Results are similar when Medicare alters overall reimbursement levels. Medicare thus strongly influences both relative valuations and aggregate expenditures. Medicare's price transmission is strongest when physician groups are numerous and competitive. Transaction and bargaining costs may lead the development of payment systems to suffer from a classic coordination problem. Changes to Medicare’s payment models may therefore be public goods.

Rafael Lalive, University of Lausanne; Camille Landais, London School of Economics; and Josef Zweimueller, University of Zurich

Market Externalities of Large Unemployment Insurance Extension Programs

Lalive, Landais, and Zweimueller offer quasi-experimental evidence of the existence of spillover effects of unemployment insurance extensions using a unique program that extended unemployment benefits drastically for a subset of workers in selected regions of Austria. The authors use the non-eligible unemployed in treated regions and a difference-in-difference identification strategy to control for preexisting differences across treated and untreated regions. They uncover the presence of important spillover effects: in treated regions, as the search effort of treated workers plummets, the job finding probability of untreated workers increases, and their average unemployment duration and probability of long-term unemployment decrease. These effects are the largest when the program intensity reaches its highest level, then decrease and disappear as the program is scaled down and finally interrupted. The authors use this evidence to assess the relevance of different assumptions on technology and the wage setting process in equilibrium search and matching models, and discuss the policy implications of their results for the Emergency Unemployment Compensation extensions in the United States.

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