Experiments and Natural Experiments

This small group of big winners have average yearly

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Unformatted text preview: the utility function is a Stone-Geary and estimate a reduced form labour earnings equation in the post-win period yit l l ( Li / 20) X i it , where yit is labour earnings, l , l are the preference parameters over leisure and consumption, is an average annuitizing factor, which adjusts for the fact that the lottery only lasts for 20 years and that people’s rate of time preference may be different than the interest rate, and the residual it captures variation in wages. This specification is predicated on the idea that Li is randomly assigned the very small winners got 0, the winners got a big prize, so preference differences can be rolled into the error and should not be correlated with the winning amount. If the discount factor and interest rate were both equal to 0.10 and the life span after winning the lottery is an additional 30 years, then =0.9. Their estimates for marginal propensity to reduce earnings per dollar of non-labor income ( mpe w H ) range from -0.10 to -0.12 and are not out of line with those in Y the literature, which is not surprising given the wide range of estimates reported there. Fortin – Econ 560 Lecture 1C Pencavel (1986) reports in his survey on 13 studies using non-experimental data for U.S. men, with estimates ranging from -0.70 to 0.08. Blundell and MaCurdy (1999) find estimates ranging from -0.95 to 0.002 for men, and from -0.40 to 0.27 for women. Surprisingly this effect does not differ much between men and women. The effect is stronger for individuals close to the standard retirement age. 2. Tax (and Transfer) Reforms Using tax reforms as a “natural experiment” to evaluate the effect of taxes on labor supply (and other outcomes) has been quite popular in the UK (Blundell, Duncan and Meghir, 1998) and the US (especially the tax reform (TRA86) of 1986). Using a unique quasi-natural experiment, Tax Holiday in Iceland, Bianchi et al. (2001) have shown large labor supply responses (extensive margins) o In 1987, Iceland transitioned from paying taxes on previous year's income to current income o To avoid double taxation during transition, no tax charged over 1987 incomes Fortin – Econ 560 Lecture 1C o Average tax rate of 14.5% in 1986, 0% in 1987, 8% in 1988 o Reform was announced in late 1986, so it was an unanticipated temporary tax change Temporary change in incentives is the ideal quasi-experiment to estimate Frisch (intertemporal substitution) elasticity Bianchi et al. (2001) look at labour supply and employment effects and found substantially large effects, but some heterogeneity in responses. In Canada, recent work (Baker, Gruber, and Milligan, 2008) has exploited differences across provinces in maternity leave benefits, child care subsidies, and child tax credits. Advantage of tax reform: policies can affect some groups and not others, creating natural treatment and control groups. Disadvantages: changes in tax laws need to be sufficiently large to generate some behavioural responses. o Perhaps for that reasons, reforms at the lower end affecting single mothers (EITC i...
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This document was uploaded on 02/26/2014 for the course ECON 560 at UBC.

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