Hamish Low

Optimal taxation, prudence and risk-sharing

Abstract This paper analyses optimal income taxation as a trade-off between the incentive effects of increased uncertainty and the welfare benefits of social insurance. Greater prudence increases labour supply because of precautionary incentive effects which reduce the progressivity of the optimal income tax schedule. Increased uncertainty increases progressivity of the income tax schedule because of a greater value of social insurance. Optimal tax progressivity depends on the ratio of prudence to risk aversion: when this ratio is high, incentive effects dominate the social insurance effect, leading to declining optimal income tax rates.

Job Loss, Credit Constraints and Consumption Growth

We use direct evidence on credit constraints to study their importance for household consumption growth and for welfare. We distentangle the direct effect on consumption growth of a currently binding credit constraint from the indirect effect of a potentially binding credit constraint that generates consumption risk. Our data are focused on job losers. We find that less than 5% of job losers experience a binding credit constraint, but those who do experience significant welfare losses, and consumption growth is 24% higher than for the rest of the population. However, even among those who are unconstrained and are able to borrow if needed, consumption responds to transitory income.

Are prices enough? The economics of material demand reduction.

Recent policy proposals to achieve carbon targets have emphasized material demand reduction strategies aimed at achieving material efficiency. We provide a bridge between the way economists and engineers think about efficiency. We use the tools of economics to think about policies directed at material efficiency and to evaluate the role and rationale for such policies. The analysis highlights when prices (or taxes) can be used to induce changes in material use and when taxes may not work. We argue that the role of taxes is limited by concerns about their distributional consequences, by international trade and the lack of international agreement on carbon prices, and by investment failures. This article is part of the themed issue ‘Material demand reduction’.

Unexploited Connections Between Intra- and Inter-temporal Allocation

This paper shows that a power utility specification of preferences over total expenditure (ie. CRRA preferences) implies that intratemporal demands are in the PIGL/PIGLOG class. This class generates (at most) rank two demand systems and we can test the validity of power utility on cross-section data. Further, if we maintain the assumption of power utility, and within period preferences are not homothetic, then the intertemporal preference parameter is identified by the curvature of Engel curves. Under the power utility assumption, neither Euler equation estimation nor structural consumption function estimation is necessary to identify the power parameter. In our empirical work, we use demand data to estimate the power utility parameter and to test the assumption of the power utility representation. We find estimates of the power parameter larger than obtained from Euler equation estimation, but we reject the power specification of within period utility.

Noisy Convention Selection with Local Interaction

Stochastic evolutionary processes can be used to determine which equilibrium a society selects, but expected waiting times for the transition to such an equilibrium can be fantastically large. Waiting times are reduced if interaction is predominantly local or if the selection process is very noisy. This article uses simulation to study waiting times when interaction is local and selection is noisy simultaneously. Waiting times fall significantly, and increases in population size do not necessarily lead to increased waiting times. The form of local interaction is shown to be important to the effect on waiting times. The key to the speed of overall convergence is the speed of convergence of the first subgroup. Applications to the problem of convention selection rely on more frequent mistakes in learning, which weakens the selection result. The selection result is also weakened by local interaction.