This course is an introduction to the economic analyses of incentives generated by tax systems and income transfer programs. The emphasis is on understanding how, and the extent to which, individuals and firms react to those policies—the central question addressed in the growing field of empirical public finance. The discussions on key design elements of those policies are expected to foster students’ understanding of important trade-offs involved in implementing government policies. The range of topics is: The effects of taxes on labour supply, saving, investment, corporations; unemployment insurance; disability insurance; workers' compensation; intra-government transfer; tax evasion. Examples will be drawn from taxes and income transfer programs implemented in the Asia-Pacific region. The course is structured around one of the important tools in empirical analysis in economics—the quasi-experimental approach. By reading articles that apply quasi-experiments for each topic, students are expected to develop practical understanding of issues involved in taking econometric models to the real world. Students will be exposed to varieties of estimation techniques.

On successful completion of this course, students should:

(a)    Understand key features of major fiscal institutions and their behavioural implications

(b)    Be able to analyse incentives generated by government policies

(c)     Formulate quasi-experimental analysis

(d)    Be able to critically evaluate quasi-experimental studies

(e)   Be able to understand and assess estimation results reported in journal articles

Exams (Midterm, 30%;  Final, 70%)

3 hours lecture per week, 6 hours reading and problem solving

An undergraduate-level course on statistics and/or econometrics so that students have a basic understanding of elementary statistical tests and a basic ability to apply indifference curve analysis.

The main text for this course is Jonathan Gruber, Public Finance and Public Policy, Third edition, Worth Publishers, 2010 (hereafter referred to as JG).

Week 1: Introduction to empirical tools of public finance

- JG Chapter 3 (including the appendix), Chapter 2 (pp.37-43, 55-56)

- Meyer, Bruce D. 1995. "Natural and Quasi-Experiments in Economics." Journal of Business & Economic Statistics, 13:2, pp. 151-61.

Further reading:

Symposia on "Con out of Economics." Journal of Economic Perspectives, 24:2, 2010.

Week 2: Introduction to behavioural responses: Case of a Cigarette tax

- JG Chapter 6 (pp. 165-177)

- Adda, Jérôme and Francesca Cornaglia. 2006. "Taxes, Cigarette Consumption, and Smoking Intensity." American Economic Review, 96:4, pp. 1013-28.

Further reading:

Thaler, R.H. & Sunstein, C.R. (2003). "Libertarian paternalism. " American Economic Review (Papers and Proceedings) 93:2, 175–179.

Choi, J., Laibson, D., Madrian, B.C., & Metrick, A. (2003). Optimal defaults. American Economic Review (Papers and Proceedings) 93(2), 180–185.

O’Donoghue, T. & Rabin, M. (2003). Studying optimal paternalism, illustrated by a model of sin taxes. American Economic Review (Papers and Proceedings) 93(2), 186–191.

Thaler, R.H. & Sunstein, C.R. (2003). Libertarian paternalism. American Economic Review (Papers and Proceedings) 93(2), 175–179.

Week 3: Unemployment insurance

- JG Chapter 14 (including the appendix)

- Meyer, Bruce D. 1989. “A Quasi-Experimental Approach to the Effects of Unemployment Insurance.” NBER Working Papers 3159.

Further readings

- Shavell & Weiss. 1979. “The Optimal Payment of Unemployment Insurance Benefits over Time.” Journal of Political Economy, 87:6, pp. 1347-62.

- Meyer, Bruce D. “Unemployment Insurance and Unemployment Spells.” Econometrica, 58:4. pp.757-82.

- Anderson & Meyer. 2000. “The effects of the unemployment insurance payroll tax on wages, employment, claims and denials.” Journal of Public Economics, 78:1-2, pp. 81-106.

Week 4/5: Disability insurance and workers’ compensation

- JG Chapter 14

- Gruber, Jonathan. 2000. "Disability Insurance Benefits and Labor Supply." Journal of Political Economy, 108:6, pp. 1162-83.

- Krueger, Alan B. 1990. "Incentive Effects of Workers' Compensation Insurance." Journal of Public Economics, 41:2, pp. 73-99.

Further readings

- Krueger, Alan B. 1990. "Workers’ compensation insurance and the duration of workplace injuries." NBER Working Papers No. 3253.

- Besley, Timothy and Anne Case. 2000. "Unnatural Experiments? Estimating the Incidence of Endogenous Policies." Economic Journal, 110:467, pp. 672–694.

Week 6: Taxes, earned income tax credits, and labour supply

- JG Chapter 21

- Eissa, Nada and Jeffrey B Liebman. 1996. "Labor Supply Response to the Earned Income Tax Credit." Quarterly Journal of Economics, 111:2, pp. 605-37.

Further readings

- Meyer and Rosenbaum. 2000. "Welfare, The Earned Income Tax Credit, and The Labor Supply of Single Mothers." Quarterly Journal of Economics, 116:3, pp. 1063-1114.

Week 7: Taxes on saving  

- JG Chapter 22

- Chou, Shin-Yi, Jin-Tan Liu, and James K. Hammitt. 2003. "National Health Insurance and precautionary saving: evidence from Taiwan." Journal of Public Economics, 87:9-10, pp. 1873-94.

- Engelhardt, Gary V. 1996. "Tax Subsidies and Household Saving: Evidence from Canada." Quarterly Journal of Economics, 111:4, pp. 1237-68.

- Ashraf, Nava, Dean Karlan, and Wesley Yin. 2006. "Tying Odysseus to the Mast: Evidence from a Commitment Savings Product in the Philippines." Quarterly Journal of Economics, 121:2, pp. 635-672.

Week 8: Intra-government transfers

- JG Chapter 10 (pp. 261-266, 275-286)

- Knight, Brian. 2002. "Endogenous Federal Grants and Crowd-out of State Government Spending: Theory and Evidence from the Federal Highway Aid Program." American Economic Review, 92:1, pp. 71-92.

Week 9: Taxes and risk taking

- JG Chapter 23

- Cullen, Julie Berry and Roger H. Gordon. 2007. "Taxes and entrepreneurial risk-taking: Theory and evidence for the U.S." Journal of Public Economics, 91:7-8, pp. 1479-505.

Further reading

- Burman, Leonard E and William C Randolph. 1994. "Measuring Permanent Responses to Capital-Gains Tax Changes in Panel Data." American Economic Review, 84:4, pp. 794-809.

Week 10: Taxes on corporations

- JG Chapter 24

- Goolsbee, Austan. 1998. "Does Government R&D Policy Mainly Benefit Scientists and Engineers?" American Economic Review, 88:2, pp. 298-302.

- Grubert, Harry and Joel Slemrod. 1998. "The Effect of Taxes on Investment and Income Shifting to Puerto Rico." Review of Economics and Statistics, 80:3, pp. 365-73.

Week 11: Tax Evasion

- JG Chapter 25 (pp. 737-748)

- Fisman, Raymond and Shang-Jin Wei. 2004. "Tax Rates and Tax Evasion: Evidence from "Missing Imports" in China." Journal of Political Economy, 112:2, pp. 471-96.

Further reading

- Slemrod, Joel, Marsha Blumenthal, and Charles Christian. 2001. "Taxpayer response to an increased probability of audit: evidence from a controlled experiment in Minnesota." Journal of Public Economics, 79:3, pp. 455-483.

- Javorcik, B.S. and Narciso, G. 2008. "Differentiated products and evasion of import tariffs. " Journal of International Economics 76:2, pp. 208-222.

Week 12: Recent developments in empirical public finance

- Bertrand, M., Duflo, E. and Mullainathan, S. 2004. "How Much Should We Trust Differences-in-Differences Estimates? " Quarterly Journal of Economics, 119:1, pp. 249-276.

Further reading

- Donald, Stephen G. and Kevin Lang. 2007. "Inference with Difference-in-Differences and Other Panel Data." Review of Economics and Statistics, 89:2, pp. 221-233.

- Rosenzweig, Mark and Kenneth I. Wolpin. 2000. " Natural “Natural Experiments” in Economics." Journal of Economic Literature, 38:4, pp. 827-874.