Eva Carceles-Poveda

Endogenous trading constraints with incomplete asset markets

This paper endogenizes the borrowing constraints on capital in a production economy with incomplete markets. We find that these limits get looser with income, a property that is consistent with US data on credit limits. The framework with endogenous limits is then used to study the effects of a revenue neutral tax reform that eliminates capital income taxes. Our results illustrate that it is very important to take into account the effects of tax policies on the limits. Throughout the transition, these effects can be big enough to change the overall conclusion about the desirability of a tax reform.

A strategic analysis of the war against transnational terrorism

We study a two stage game in which a transnational terrorist organization interacts with an arbitrary number of countries that may differ in their political or economic power, their military effectiveness, the benefit from cooperating against terrorism and the value they assign to damage. Only a subset of countries that emerges endogenously takes proactive measures to fight the terrorist, while all countries incur defensive expenditures to protect their soil. We characterize analytically the pure strategy subgame perfect equilibrium of the game and show how the equilibrium strategies depend on the key model parameters. We provide an algorithm to find the endogenous set of cooperating countries based on their benefit from cooperation and their political/economic power.

Effects of Legal and Unauthorized Immigration on the U.S. Social Security System

Immigration is having an increasingly important effect on the social insurance system in the United States. On the one hand, eligible legal immigrants have the right to eventually receive pension benefits, but also rely on other aspects of the social insurance system such as health care, disability, unemployment insurance, and welfare programs, while most of their savings have direct positive effects on the domestic economy. On the other hand, most undocumented immigrants contribute to the system through taxed wages, but they are not eligible for these programs unless they attain legal status, and a large proportion of their savings translates into remittances, which have no direct effects on the domestic economy. Moreover, a significant percentage of immigrants migrate back to their countries of origin after a relatively short period of time, and their savings while in the US are predominantly in the form of remittances. Therefore, any analysis that tries to understand the impact of immigrant workers on the overall system has to take into account the decisions and events these individuals face throughout their lives, as well as the use of the government programs they are entitled to. We propose a life-cycle OLG model in a General Equilibrium framework of legal and undocumented immigrants’ decisions regarding consumption, savings, labor supply and program participation to analyze their role in the financial sustainability of the system. Our analysis of the effects of potential policy changes, such as giving some undocumented immigrants legal status, shows increases in capital stock, output, consumption, labor productivity, and overall welfare. The effects are relatively small in percentage terms, but considerable given the size of our economy.

On the Double Taxation of Corporate Profits

This paper studies the aggregate and distributional effects of switching from taxing corporate profits at the firm level to taxing them at the household level, in the form of dividend and capital gains taxes. It is argued that a careful analysis of the relevant trade-offs necessitates the construction of a model that incorporates substantial heterogeneity across households and across firms. Such a model is constructed and used to evaluate the effects of several alternative reforms, where the main focus is on how to finance a reduction in corporate profits taxes. It is shown that using shareholder taxes to finance such a tax cut represents a better alternative to using labor income taxes, because it generates welfare benefits for a majority of households and can thus gather popular support. Focusing on shareholder taxes, the option of increasing dividend taxes only is evaluated against another alternative in which both dividend and capital gains taxes are increased. The former reform has the unintended consequence of creating misallocation of capital and this reduces the overall welfare benefits. The latter reform avoids introducing this distortion and is found to be the best alternative. In this scenario, a complete elimination of corporate profits taxes leads to an increase in long run output of approximately 2% and welfare gains equivalent to 1% of consumption. A less dramatic reform, in which the tax rates on all types of personal income as well as on corporate income are equalized, yields smaller overall benefits but is found to benefit more than 95% of households in the economy.

Value Preserving Welfare Weights for Social Optimization Problems

Social optimization problems typically maximize the sum of individual weighted utilities over feasible allocations that satisfy certain constraints. While social optimization problems are at the heart of economic analysis, it is not always clear how to choose individual welfare weights. In this paper, we propose a mechanism that determines individual weights for social optimization problems. We first provide a set of axioms which uniquely determine, for any welfare function (social or individual), the contribution of a bundle of goods to that welfare function. We then choose welfare weights so that the contribution of an individual’s initial endowments to social welfare is proportional to the contribution of that individual’s final consumption allocation to his own welfare. That is, we choose the weights so that the ratio of social to private contributions is the same across individuals. For complete markets, we show that these weights are equal to the well known Negishi welfare weights. However, our principle can also be applied to other contexts where the welfare theorems do not hold. We provide an optimal taxation example that illustrates our methodology. Our results suggest that the allocations and tax rates with the weights we propose can substantially differ from the ones obtained with a standard utilitarian social welfare function. In particular, the weights we propose mute the redistribution motive inherently present under utilitarianism. As a result, with high levels of inequality and positive government spending, the government predominantly taxes labor income with the weights we propose, while the utilitarian approach predominantly taxes capital income. Moreover, with no government spending, taxes are zero with the weights we propose, while the utilitarian approach taxes capital and subsidizes labor.