Hjemmesidens titel

This paper documents a large association between individuals’ time discounting in incentivized ex-periments and their positions in the real-life wealth distribution derived from Danish high-quality administrative data for a large sample of middle-aged individuals. The association is stable overtime, exists through the wealth distribution and remains large after controlling for education, income profile, school grades, initial wealth, parental wealth, credit constraints, demographics, risk prefer-ences and additional behavioral parameters. Our results suggest that savings behavior is a driver of the observed association between patience and wealth inequality as predicted by standard savings theory.

It is well-established that neonatal health is a strong predictor of socioeconomic outcomes later in life, but does neonatal health also predict key outcomes of the next generation? This paper documents a surprisingly strong relationship between birth weight of parents and school test scores of their children. The association between maternal birth weight and child test scores corresponds to 50-80 percent of the association between the child’s own birth weight and test scores across various empirical specifications, for example including grandmother fixed effects that isolate withinfamily differences between mothers. Paternal and maternal birth weights are equally important in predicting child test scores. Our intergenerational results suggest that inequality in neonatal health is important for inequality in key outcomes of the next generation.

We estimate the impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18, using monthly payroll records for the Danish population. The hourly wage jumps up by 40 percent at the discontinuity. Employment falls by 33 percent and total input of hours decreases by 45 percent, leaving the aggregate wage payment almost unchanged. We show theoretically how the discontinuity may be exploited to evaluate policy changes. The relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is in the range 0.6-1.1.

This paper uses administrative data with longitudinal information about defaults for the universe of personal loans in Denmark to analyse the driving forces behind nancial problems. Non-parametric evidence shows that the default propensity is more than four times higher for individuals with parents who are in default compared to individuals with parents not in default. This intergenerational relationship is apparent soon after children move into adulthood and become legally able to borrow, and is remarkably stable across parental income levels, childhood school performances, levels of loan balances and time periods. Basic theory points to three possible explanations for the intergenerational correlation in nancial trouble: (i) children and parents face common shocks; (ii) children and parents insure each other against adverse shocks; (iii) nancial behavior diers across individuals and is transmitted across generations. Our evidence indicates that inherited dierences in nancial behavior is most important. The interest rates on loans do not incorporate the full risk of default related to the dierences in nancial behavior, which points to the existence of an interest rate externality in the credit market for personal loans.

The marginal interest rate is the rate of interest at which a household can access additional liquidity. Consumption theory posits that variation in marginal interest rates across consumers predicts diﬀerences in the propensity to spend a stimulus payment. This hypothesis is directly tested in the context of a Danish 2009 stimulus policy that transformed illiquid pension wealth into liquid wealth. The analysis is based on administrative records with account level information about loans and deposits to derive a household level measure of the marginal interest rate, which is merged with survey data collected speciﬁcally to measure the spending response to the stimulus policy. The data reveal substantial variation in marginal interest rates across consumers, and these interest rates predict spending responses.

This paper proposes a new method to compute the income gradient in period life expectancy that accounts for income mobility. Using income and mortality records of the Danish population over the period 1980-2013, we validate the method and provide new estimates of the income gradient. The period life expectancy of individuals at a certain age, and belonging to a certain income class, is normally computed using the mortality of older cohorts in the same income class. This approach does not take into account that a substantial fraction of the population move away from their original income class, which leads to an upward bias in the estimation of the income gradient in life expectancy. For 40-year-olds in the bottom 5\% of the income distribution, the risk of dying before age 60 is overestimated by 25 percent. For the top 5\% income class, the risk of dying is underestimated by 20 percent. By incorporating a classic approach from the social mobility literature, we provide a method that predicts income mobility and future mortality simultaneously. With this method, the association between income and life expectancy is lower throughout the income distribution. Without accounting for income mobility, the estimated difference in life expectancy between persons in percentiles 20 and 80 in the income distribution is 4.6 years for males and 4.1 years for females, while it is only half as big when accounting for mobility. The estimated rise in life expectancy inequality over time is also halved when accounting for income mobility.

We use Danish wealth records from three decades to characterise wealth inequality in childhood, where the main source of wealth is transfers. Wealth holdings are small in childhood, but they have strong predictive power for future wealth in adulthood. At age 18, asset holdings of children are more informative than parental wealth in predicting wealth of children when they are in their 40s. We investigate why and rule out that childhood wealth in itself can accumulate enough to explain later wealth inequality. Instead, childhood wealth seems to proxy for intergenerational correlation in savings behaviour and additional transfers from parents.

We propose a novel method for modeling income processes using machine learning. Our method links age-specific regression trees, and returns a discrete state process, which can be included in consumption-saving models without further discretizations. A central advantage of our approach is that it does not rely on any parametric assumptions, and because we rely on existing machine learning tools it is furthermore easy to apply in practice. Using a 30 year panel of Danish males, we document rich higher-order income dynamics including substantial skewness and high kurtosis of income levels and growth rates, and changes in income risk over the life-cycle and the income distribution. We show that our estimated process match these dynamics closely. Using a consumption-saving model, the implied welfare cost of income risk is more than 10 percent of income.

If productivity increases more slowly for services than for manufactured goods then services suffer from Baumol’s cost disease and tend to become relatively more costly over time. Since the welfare state in all countries is an important supplier of tax financed services, this translates into a financial pressure which seems to leave policymakers with a trilemma; increase tax distortions, cut spending or redistribute less. Under the assumptions underlying Baumol’s cost disease, we show that these dismal implications are not warranted. The welfare state is sustainable and there is even scope for Pareto improvements under Baumol’s cost disease.

Using Danish administrative data, we estimate the impact of bequests on the level and inequality of wealth. We employ an event study design where we follow the distribution of wealth over time of people who are 45-50 years old, and divide them into treatment group and control group depending on whether a parent dies or not. Bequests account for 26 percent of the average post-bequest wealth 1-3 years after parental death and significantly affect wealth throughout the distribution. We find that bequests increase measures of absolute wealth inequality (variance), but reduce relative inequality (top wealth shares). Following the receipt of bequests, variance of the distribution censored at the top/bottom 1% increases by 33 percent, but the top 1% share declines by 6 percentage points from an initial level of 31 percent and the top 10% share declines by 10 percentage points from a base of around 81 percent.

This paper uses monthly payroll records for all Danish employees to identify widespread intertemporal shifting of labor income in response to a tax reform that significantly reduced the marginal tax rates for 1/4 of all employees. When ignoring shifting, the estimate of the overall elasticity of taxable income equals 0.1, and the elasticity is increasing with earnings. When removing the shifting component, the elasticity is close to zero at all earnings levels. The evidence also indicates that tax salience, liquidity constraints and firm willingness to cooperate in shifting are important factors in explaining shifting behavior.

This paper presents a simple agency model to explain why third-party information reporting by firms dramatically improves tax enforcement. Modern firms have a large number of employees and carry out complex production tasks, which requires the use of accurate business records. Because such records are widely used within the firm, any single employee can denounce collusive tax cheating between employees and the employer by (accidentally or deliberately) revealing the true records to the government. We show that, if a firm is large enough, this threat will make tax enforcement successful even with low penalties and low audit rates. We embed this agency model into a macroeconomic growth model where firm size grows with exogenous technological progress. In early stages of development, firms are small, tax rates are severely constrained by enforcement, and the size of government is too small. As firm size increases, the enforcement constraint is slackened, and government size is growing. In late stages of development, firm size is suficiently large to make third-party tax enforcement completely effective and government size is socially optimal. Therefore, economic development relaxes the tax enforcement constraint and naturally leads to large welfare state governments. We show that these theoretical predictions are consistent with a set of stylized facts on the cross-sectional and time series relationship between development and the size and composition of the tax take.

This paper considers two competing approaches in the literature on the optimal provision of public goods. The standard approach highlights the importance of distortionary taxation and distributional concerns. The new approach neutralizes distributional concerns by adjusting the non-linear income tax, and finds that this reinvigorates the simple Samuelson rule when preferences are separable in goods and leisure. We provide a synthesis by demonstrating that both approaches derive from the same basic formula. We further develop the new approach by deriving a general, intuitive formula for the optimal level of public goods without imposing strong assumptions on preferences. This formula shows that distortionary taxation may have a role to play as in the standard approach. However, the main determinants of optimal provision are different and the traditional formula with its emphasis on MCF may very well lead to underprovision.

This paper analyzes a tax enforcement field experiment in Denmark. In the base year, a stratified and representative sample of over 40,000 individual income tax filers was selected for the experiment. Half of the tax filers were randomly selected to be thoroughly audited, while the rest were deliberately not audited. The following year, threat-of-audit letters were randomly assigned and sent to tax filers in both groups. We present three main empirical findings. First, using baseline audit data, we find that the tax evasion rate is close to zero for income subject to third-party reporting, but substantial for self-reported income. Since most income is subject to third-party reporting, the overall evasion rate is modest. Second, using quasi-experimental variation created by large kinks in the income tax schedule, we find that marginal tax rates have a positive impact on tax evasion for self-reported income, but that this effect is small in comparison to legal avoidance and behavioral responses. Third, using the randomization of enforcement, we find that prior audits and threat-of-audit letters have significant effects on self-reported income, but no effect on third-party reported income. All these empirical results can be explained by extending the standard model of (rational) tax evasion to allow for the key distinction between self-reported and third-party reported income.

This paper analyzes the optimal design of general nonlinear tax-transfer schedules for couples under unitary and collective approaches to family decision making. We consider a double-extensive model of labor supply where each spouse makes a labor force participation choice for given hours of work. We present simple and intuitive optimal tax rules that generalize existing findings on the optimal taxation of single-person households with extensive responses (Saez, 2002) to the case of two-person households with double-extensive responses. Without income effects on labor supply, optimal tax rules as a function of sufficient statistics are the same under the unitary and collective approaches. With income effects on labor supply, optimal tax rules under the two approaches continue to depend on the same sufficient statistics, but the collective model features an additional Pigouvian term arising from a within-family participation externality. Finally, we present microsimulations of tax reform for 15 European countries suggesting that a reduction of tax rates on secondary earners relative to primary earners is associated with strong welfare gains in all countries.

This paper analyzes the general nonlinear optimal income tax for couples, a multidimensional screening problem. Each couple consists of a primary earner who always participates in the labor market, but makes an hours-of-work choice, and a secondary earner who chooses whether or not to work. If second-earner participation is a signal of the couple being better (worse) off, we prove that optimal tax schemes display a positive tax (subsidy) on secondary earnings and that the tax (subsidy) on secondary earnings decreases with primary earnings and converges to zero asymptotically. We present calibrated microsimulations for the United Kingdom showing that decreasing tax rates on secondary earnings is quantitatively significant and consistent with actual income tax and transfer programs.

An emerging consensus is that labor force participation is more responsive to taxes and transfers than hours worked. To understand the implications of participation responses for the welfare analysis of tax reform, this paper embeds this margin of labor supply in an explicit welfare theoretic framework. We apply the framework to examine the welfare effects on single mothers in the United States following four tax acts passed in 1986, 1990, 1993, and 2001. We propose a simulation method combining features of fully structural microsimulation studies and simple deadweight loss calculations. Our approach accounts for the observed heterogeneity in the microdata, but is simple to implement because we do not need to specify utility functions and estimate utility parameters. We find that each of the four tax acts created substantial welfare gains, and that the gains were concentrated almost exclusively on the participation margin. Our results imply that standard approaches not modeling the participation decision can make large errors.

The literature suggests that the concern for economic efficiency calls for individual-based taxation of married couples with a higher rate on the primary earner. This paper reconsiders the choice of tax unit in the Becker model of household production. Our aim is to study the robustness of previous results to the modelling of time allocation. In addition, we analyze the interaction between the optimal income tax for couples and the chosen commodity tax structure. In the absence of restrictions on the use of commodity taxes, efficient taxation requires joint taxation of the family. In the presence of restricted commodity taxation, the income tax should compensate for the erroneous commodity taxes. In this case, individual taxation is typically optimal, but not necessarily with a higher rate on primary earners as usually suggested.

This paper estimates the welfare and distributional impact of two types of welfare reform in the 15 (pre-enlargement) member countries of the European Union. The reforms are revenue neutral and financed by an overall and uniform increase in marginal tax rates on earnings. The first reform distributes the additional tax revenue uniformly to everybody (traditional welfare) while the second reform distributes tax proceeds uniformly to workers only (in-work benefit). We build a simple model of labor supply encompassing responses to taxes and transfers along both the intensive and extensive margin. We then use EUROMOD to describe current welfare and tax systems in European Union countries and use calibrated labor supply elasticities along the intensive and extensive margins to analyze the effects of the two welfare reforms. We quantify the equity-efficiency trade-off for a range of elasticity parameters. In most countries, because of large existing welfare programs with high phase-out rates, the uniform redistribution policy is undesirable unless the redistributive tastes of the government are extreme. The in-work benefit reform, on the other hand, is desirable in a very wide set of cases. We discuss the practical policy implications for European welfare policy.

This paper extends the theory and measurement of the marginal cost of public funds (MCF) to account for labor force participation responses. Our work is motivated by the emerging consensus in the empirical literature that extensive (participation) responses are more important than intensive (hours of work) responses. In the modelling of extensive responses, we argue that it is crucial to account for the presence of non-convexities created by fixed work costs. In a non-convex framework, tax and transfer reforms give rise to discrete participation responses generating first-order effects on government revenue. These revenue effects make the marginal cost of funds higher, and we show numerically that the implications for MCF tend to be substantial.

This paper analyzes the welfare implications of introducing workfare into unemployment benefit policy. We consider a population composed of employed and unemployed workers and of individuals who do not seek employment. Job search behavior is unobservable, which means that voluntarily unemployed individuals can claim unemployment insurance (UI) benefits intended for unemployed workers. As a consequence, pecuniary benefit schemes underinsure workers against unemployment. We show that requiring unproductive activities (workfare) in exchange for UI benefits may generate a Pareto improvement by facilitating better unemployment insurance for workers, and we characterize the situations where this is the case.

Do the New Keynesian Microfoundations Rationalise Stabilisation Policy?

Economic Journal 112, pp. 2002, pp. 384-401

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Dual Labour Markets and Nominal Rigidity

with Huw Dixon and Henrik Kleven

Oxford Economic Papers 54, 2002, pp. 561-583

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Duration Dependent Unemployment Benefits in Trade Union Theory

with Hans Jørgen Whitta-Jacobsen

European Economic Review 46, 2002, pp. 1229-1251

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Fixed Production Capacity, Menu Costs and the Output-Inflation Relationship

with Leif Danziger

Economica 69, 2002, pp. 433-444

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Is Declining Productivity Inevitable?

with Carl Johan-Dalgaard

Journal of Economic Growth 6, 2001, pp. 187-203

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Pay-per-view Broadcasting of Outstanding Events: Consequences of a Ban

with Søren Kyhl

International Journal of Industrial Organization 19, 2001, pp. 589-609

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Ambiguous Effects of Tax Progressivity - Theory and Danish Evidence

with Lars Haagen Pedersen and Torsten Sløk

Labour Economics 7, 2000, pp. 335-347

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A Mixed Industrial Structure Magnifies the Importance of Menu Costs

with Huw Dixon

European Economic Review 43, 1999, pp. 1475-1499

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Lower Tax Progression, Longer Hours and Higher Wages

Scandinavian Journal of Economics 101(1), 1999, pp. 49-65

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Second-Best Antitrust in General Equilibrium - A Special Case

Economics Letters 63(2), 1999, pp. 193-199

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Long Run Impact of Increased Wage Pressure

Journal of Economics 69(2), 1999, pp. 141-157

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This paper argues that recent empirical evidence on labor supply behavior – showing stronger participation responses than hours-of-work responses–has important implications for the design of tax and transfer policy. Based on a review of recent research in this field, we conclude the following: (i) Conventional ways of evaluating the impact of tax-transfer reforms on economic efficiency have to be revised. (ii ) Optimal redistributional policies may well involve negative marginal tax rates at the bottom of the earnings distribution. (iii) The introduction of the Earned Income Tax Credit (EITC) in the United States in the mid-1970s and the large expansions of the credit during the past two decades did not involve a trade-off between efficiency and equality as suggested by previous estimates. Instead, the EITC has improved both equality and efficiency. (iv ) For most European countries, redistribution to the working poor involves a substantially lower trade-off between efficiency and equality than traditional redistributional policies targeted to those out of work.

This paper generalizes the model of individual demand for housing over the life-cycle in Attanasio et al. (2012) by formulating the long-term debt contracts in gross terms instead of in net terms. This more realistic market structure have important implications for the model dynamics because it allows the households to save in financial assets instead of forcing them to save by increasing their mortgage repayments. Moreover the potential for such precautionary balance sheet expansions make the households able to self-insure more optimally and thus increase their ex ante expected welfare. Quantitatively the welfare gain is largest when there is no mortgage spread and no forced mortgage repayments. Qualitatively the results are robust to a substantial mortgage spread and forced repayments if just the households are impatient enough. Introducing a combination of proportional and fixed (re)financing costs does likewise not affect the central results.