Arnold C. Harberger

The Incidence of the Corporation Income Tax

The Incidence of the Corporation Income Tax Arnold C. Harberger 215 Externalities, Welfare, and the Theory of Games Otto A. Davis and Andrew Whinston 241 Business Cycles, Residential Constrution Cycles, and the Mortgage Market William W. Alberts 263 Marshalls Principles after Guilebaud George 1. Stigler 282 The Saving-Wealth Relation and the Measure of the Real Value of Assets Syed Ahmad 287 Contracted Research and the Case for Big Business William L. Balduuin 294 Weinstein on Featherbedding: A Comment N. J. Sinter 299 Book Reviews (See inside front cover) 302 Books Received 319

On Measuring the Social Opportunity Cost of Labour

In this paper I attempt to examine in some detail the commonly held notion that the opportunity cost of labor is represented by the product that is forgone from other activities as a consequence of being labor for a given activity. The first variant of this notion that will be treated is the idea that in some poor countries the pool of labor in the agricultural sector is so abundant, and its marginal product so low (effectively zero, according to this idea) that other sectors can expand their demand for labor without entailing any significant loss in production elsewhere. The second variant to be considered is the idea, less restrictive than the first, that the product forgone in other sectors (in this case not necessarily zero or insignificant) is the appropriate measure of the social opportunity cost of labor. I shall argue that the data seem to contradict the idea that great masses of labor can be withdrawn from the agrarian sector without a palpable loss in product. I shall also contend that the use of forgone product as a measure of opportunity cost is an oversimplification which can lead an analyst to wrong conclusions in a number of different ways.

On Measuring the Social Opportunity Cost of Public Funds

The literature on project evaluation abounds with competing recommendations as to what rate of interest should be used to discount to a single point in time the estimated costs and benefits of public-sector projects. Official policy in the United States, as established in the Green Book1 and in Senate Resolutions, is to base public-sector investment decisions on interest rates prevailing or expected to prevail in the market for government bonds. An alternative, proposed by such authors as Hirshleifer, DeHaven and Milliman, Strotz, and Stockfisch, is to discount benefits and costs at the estimated marginal productivity of capital in the private sector of the economy. A third group, to which Marglin and Sen belong, asserts that market interest rates give an exaggerated picture of the rate of ‘social time preference’, and suggests that that rate be chosen which represents the consensus of the policy-makers (or of the society as a whole) concerning what the social time preference rate really is or should be. I shall defer discussion of social time preference rates, thus arbitrarily defined, to a later point, and shall instead assume that the ‘social rate of time preference’ refers to an appropriately weighted average of the different marginal rates of time preference applicable to the individuals who compose the society.

Monopoly and Resource Allocation

This classic 1954 article broke with the then-current economic orthodoxy and set monopoly research on a path that would lead to a strong shift toward empiricism and the development of a more cautious approach for antitrust enforcement.

A Primer on Inflation

Publisher Summary This chapter discusses the present state of knowledge about the phenomenon of inflation. It presents a definition of chronic inflation as a condition in which price increases of more than 20% per annum have been typical over an extended period. It turns out that only four countries—Argentina, Brazil, Chile, and Uruguay—meet that condition during the period since 1950. The close contenders are Iceland—with four consecutive years of inflation over 20% in 1973 through 1976—Paraguay with three years of over 20% inflation in 1954 through 1956, and Yugoslavia. There is a close relationship between the rate of inflation and the rate of increase in the money supply. The rate of monetary expansion tends, even in these chronic inflations, to be greater than the rate of increase of prices. If the amount of real purchasing power that is held in the form of cash is to increase through time, the money supply must rise more rapidly than the price level.

EMPIRICAL EVIDENCE ON THE INCIDENCE OF THE CORPORATION INCOME TAX

E incidence of the corporation income tax cannot easily be deter1 mined from empirical evidence for a variety of reasons. First, changes in the corporation tax rate are only one of many forces that operate secularly on the distribution of income; also operative are secular changes in the quality of labor and of capital equipment, secular changes in demand which may shift the pattern of production from relatively capitalintensive to relatively labor-intensive activities (or vice versa), secular changes in production functions themselves (reflecting, among other things, technical innovations which may be biased either in a labor-saving or capital-saving direction), plus, of course, non-tax-induced movements in labor supply and in the stock of capital in the economy. Second, and similarly, the cyclical movements of income distribution in the economy are the products of many forces other than corporation income tax changes-the complicated workings of the housing cycle, of inventory cycles, of investment and savings incentives for the economy as a whole, together with their interactions; plus the influences of monetary and fiscal policies (other than corporate tax rate changes themselves); plus the pressures and constraints imposed on the

Dutch disease — how much sickness, how much boon?

Abstract This paper sets out a very simple neo-classical, small-country, open-economy model with nontradeable goods, tradeables other than oil, and oil. Using the comparative static version of the model it is shown that a rise in the world price of oil must, ceteris paribus, cause the price level of non-tradeables to rise if a fixed exchange rate is maintained. Using the dynamic version of the model it is shown that the path of the non-tradeables price level in response to an oil shock may carry it through substantial overshooting before the final equilibrium is reached. However, it is also shown that the degree of overshooting can be reduced dramatically by the simple expedient of seeing to it that the increase in spending generated by the added revenues takes place gradually through time, rather than precipitously. In this way the rise in the domestic price level caused by the oil shock can be limited (for practical purposes) to approximately the amount dictated by the degree of appreciation of the real exchange rate necessary to restore equilibrium.

Professor Arrow on the Social Discount Rate

In this section I briefly sketch an alternative conceptual framework for measuring the social rate of discount. In it, the discount rate is obtained by tracing through the effects of additional government borrowing on various classes of investment and saving. The resulting figure for the social rate of discount is a weighted average of the marginal rates of productivity of capital in the various sectors from which investment is displaced and of the marginal rates of time preference applicable to the various groups (if any) whose saving is stimulated (through higher interest rates) by the additional government borrowing.

Investment in Men Versus Investment in Machines: The Case of India

This chapter attempts to evaluate the economic rate of return to society as a whole of investment in physical capital, on one hand, and of investment in secondary and higher education, on the other. The chapter deals exclusively with data from India. It goes into considerable methodological detail in an effort to indicate ways of making as good use as possible of data that are far from ideal. Poor data are characteristic of underdeveloped countries—indeed, the Indian data are probably better than those for the overwhelming bulk of poor countries. Part of my purpose in presenting this study is to help ‘break the ice’ by suggesting a variety of ways of overcoming potential inadequacies in the data. The other part of my purpose is to draw some inferences about the Indian situation.

Survey of Literature on Cost-Benefit Analysis for Industrial Project Evaluation

The field of industrial project evaluation is a relatively new branch of economic analysis, and as such is still in its formative stages. Numerous gaps still exist in the available literature, and in many cases alternative approaches to problems have been suggested which entail differences of concept that are as yet unresolved. These facts have determined the design of this survey. An attempt has been made here to take a constructive and forward-looking approach, focusing on gaps, weaknesses and unresolved issues in the field and attempting to contribute to an improvement of existing procedures wherever possible.