Anna Pettini

Transfers to families with children as a principal-agent problem

The relationship between government and parents is modelled as a principal-agent problem, with the former in the role of principal and the latter in the role of agents. We make three major points. The first is that, if the well-being of the child depends not only on luck, but also on parental actions that the government cannot readily observe, the latter can influence parental behaviour indirectly, by conditioning transfers on performance. The second point is that, if there are market inputs into the making of a happy or successful child, which the government can observe, but cannot ascribe to any particular parent or child because they are bought anonymously, an income transfer policy can be usefully complemented by an indirect tax policy that systematically distorts prices in favour of these inputs. The third is that, if parents care about their children, insurance and incentive considerations must be tempered by the need to compensate parents who have the misfortune of getting a child with low ability or, more generally, less well equipped to make the most of life. Ways of making these findings operative are discussed in some detail.

Endogenous Fertility and the Design of Family Taxation

The paper innovates on the existing optimal taxation literature by taking fertility as endogenous, and allowing for households to be differentiated by their ability to raise children, as well as by their ability to raise income. In a context where the government cannot observe personal abilities, fertility behaviour conveys a great deal of information about those characteristics, which helps to relax the self-selection constraints on re-distribution. Bi-dimentional household differentiation introduces the possibility that re-distribution will be from households with low utility to households with high utility, and that it may be optimal to accentuate or reverse the sign of laissez-faire utility inequality. Contrary to popular belief, we find that it is not necessarily optimal for the tax system to be so designed that an additional child would lighten the tax burden on his or her parents. If it is, the optimal policy may include an unusual mix of taxes on number of children, subsidies on child-specific commodities, income support for low-wage households, and positive marginal income tax rates for all.

Taxing family size and subsidizing child-specific commodities?

Abstract The effects and optimal choice of policy instruments directly affecting the welfare of parents and children are examined within the context of a household economics model. If fertility were exogenous, and households differed in number of children only, a first best could be implement through a grant conditional on family size. Outside this very special case, public intervention is either not justifiable on distributional grounds, or involves taxing child-specific commodities less than adult-specific commodities. If fertility is endogenous, family size must be taxed or subsidized according to whether household expenditure on children is decreasing or increasing in the mother’s wage rate.

Doing Wonders with an Egg: Optimal Re-distribution When Households Differ in Market and Non-Market Abilities

The paper studies non-linear income taxation and linear commodity taxation in a household production context with households differentiated by market and non-market ability. In such a setting, there is an efficiency motive for re-distribution which is independent from the usual equity motive, and operates also when the social planner is indifferent to utility inequality. As a consequence, some of the policy prescriptions applicable to the case in which households differ in market ability only do not hold when households differ also in non-market ability. For instance, re-distribution is not necessarily from high- to low-wage households, and it is not necessarily true that the marginal rate of income tax should be zero for high incomes and positive for low incomes. In some cases, re-distribution may accentuate rather than lessen utility inequality, and can reverse the direction of income inequality relative to the laissez-faire equilibrium. Furthermore, contrary to Atkinson-Stiglitz, it may be optimal to use indirect and direct taxation simultaneously even when the utility function is separable in commodities and labour. Copyright 2003 Blackwell Publishing Inc..

Is Fiscal Progressivity Enhanced by Redistribution in Kind

This paper considers the redistributive effects of four mixed fiscal systems in which redistribution in cash is combined with redistribution in kind. A private good is offered by both the public and the private sector, at a non-zero price in both cases, so that the market is vertically segmented and the quality differences are used to select recipients on the basis of their income. This paper shows how an appropriate selection of recipients can add redistributive power to an already redistributive taxation system, while universal public provision never does. A numerical simulation gives some policy insights.