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Working Paper
The Political Economy of Underfunded Municipal Pension
This paper analyzes the determinants of underfunding of local government?s pension funds using a politico-economic overlapping generations model. We show that a binding down payment constraint in the housing market dampens capitalization of future taxes into current land prices. Thus, a local government?s pension funding policy matters for land prices and the utility of young households. Underfunding arises in equilibrium if the pension funding policy is set by the old generation. Young households instead favor a policy of full funding. Empirical results based on cross-city comparisons in the ...
Working Paper
The political economy of endogenous taxation and redistribution
This paper examines a simple dynamic model in which agents vote over capital income taxation and redistributive transfers. We show that in equilibrium the typical agent's preferences over the tax rate are single-peaked and derive a closed-form solution for the majority-rule tax rate. We also show that high levels of initial wealth inequality can place the economy on the 'wrong side of the Laffer curve'.
Working Paper
Majority Voting: A Quantitative Investigation
We study the tax systems that arise in a once-and-for-all majority voting equilibrium embedded within a macroeconomic model of inequality. We find that majority voting delivers (i) a small set of outcomes, (ii) zero labor income taxation, and (iii) nearly zero transfers. We find that majority voting, contrary to the literature developed in models without idiosyncratic risk, is quite powerful at restricting outcomes; however, it also delivers predictions inconsistent with observed tax systems.
Working Paper
The Changing Polarization of Party Ideologies: The Role of Sorting
U.S. congressional roll-call voting records show that as polarization of the two parties along the economic dimension changes, polarization along the social/cultural dimension tends to change in the opposite direction. A model of party competition within a two-dimensional ideology space is developed in which party platforms are determined by voters who compose the party. It is shown that if distribution of voter preferences is radially symmetric, polarization of party ideologies along the two dimensions are inversely related, as observed. The model gives a remarkably good quantitative account ...
Working Paper
The Changing Polarization of Party Ideologies: The Role of Sorting
Ideology scores derived from U.S. congressional roll-call voting patterns show that the ideological distance between the two parties along the primary dimension changes inversely with the ideological distance along the secondary dimension. To explain this inverse association, a model of party competition with endogenous party membership and a two-dimensional ideology space is developed. If the distribution of voter preferences is uniform on a disk, equilibrium ideological distances along the two dimensions are inversely related. The model can quantitatively account for the historical ...
Working Paper
The Changing Polarization of Party Ideologies: The Role of Sorting
Ideology scores derived from U.S. congressional roll-call voting patterns show that the ideological distance between the two parties along the primary dimension changes inversely with the ideological distance along the secondary dimension. To explain this inverse association, a model of party competition with endogenous party membership and a two-dimensional ideology space is developed. If the distribution of voter preferences is uniform on a disk, equilibrium ideological distances along the two dimensions are inversely related. The model can quantitatively account for the historical ...
Working Paper
What drives economic policy uncertainty in the long and short runs? European and U.S. evidence over several decades
Economic policy uncertainty (EPU) has increased markedly in recent years in the U.S. and Europe, and some have posited a link between this phenomenon and subpar economic growth in advanced economies (see Baker, Bloom, and Davis, 2015). But methodological and data concerns have thus far raised doubts about whether EPU contains marginal and exogenous information about other economic phenomena. Our work analyzes the impact on EPU of several possibly endogenous variables, such as inflation and unemployment rates in countries where EPU is measured. We also consider longer-term technological ...
Working Paper
Heterogeneous Districts, Interests, and Trade Policy
Congressional districts are political entities with heterogeneous trade policy preferences due to their diverse economic structures. Representation of these interests in Congress is a crucial aspect of trade policymaking that is missing in canonical political economy models of trade. In this paper, we underscore the influence of districts by developing a political economy model of trade with region-specific factors. Using 2002 data from U.S. Congressional Districts, we first characterize the unobserved district-level demand for protection. Extending the model beyond the small country ...
Working Paper
The Politics of Flat Taxes
We study the political determination of flat tax systems using a workhorse macroeconomic model of inequality. There is significant variation in preferred tax policy across the wealth and income distribution. The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) essentially zero transfers. This policy is supported by a coalition of low- and middle-wealth households. Zero labor income taxation is supported by households with below average wealth, while the middle-wealth households prefer to keep the ...
Working Paper
The Politics of Flat Taxes
We study the determination of flat tax systems using a workhorse macroeconomic model of inequality. Our first result is that, despite the multidimensional policy space, equilibrium policies are typically unique (up to a fine grid numerical approximation). The majority voting outcome features (i) zero labor income taxation, (ii) simultaneous use of capital income and consumption taxation, and (iii) generally low transfers. We discuss the role of three factors?the initial heterogeneity in sources of income, the mobility of income and wealth, and the forward-looking aspect of voting?in ...