This paper develops a structural framework for analyzing top income taxation and applies it to six decades of U.S. tax history and to eight other advanced economies. The paper derives explicit expressions for top-bracket tax revenue and total excess burden across the full range of tax rates, while preserving local consistency with the sufficient-statistics approach of Saez (2001). Applied to the United States, the analysis implies that the current excess burden of the top federal tax bracket is $101 billion and that raising the top marginal tax rate to its revenue-maximizing level of 72 percent would increase annual revenue by $111 billion, given a taxable income elasticity of 0.25. The current tax rate is lower than what is consistent with a purely utility-based notion of social welfare. By contrast, Nordic countries and the United States in earlier decades appear to have operated at tax rates exceeding revenue-maximizing levels.
As shortages of essential resources become more frequent, high prices alone may fail to curb demand. We study power limits for residential electricity, which restrict household consumption rather than setting it to zero as in rolling blackouts. We show theoretically and empirically that power limits can deliver electricity savings equivalent to sizable blackouts while affecting fewer households. The mechanism works through selection of high users, creating distributional trade-offs that depend on whether limits are uniform or proportional to contracted power. This highlights the potential of smart meters to improve shortage management while preserving access to essential electricity services.
Should public policies address inequality due to heterogeneous life expectancy? Intuitively, taking a short life as a disadvantage, such policies should favor those with high mortality. Yet, pension systems implicitly redistribute from low-life-expectancy to high-life-expectancy people. Moreover, this direction of redistribution is optimal from the perspective of the standard utilitarian welfare criterion. We study mortality-related redistribution in a more flexible setting. We start by establishing a formal framework for the analysis by clearly distinguishing between redistribution along the mortality and income dimensions. We then characterize the conditions under which it is optimal to redistribute toward high-mortality people. One such condition is that the welfare criterion must feature an aversion to lifetime inequality that exceeds the aversion to consumption inequality.
This paper studies the optimal combination of government grants that provide direct public funding to nonprofits and tax incentives that reduce the cost of charitable giving. When nonprofits face high fundraising costs to attract donors, tax incentives cannot fully replace grants, which remain part of the optimal funding policy. When fundraising costs are sufficiently low, a government that can tailor tax incentives across causes can finance some causes entirely through donations. However, when cause-specific tax differentiation is unavailable, grants remain necessary to accommodate differences in funding needs across causes. In a calibrated example, imposing a uniform tax treatment of donations across charitable causes raises the optimal share of nonprofit funding covered by grants from 0 to 60%.
We study technology investment and public good provision in a setting where two parties with differing valuations of the public good alternate in power. In each period, the incumbent chooses public good provision and invests in technology that lowers the cost of future public good provision. We characterize Markov perfect equilibria and show how polarization and irreversibility of investment jointly shape long-run outcomes. When polarization is low, power turnover may increase expected technology investment and public good provision, and steady-state outcomes are unaffected by the degree of reversibility. When polarization is high, however, irreversibility becomes important: the party favoring the public good invests more aggressively, and irreversible investment induces higher public good provision by both parties. As polarization rises, expected technology stock and public good provision initially decline but jump upward once the irreversibility constraint binds.
Providing a public good that causes a local harm to its host poses two problems previously unexplored together: where to locate it and how large it should be. We propose a mechanism combining some market-like properties with a modified second-price auction. The mechanism selects a host, a facility size, a compensation for hosting the project, and determines how the compensation is split among the non-hosts. If each community bids truthfully for becoming the host–a strategy from which no community has incentives to deviate–the selected allocation is globally optimal, even if communities’ preferences are private information. In contrast with the literature, the host pays the second-highest bid while receiving the market benefits to prevent distortions in the optimal size.
We address organizations that rely on donors, when those donors are motivated by making a difference. We show that when donors care sufficiently about their marginal impact, firms use practices that would normally be deemed inefficient. These include prioritizing less valuable opportunities over better ones, investing most in their weakest initiatives, and benefiting from not identifying the quality of their projects. These all arise from a distinction between marginal and average returns generated by donor preferences.
Adverse selection famously leads to the crowding out of socially beneficial trades. We show that even more trades may be simultaneously crowded in. The reason is that, in the absence of complete unravelling, “lemons” fetch more under adverse selection. It is demonstrated how these “bad” trades occur in insurance, credit and used-car markets, and some policy implications are discussed.