Summer 2022
Taxation of Top Incomes and Tax Avoidance
This paper studies the aggregate and distributional effects of raising the top marginal income tax rate in the presence of tax avoidance. To this end, we develop a quantitative macroeconomic model with heterogeneous agents and occupational choice in which entrepreneurs can avoid taxes in two ways. On the extensive margin, entrepreneurs can choose the legal form of their business organization to reduce their tax burden. On the intensive margin, entrepreneurs can shift their income between different tax bases. In a quantitative application to the US economy, we find that tax avoidance lowers productive efficiency and reduces the effectiveness of the top marginal tax rate at lowering inequality.
FU contact: dieter.nautz@fu-berlin.de
International bribery: Results from an on-line, cross-country, behavioural experiment
We report the findings from an on-line, cross-country, behavioural experiment involving an incentivised bribery game. Referencing actual flows of foreign direct investment, we selected the potential bribers in our experiment from subject pools in China, Germany, the UK and the USA, and the potential bribe-takers from subject pools in China, Ghana, Kenya, Nigeria, and Uganda. Referencing actual international anti-bribery laws, we applied a treatment involving monitors with the power to report bribers who might then be fined. The monitors were located in the same countries as the potential bribers but could monitor and report across countries. As well as behaviours in the bribery game, we elicited measures of the social appropriateness of bribe offering, taking and reporting, and the beliefs of subjects about how others would behave. To date, 2,259 student subjects, 1/3 with experience in public service, have participated in the experiment. Included in our extensive range of findings are the following. The presence of a monitor deters bribery, but only if potential bribers believe that the monitor will report. Beliefs about the likelihood of monitors reporting do not match the reality. And shared national identity reduces the likelihood of a monitor reporting a briber. In addition, we find cross-country differences in behaviours, the social appropriateness of those behaviours and beliefs about others’ behaviours.
FU contact: steffen.ahrens@fu-berlin.de
Discontinuities in the Age-Victimization Profile and the Determinants of Victimization
Dutch victimization rates increase by 9-15% immediately upon reaching ages 16 and 18. We disentangle the role of the many rights granted at these ages using offense location data, cross-cohort variation in the minimum legal drinking age driven by a 2014 reform, and survey data of alcohol/drug consumption and mobility behaviors. We conclude that access to weak alcohol, bars/clubs and smoking increases victimization at 16 and that age 18 rights (hard alcohol, marijuana coffee shops) exacerbate this risk; vehicle access does not play an important role. We find no evidence of systematic spillovers onto individuals still ineligible for these rights.
FU contact: dieter.nautz@fu-berlin.de
Top Wealth and Income: New Data, Methods, and Estimates for Germany
The new subsample of the rich (called SOEP-P) is shown to overcome the “missing rich” problem for top wealth and income in the German Socio-Economic Panel (SOEP). In a comprehensive distributional analysis, we quantify now credibly and transparently top wealth and income concentrations, and measure the dependence between top wealth and income. The routes to the top are examined in our new covariate-based classification analysis which establishes the substantial predictive power of inheritances and entrepreneur-ship for membership in the top 1% joint income and wealth group; this group is shown to differ noticeably from the (marginal) top1% in income or wealth.
FU contact: giacomo.corneo@fu-berlin.de
Couples’ Time-Use and Aggregate Labor Market Outcomes
We present a model of the time-allocation decision of spouses in order to study the role of heterogeneity in preferences and wages for couples’ labor supply. Spouses differ in their tastes for market consumption and non-market goods and activities, and also in their offered or earned wages. They interact in their choices of market hours, homework, and leisure. We estimate the model for married or cohabiting couples in the 2001/02 wave of the German Time-Use Survey using Bayesian techniques. We generate gender-specific own- and cross-wage elasticities of market hours in the cross-section. Elasticities are significantly larger, if the wage shock is asymmetric across partners, not symmetric. They are small and of comparable size for single earner males and females. Aggregating preferences and wages by gender and comparing outcomes for a representative couple with those from heterogeneous couples yields a discrepancy between the alternative aggregate wage-elasticities. Its size varies with the type of wage shock and the distribution of spouses across the preference-wage space.
FU contact: AKriwoluzky@diw.de
Rituals of Reason: A Choice-Based Approach to the Acceptability of Lotteries in Allocation Problems (with Elias Bouacida)
We study revealed preferences towards the use of random procedures in allocation mechanisms. We report the results of an experiment in which subjects vote on a procedure to allocate a reward to half of them. The first possibility is an explicitly random device: the result of a lottery. The second is either an unpredictable procedure they could interpret as meritocratic, or one that is obviously arbitrary. We run all treatments with and without control. We identify an aversion to lotteries and clearly arbitrary procedures across treatments, even though, on aggregate, subjects do not believe any procedure to give them a higher probability of success and there is no correlation between beliefs and outcomes. In line with the literature, we also find evidence of a control premium in most procedures.
FU contact: jana.friedrichsen@fu-berlin.de
Forecasting with a Panel Tobit Model
We use a dynamic panel Tobit model with heteroskedasticity to generate forecasts for a large cross-section of short time series of censored observations. Our fully Bayesian approach allows us to flexibly estimate the cross-sectional distribution of heterogeneous coefficients and then implicitly use this distribution as prior to construct Bayes forecasts for the individual time series. In addition to density forecasts, we construct set forecasts that explicitly target the average coverage probability for the cross-section. We present a novel application in which we forecast bank-level loan charge-off rates for small banks.
FU contact: dieter.nautz@fu-berlin.de
Women in economics: the role of gendered references at entry in the profession
We study the presence and the extent of gender differences in reference letters for graduate students in economics and how these may affect the start of young researchers' careers. To these ends, we build a novel rich dataset covering ten cohorts of academic job market applicants to two top institutions hiring on the international market. We collect information from the application packages and conduct text analysis of reference letters using Natural Language Processing (NLP) techniques in order to measure gender differences in the style and content of the letters. We then combine the resulting measures with information on the applicants' subsequent labor market outcomes as extrapolated from the main online repositories. Our results reveal that male and female candidates receive different support from their sponsors and are described in systematically different terms. Such differences affect subsequent career outcomes and explain a non-negligible part (5 to 8% approximately) of the observed gender gaps.
FU contact: luca.stella@fu-berlin.de
Country, Culture or Competition - What Drives Attitudes Towards Immigrants in Sub-Sahara Africa?
Sub-Saharan Africa is becoming an increasingly important destination for international migration. The region hosts immigrants from other African countries and from other parts of the world, such as China. Given high poverty levels and weak social security systems in Sub-Saharan Africa, host populations might fear increasing competition for resources and labor, potentially resulting in negative attitudes towards immigrants. We provide the first systematic study of attitudes towards immigrants in Sub-Saharan African countries that uses a causal framework. Using a survey experiment in Uganda and Senegal, we study both attitudes towards immigrants in general and towards specific immigrant groups. In particular, we focus on Chinese immigrants, whose increasing presence in Africa is seen by many as the most important contemporary geopolitical shift involving the continent. We find that attitudes towards immigrants are mainly driven by sociotropic cultural and sociotropic economic concerns. Furthermore, immigrants from China are perceived less positively and economically more threatening than immigrants in general.
FU contact:max.steinhardt@fu-berlin.de
Lifetime Income Inequality and Redistribution
This paper offers the first analysis of actual lifetime income inequality and redistribution over a large number of cohorts in a major economy, Germany. Starting with the 1935 cohort, we document a secular rise of lifetime income inequality, both pre-fisc and post-fisc. The German tax-transfer system is linearly progressive in terms of lifetime income and exerts a substantial impact on the disposable incomes of the top and bottom decile. Governmental income redistribution mechanically reduces lifetime inequality by one fifth to one fourth; the lion’s share of this reduction is effectuated by the personal income tax. Lifetime inequality in terms of equivalized income has been contained by a reduced propensity of individuals in the bottom quartile to form a family. Differential mortality is sizable but eliminating it would not markedly reduce lifetime income inequality. We develop a theoretically founded money-metric welfare measure that takes the value of greater longevity into account. We find that differential mortality is a major driver of lifetime welfare inequality.
FU contact: giacomo.corneo@fu-berlin.de
Price setting frequency and the Phillips curve
We develop a New Keynesian (NK) model with endogenous price setting frequency. Whether a firm updates its price in a given period depends on an analysis of expected cost and benefits modelled by a discrete choice process. A firm decides to update the price when expected benefits outweigh expected cost and then resets the price optimally. The model predicts that prices are more flexible during expansions and less flexible during recessions. Our quantitative analysis shows that contrary to the standard NK model, the assumed price setting behaviour: (i) is consistent with micro data on price setting frequency; (ii) gives rise to a non-linear Phillips curve that is steeper during expansions and flatter during recessions; (iii) explains shifts in the Phillips curve associated with different historical episodes without relying on implausible high cost-push shocks and nominal rigidities inconsistent with micro data; (iv) improves the macroeconomic time series fit of a medium-scale NK model over the sample 1959 to 2019.
FU contact: dieter.nautz@fu-berlin.de
Volatility and Growth with Recursive Preferences
This paper studies the relationship between volatility and long-run growth in a complete market economy with human capital accumulation and Epstein-Zin preferences. There is both cross-country and time-series evidence that volatility is associated with lower growth. Matching this evidence has proved a challenge for growth models with no market failures, as they tend to predict the opposite for values of risk aversion higher than unity. However in our model, risk aversion and intertemporal elasticity of substitution are allowed to move independently of each other, and when both are relatively high or relatively low, the relationship between volatility and growth is negative. Indeed this is the case for parametrization of preferences in line with the literature.
FU contact: giacomo.corneo@fu-berlin.de