Subjective income expectations, canonical models and income risk

Expectations are central to behaviour. Despite the existence of subjective expectations data, the standard approach is to ignore these, to hypothecate a model of behaviour and to infer expectations from realisations. In the context of income models, we reveal the informational gain obtained from using both a canonical model and subjective expectations data. We propose a test for this informational gain, and illustrate our approach with an application to the problem of measuring income risk.

Investor protection, risk sharing and inequality

This paper studies the relationship between investor protection, financial risk sharing and income inequality. In the presence of market frictions, better protection makes investors more willing to take on entrepreneurial risk while lending to firms. This implies lower cost of external finance and better risk sharing between financiers and entrepreneurs. Investor protection, by boosting the market for risk sharing plays the twofold role of encouraging agents to undertake risky enterprises and providing them with insurance. By increasing the number of risky projects, it raises income inequality. By extending insurance to more agents, it reduces it. As a result, the relationship between the size of the market for risk sharing and income inequality is hump-shaped. Empirical evidence from a cross-section of sixty-eight countries, and a panel of fifty countries over the period 1976-2000, supports the predictions of the model.

The Social contract with endogenous sentiments

Moral values infuence individual behavior and social interactions. A specially signif- cant instance is the case of moral values concerning work e¤ort. Individuals determine what they take to be proper behaviour and judge the others, and themselves, accordingly. They increase their esteem -and self-esteem- for those who perform in excess of the standard and decrease their esteem for those who work less. These changes in self-esteem result from the self-regulatory emotions of guilt or pride extensively studied in Social Psychology. We examine the interactions between sentiments, individual behaviour and the social contract in a model of rational voting over redistribution where individual self-esteem and relative es-teem for others are endogenously determined. Individuals di¤er in their productivities. The desired extent of redistribution depends both on individual income and on individual attitudes toward others. We characterize the politico-economic equilibria in which sentiments, labor supply and redistribution are simultaneously determined. The model has two types of equilibria. In "cohesive" equilibria, all individuals conform to the standard of proper behav- iour, income inequality is low and social esteem is not biased toward any particular type. Under these conditions equilibrium redistribution increases in response to larger inequality. In a "clustered" equilibrium skilled workers work above the mean while unskilled workers work below. In such an equilibrium, income inequality is large and sentiments are biased in favor of the industrious. As inequality increases, this bias may eventually overtake the egoistic demand for greater taxation and equilibrium redistribution decreases. The type of equilibrium that emerges crucially depends on inequality. We contrast the predictions of the model with data on inequality, redistribution, work values and attitudes toward work and toward the poor for a set of OECD countries.

Income growth and atmospheric pollution in Spain: an input-output approach

The relationships between economic growth and environmental pressures are complex. Since the early nineties, the debate on these relationships has been strongly influenced by the Environmental Kuznets Curve hypothesis, which states that during the first stage of economic development environmental pressures increase as per capita income increases, but once a critical turning-point has been reached these pressures diminish as income levels continue to increase. However, to date such a delinking between economic growth and emission levels has not happened for most atmospheric pollutants in Spain. The aim of this paper is to analyse the relationship between income growth and nine atmospheric pollutants in Spain. In order to obtain empirical outcomes for this analysis, we adopt an input-output approach and use NAMEA data for the nine pollutants. First, we undertake a structural decomposition analysis for the period 1995-2000 to estimate the contribution of various factors to changes in the levels of atmospheric emissions. And second, we estimate the emissions associated with the consumption patterns of different groups of households classified according to their level of expenditure

The biophysical perspective of a middle income economy: material flows in Mexico

We analyse natural resource use dynamics in the Mexican economy during the last three decades. Despite low and uneven economic growth, the extraction and use of materials in the Mexican economy has continuously increased during the last 30 years. In this period, population growth rather than economic growth was the main driving force for biophysical growth. In addition, fundamental changes have taken place in the primary sectors, in manufacturing, and in household consumption and these are reflected in an increasing emphasis on the use of fossil fuels and construction materials. Mexico’s economy has been strongly influenced by international trade since the country commenced competing in international markets. In the 1970s, Mexico mainly exported primary resources. This pattern has changed and manufactured goods now have a much greater importance due to a boom in assembling industries. In contrast with other Latin American countries, Mexico has achieved a diversification of production, moving towards technology-intensive products and a better mix in its export portfolio. However, crude oil exports still represent the single most important export good. Mexico’s material consumption is still well below the OECD average but is growing fast and the current resource use patterns may well present serious social and environmental problems to the medium and long term sustainability of Mexico’s economy and community. Information on natural resource use and resource productivity could provide valuable guidance for economic policy planning in Mexico.

A theoretical and practical study on linear reforms of dual taxes

We extend the linear reforms introduced by Pf¨ahler (1984) to the case of dual taxes. We study the relative effect that linear dual tax cuts have on the inequality of income distribution -a symmetrical study can be made for dual linear tax hikes-. We also introduce measures of the degree of progressivity for dual taxes and show that they can be connected to the Lorenz dominance criterion. Additionally, we study the tax liability elasticity of each of the reforms proposed. Finally, by means of a microsimulation model and a considerably large data set of taxpayers drawn from 2004 Spanish Income Tax Return population, 1) we compare different yield-equivalent tax cuts applied to the Spanish dual income tax and 2) we investigate how much income redistribution the dual tax reform (Act ‘35/2006’) introduced with respect to the previous tax.

Health and income: a robust comparison of Canada and the US

This paper uses sequential stochastic dominance procedures to compare the joint distribution of health and income across space and time. It is the First application of which we are aware of methods to compare multidimensional distributions of income and health using procedures that are robust to aggregation techniques. The paper's approach is more general than comparisons of health gradients and does not require the estimation of health equivalent incomes. We illustrate the approach by contrasting Canada and the US using comparable data. Canada dominates the US over the lower bidimensional welfare distribution of health and income, though not generally in terms of the uni-dimensional distribution of health or income. The paper also finds that welfare for both Canadians and Americans has not unambiguously improved during the last decade over the joint distribution of income and health, in spite of the fact that the uni-dimensional distributions of income have clearly improved during that period.

A Comparison of the poverty impact of transfers, taxes and market income across five OECD Countries

This paper compares the poverty reduction impact of income sources, taxes and transfers across five OECD countries. Since the estimation of that impact can depend on the order in which the various income sources are introduced into the analysis, it is done by using the Shapley value. Estimates of the poverty reduction impact are presented in a normalized and un-normalized fashion, in order to take into into account the total as well as the per dollar impacts. The methodology is applied to data from the Luxembourg Income Study (LIS) database.

The Causal effect of education on aggregate income

Empirical studies assume that the macro Mincer return on schooling is con- stant across countries. Using a large sample of countries this paper shows that countries with a better quality of education have on average relatively higher macro Mincer coeficients. As rich countries have on average better educational quality, differences in human capital between countries are larger than has been typically assumed in the development accounting literature. Consequently, factor accumulation explains a considerably larger share of income differences across countries than what is usually found.

Economic growth and inequality: the role of fiscal policies

This paper analyses the impact of different instruments of fiscal policy on economic growth as well as on income inequality, using an unbalanced panel of 43 upper-middle and high income countries for the period 1972-2006. We consider and estimate two individual equations explaining growth and inequality in order to assess the incidence of different fiscal policies. Firstly, our approach considers imposing orthogonal assumptions between growth and inequality in both equations, and secondly, it allows growth to be included in the inequality equation, and inequality to be included in the growth equation. The empirical results suggest that an increase in the size of government measured through current expenditures and direct taxes diminishes economic growth while reducing inequality, being public investment the only fiscal policy that may break this trade-off between efficiency and equity, since increases in this item reduces inequality without harming output. Therefore, the results reflect that the trade-off between efficiency and equity that governments often confront when designing their fiscal policies may be avoided.

Empirical approaches to inequality of opportunity: principles, measures, and evidence

We put together the different conceptual issues involved in measuring inequality of opportunity, discuss how these concepts have been translated into computable measures, and point out the problems and choices researchers face when implementing these measures. Our analysis identifies and suggests several new possibilities to measure inequality of opportunity. The approaches are illustrated with a selective survey of the empirical literature on income inequality of opportunity.

An ex-post view of inequality of opportunity in France and its regions

This paper proposes an ex-post measure of inequality of opportunity in France and its regions by assessing the inequality between individuals exerting the same effort. To this end, we define a fair income that fulfils ex-post equality of opportunity requirements. Unfairness is measured by an unfair Gini based on the distance between the actual income and the fair income. Our findings reveal that the measures of ex-post inequality of opportunity largely vary across regions, and that this is due to di_erences in reward schemes and in the impact of the non responsibility factors of income. We find that most regions have actual incomes closer to fair incomes than to average income, excepted Ile de France where the actual income looks poorly related to effort variables. Finally, we find that income inequality and inequality of opportunity are positively correlated among regions.

Social spending and demographics: The role of public policies in the intergenerational redistribution of income. Empirical evidence from Spain and Catalonia

The demographic shift underway in Southern Europe requires a revision of some of the fundamental principles of the traditional welfare state. We analyze the evolution of several aspects of welfare and social expenditure over the last two decades. We find that in the context of the present demographic changes and real estate boom current social and pension policy leads to a new distribution of benefits and burdens which is highly intergenerationally unequal. We argue for a revised definition of public policy based on Musgrave's proposition as a possible rule for an intergenerationally fair distribution.

Equities and inequality

Most US credit card holders revolve high-interest debt, often combined with substantial (i) asset accumulation by retirement, and (ii) low-rate liquid assets. Hyperbolic discounting can resolve only the former puzzle (Laibson et al., 2003). Bertaut and Haliassos (2002) proposed an 'accountant-shopper'framework for the latter. The current paper builds, solves, and simulates a fully-specified accountant-shopper model, to show that this framework canactually generate both types of co-existence, as well as target credit card utilization rates consistent with Gross and Souleles (2002). The benchmark model is compared to setups without self-control problems, with alternative mechanisms, and with impatient but fully rational shoppers.

Banks and development: Jewish communities in the Italian Renaissance and current economic performance

Are differences in local banking development long-lasting? Do they affect long-term economic performance?I answer these questions by relying on an historical development that occurred in Italian cities during the 15thcentury. A sudden change in the Catholic doctrine had driven the Jews toward money lending. Cities thatwere hosting Jewish communities developed complex banking institutions for two reasons: first, the Jews werethe only people in Italy who were allowed to lend for a profit and, second, the Franciscan reaction to Jewishusury led to the creation of charity lending institutions, the Monti di Pietà, that have survived until today andhave become the basis of the Italian banking system. Using Jewish demography in 1500 as an instrument, Iprovide evidence of (1) an extraordinary persistence in the level of banking development across Italian cities (2)large effects of current local banking development on per-capita income. Additional firm-level analyses suggestthat well-functioning local banks exert large effects on aggregate productivity by reallocating resources towardmore efficient firms. I exploit the expulsion of the Jews from the Spanish territories in Italy in 1541 to arguethat my results are not driven by omitted institutional, cultural and geographical characteristics. In particular,I show that, in Central Italy, the difference in current income between cities that hosted Jewish communitiesand cities that did not exists only in those regions that were not Spanish territories in the 16th century.