Casey B. Mulligan

The Endogenous Determination of Time Preference

We model a consumers efforts to reduce the discount on future utilities. Our analysis shows how wealth, mortality, addictions, uncertainty, and other variables affect the degree of time preference. In addition to working out many implications of the model, we discuss evidence on consumption, savings, equilibrium, and the dynamics of inequality. We claim that most ofthat evidence is consistent with the predictions of our approach.

Transitional Dynamics in Two-Sector Models of Endogenous Growth

The steady state and transitional dynamics of two-sector models of endogenous growth are analyzed in this paper. We describe necessary conditions for endogenous growth. The conditions allow us to reduce the dynamics of the solution to a system with one state-like and two control-like variables. We analyze the determinants of the long run growth rate. We use the Time-Elimination Method to analyze the transitional dynamics of the models. We find that there are transitions in real time if the point-in-time production possibility frontier is strictly concave, which occurs, for example, if the two production functions are different or if there are decreasing point-in-time returns in any of the sectors. We also show that if the models have a transition in real time, the models are globally saddle path stable. We find that the wealth or consumption smoothing effect tends to dominate the substitution or real wage effect so that the transition from relatively low levels of physical capital is carried over through high work effort rather than high savings. We develop some empirical implications. We show that the models predict conditional convergence in that, in a cross section, the growth rate is predicted to be negatively related to initial income but only after some measure of human capital is held constant. Thus, the models are consistent with existing empirical cross country evidence.

Scale Economies, the Value of Time, and the Demand for Money: Longitudinal Evidence from Firms

COMPUSTAT data on 12,000 firms for the years 1961–92 indicate that large firms hold less cash as a percentage of sale than small ones. Whether comparisons are made within or across industries, the clasticity of cash balance with respect to sales is about 0.8. Firms headquartered in counties with high wages hold more money for a given level of sales, a finding consistent with the idea that time can substitute for mony in the provision of transactions services. The estimates are consistent with both scale economies in the holding of money and secular declines in velocity.

Deadweight Costs and the Size of Government

We provide a model for analyzing effects of the tax system and spending programs on the determination of government spending and taxpayer welfare. An improvement in the efficiency of either taxes or spending would reduce political pressure for suppressing the growth of government and thereby increase total tax revenue and spending. We demonstrate the similarity of the political responses to revenue shocks, spending shocks, changes in tax efficiency, and changes in spending program efficiency. Empirical analysis of oil shocks, intergovernmental grants, and other autonomous changes in taxes or spending indicates that cause and effect is not only from spending to tax structures.

Extensive Margins and the Demand for Money at Low Interest Rates

We argue that the relevant monetary decision for the majority of U.S. households is not the fraction of assets to be held in interest‐bearing form, but whether to hold any such assets at all (we call this “the decision to adopt” the financial technology). We show that the key variable governing the adoption decision is the product of the interest rate times the total amount of assets. This implies that the interest elasticity of household money demand at low interest rates can be estimated from the variation in asset holdings in a cross section of households rather than historical interest rate variations. We do so with the 1989 Survey of Consumer Finances. We find that (a) the elasticity of money demand is very small when the interest rate is small, (b) the probability that a household holds any amount of interest‐bearing assets is positively related to the level of financial assets, and (c) the cost of adopting financial technologies is negatively related to participation in a pension program. At intere...

The Extent of the Market and the Supply of Regulation

We present a model in which setting up and running a regulatory institution takes a fixed cost. As a consequence, the supply of regulation is limited by the extent of the market. We test three implications of this model. First, jurisdictions with larger populations affected by a given regulation are more likely to have it. Second, jurisdictions with lower incremental fixed costs of introducing and administering new regulations should regulate more. This implies that regulation spreads from higher to lower population jurisdictions, and that jurisdictions that build up transferable regulatory capabilities should regulate more intensely. Consistent with the model, we find that higher population U. S. states have more pages of legislation and adopt particular laws earlier in their history than do smaller states. We also find that the regulation of entry, the regulation of labor, and the military draft are more extensive in countries with larger populations, as well as in civil law countries, where we argue that the incremental fixed costs are lower.

The Optimum Quantity of Money: Theory and Evidence

In this paper we propose a simple and general model for computing the Ramsey optimal inflation tax, which includes several models from the previous literature as special cases. We show that it cannot be claimed that the Friedman rule is always optimal (or always non-optimal) on theoretical grounds. The Friedman rule is optimal or not, depending on conditions related to the shape of various relevant functions. One contribution of this paper is to relate these conditions to measurable variables such as the interest rate or the consumption elasticity of money demand. We find that it tends to be optimal to tax money when there are economies of scale in the demand for money (the scale elasticity is smaller than one) and/or when money is required for the payment of consumption or wage taxes. We find that it tends to be optimal to tax money more heavily when the interest elasticity of money demand is small. We present empirical evidence on the parameters that determine the optimal inflation tax. Calibrating the model to a variety of empirical studies yields an optimal nominal interest rate of less than 1% per year, although that finding is sensitive to the calibration.

Conscription as Regulation

We examine the practice of military conscription around the world from the perspective of two standard theories, and a new one, which emphasizes the fixed cost of introducing and administering the draft as a deterrent to its use. We find that, holding the relative size of the military constant, higher population countries are more likely to use the draft. We also find that French legal origin countries, which we see as facing lower fixed and variable administrative costs, are more likely to draft than are common law countries. Conscription does not seem to be influenced by democracy, and is influenced by the deadweight costs of taxation only in countries with very large militaries. The results suggest that fixed costs of introducing and administering new regulations may be an important determinant of their use.

Social Security and Democracy

Many political economic theories use and emphasize the process of voting in their explanation of the growth of Social Security, government spending, and other public policies. But is there an empirical connection between democracy and Social Security program size or design? Using some new international data sets to produce both country-panel econometric estimates as well as case studies of South American and southern European countries, we find that Social Security policy varies according to economic and demographic factors, but that very different political histories can result in the same Social Security policy. We find little partial effect of democracy on the size of Social Security budgets, on how those budgets are allocated, or how economic and demographic factors affect Social Security. If there is any observed difference, democracies spend a little less of their GDP on Social Security, grow their budgets a bit more slowly, and cap their payroll tax more often, than do economically and demographically similar nondemocracies. Democracies and nondemocracies are equally likely to have benefit formulas inducing retirement and, conditional on GDP per capita, equally likely to induce retirement with a retirement test vs. an earnings test.

U.S. Money Demand: Surprising Cross-Sectional Estimates

We estimate money demand functions using cross-sections of U.S. states over the period 1929-1990. We arrive at a number of interesting conclusions: First our estimates of the income elasticity lie between 1.3 and 1.5 significantly above one. Second money demand is a stable function over an impressive sample period 1929-1990. Third income per capita is a better scale variable than consumption. And finally after having been fairly constant between 1950 and 1980 the rate of technological progress (which determines the amount of money demanded for given incomes price levels and interest rates) accelerated substantially over the 1980s. (authors)