Research FieldsMacroeconomics, Public Economics, International Economics
A central concern in industrial policy discussions is that sector-specific external economies of scale may create multiple equilibria—and therefore the potential for coordination failure. Unfortunately, Pigouvian policies that address market failures on the margin do not remove the risk of mis-coordination globally. I propose a new “super-Pigouvian” (SP) policy that retains the decentralized spirit of Pigouvian policy— regulating prices rather than quantities—but also prevents coordination failure. The main idea behind SP is to subsidize market behavior, both on and off the equilibrium path, according to the population’s willingness to pay for the externalities that (a) those behaviors generate directly, like Pigou, and also (b) they generate indirectly by affecting other households’ choices. After demonstrating SP’s welfare properties theoretically, I quantify them in a dynamic model of structural transformation calibrated to South Korea’s heavy and chemical industry drive in the 1970s. SP modestly improves welfare compared to the worst equilibrium under Pigouvian policy.
How can a country design economic sanctions to maximize their economic cost to the sanctioned country at the lowest cost to the sanctioner? I consider this problem from the perspective of international trade and draw a close connection between trade restrictions as economic sanctions and trade restrictions as terms-of-trade manipulation. This connection has several useful implications for sanction design: Small sanctions increase welfare in the sanctioning country. Sanctions target the same goods as terms-of-trade manipulation. Sanctions ignore elasticities of demand and supply in the sanctioning country. Sanctions treat imports and exports asymmetrically.
How should income taxes account for differences in households’ tax responses? We address this question with a new efficiency test for non-linear income tax schedules in environments with arbitrary heterogeneity in the elasticity of taxable income (ETI). Importantly, the test fails when these differences in ETI are wide enough among households with the same income. In such cases, the planner can reform taxes to (a) sort households into different parts of the income distribution based on their elasticities and—at the same time—(b) adapt to this separation using higher marginal taxes on the less elastic. Moving to the data, we evaluate our test using novel estimates of the variance of ETI by income bracket. In the NBER sample of tax returns from 1979 to 1990, our preliminary estimates indicate that the test fails every year. This implies that a “free lunch” is available through tax reform.
Advanced economies feature complicated networks that connect households, firms, and regions. How do these structures affect the impact of fiscal policy and its optimal targeting? We study these questions in a model with input-output linkages, regional structure, and household heterogeneity in MPCs, consumption baskets, and shock exposures. Theoretically, we derive estimable formulae for the effects of fiscal policies on aggregate GDP, or fiscal multipliers, and show how network structures determine their size. Empirically, we find that multipliers vary substantially across policies, so targeting is important. Beneath these aggregate effects are large spatial and sectoral spillovers from policies directed to any one firm or household. However, virtually all variation in multipliers stems from differences in policies’ direct incidence onto households’ MPCs. Thus, while the distributional effects of fiscal policy depend on the detailed structure of the economy, maximally expansionary fiscal policy simply targets households’ MPCs.
Works in Progress
How should income taxes respond to changes in technology or labor markets? Starting from a benchmark where changes in the income distribution do not affect the fiscal cost of redistribution, we emphasize three key factors: First, increased income inequality decreases the cost of redistribution. Second, uniform income growth decreases the cost of redistribution when higher income households have higher labor supply elasticities. Third, uniform income growth increases (decreases) the cost of redistribution at high (low) incomes when elasticities vary within income levels. A preliminary calibration to the U.S. between 1982 and 2008 suggests the third effect has dominated, making redistribution more expensive.
The Non-Substitution Theorem: A Modern Treatment
When do factor prices determine goods prices and/or input-output structure? I provide a modern treatment of the non-substitution theorem first introduced by Samuelson (1949) and Georgescu-Roegen (1951). A focus on price uniqueness rather than production methods allows me to weaken assumptions in the existing literature. All of my results extend to models with multiple factors and imperfect competition with constant markups.
What economic trade-offs should inform the design of trade sanctions? This paper—intended as a guide for policymakers with some background in economics—uses supply and demand diagrams to illustrate seven simple lessons.
In the wake of Russia’s invasion of Ukraine, EU policymakers are weighing the costs and benefits of restrictions on imports of Russian oil and gas. This paper seeks to inform the debate by studying tariff and embargo policies through the lens of a formal economic model of global energy markets. Our main theoretical result is a formula for the EU’s optimal tariff on Russian energy imports. The optimal tariff balances competing domestic effects—on tariff revenue, on terms of trade with Russia, and on terms of trade with the rest of the world—and also reflects the EU’s desire to damage the Russian economy through worsened terms of trade with both the EU and the rest of the world, as well as lost profits and export tax revenue. While for policymakers willing to accept large enough costs to the EU in order to harm Russia, the optimal tariff is effectively an embargo, those with a lower “willingness to pay” for damage to Russia, in terms of reduced EU welfare, should prefer a tariff that prevents some but not all trade. We also discuss how raising tariffs can, in theory, harm Russia while actually making the EU better off, and we provide a simple, quantitative test for when this is the case. Finally, we use a simple, game-theoretic model to assess the possibility that Russia may retaliate to EU tariffs with an energy embargo. We discuss what factors determine how high the EU can set tariffs before such retaliation becomes economically rational for Russia.