nep-pbe New Economics Papers
on Public Economics
Issue of 2016‒08‒07
twenty-two papers chosen by
Thomas Andrén

  1. Sub-metropolitan Tax Competition with Household and Capital Mobility By Tidiane Ly
  2. Migration and Tax Yields in a Devolved Economy By Foreman-Peck, James; Zhou, Peng
  3. The welfare effect of at income tax reform: the case of Bulgaria By Vasilev, Aleksandar
  4. Family, Community and Long-Term Earnings Inequality By Bingley, Paul; Cappellari, Lorenzo; Tatsiramos, Konstantinos
  5. Progressive taxation and (in)stability in an exogenous growth model with an informal sector By Vasilev, Aleksandar
  6. Taxation, Debt and Relative Prices in the Long Run: The Irish Experience By Vahagn Galstyan; Adnan Velic
  7. Tax loss carryforward disclosure and uncertainty By Flagmeier, Vanessa; Müller, Jens
  8. Taxing Consumption in Canada: Rates, Revenues, and Redistribution By Richard Bird; Michael Smart; Jorge Martinez-Vazquez
  9. Higher Taxes at the Top: The Role of Entrepreneurs By Bettina Brueggemann
  10. The Italian Blitz: a natural experiment on audit publicity and tax compliance By Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro
  11. Tax Evasion and Institutions. An Experiment on The Role of Principal Witness Regulations By Johannes Buckenmaier; Eugen Dimant; Luigi Mittone
  12. The Effect of Inflation and Interest Rates on Forward-Looking Effective Tax Rates By Centre for European Economic Reserach (ZEW)
  13. Maybe "honor thy father and thy mother": uncertainfamily aid and the design of social long term care insurance By Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
  14. Fiscal Policy, Inequality and Poverty in Iran: Assessing the Impact and Effectiveness of Taxes and Transfers By Ali Enami; Nora Lustig; Alireza Taqdiri
  15. Inequality and Growth: The Role of Human Capital with Heterogeneous Skills By Borissov, Kirill; Bosi, Stefano; Ha-Huy, Thai; Modesto, Leonor
  16. A Long-Term Evaluation of Recent Hungarian Pension Reforms By Christoph Freudenberg; Tamás Berki; Ádám Reiff
  17. Inequality-minimization with a given public budget By König, Johannes; Schröder, Carsten
  18. On the Distribution of the Welfare Losses of Large Recessions By Krueger, Dirk; Mitman, Kurt; Perri, Fabrizio
  19. Aging of the Baby Boomers: Demographics and Propagation of Tax Shocks By Giuseppe Fiori; Domenico Ferraro
  20. Do Tax Credits Increase Charitable Giving? Evidence from Arizona and Iowa By Daniel Teles
  21. Does self-perceptions and income inequality match? By Philipp Poppitz
  22. A Unified Approach to Estimating Demand and Welfare By Redding, Stephen J.; Weinstein, David E.

  1. By: Tidiane Ly (Univ Lyon, CNRS, GATE UMR 5824, F-69130 Ecully, France)
    Abstract: This paper investigates the efficiency properties of tax competition between submetropolitan jurisdictions when capital, residents and workers are mobile, and both households and firms compete for local land markets. We analyze two decentralized equilibria: (1) with a local tax on residents and two separate local taxes on capital and land inputs, efficiency is achieved and the existence of a marginal fiscal cost due to residents’ mobility is revealed; (2) combination of the taxes on capital and land inputs into a single business property tax leads local authorities to charge inefficiently high taxation on capital. We show that capital mobility induces a reduction in the business land taxation and local public inputs are used to offset the distorting effects of the property tax, accounting for the distorting impact of workers’ mobility.
    Keywords: Tax competition, Mobility, Public goods, Public inputs
    JEL: H71 H72 R50 R51
    Date: 2016
  2. By: Foreman-Peck, James (Cardiff Business School); Zhou, Peng (Cardiff Business School)
    Abstract: Households may migrate between jurisdictions to secure preferred mixes of collectively sup-plied services and taxation. But devolution of taxes to sub-national jurisdictions could reduce expected tax revenue if some move to lower tax regimes, constraining devolved government policy. This paper develops an indirect approach to establish lower bound tax revenue impacts of possible tax changes by devolved governments. We estimate and aggregate migration responses to existing tax differentials between smaller, component administrative areas of the devolved jurisdictions. Because such existing taxes may have different bases from proposed devolved taxes, appropriate corrections are made in a model of the devolved economy. This model also establishes how the tax base and therefore the tax yield of the devolved economy, as well as the output per capita, would be changed by implementing different tax rates, given the migration responses estimated. The model is used to assess the fiscal possibilities for Wales created by the UK Government of Wales Act 2014.
    Keywords: Migration; Fiscal Decentralisation; Tax Revenue
    JEL: R23 J61 H11 H22 H71 H72 H77
    Date: 2016–07
  3. By: Vasilev, Aleksandar
    Abstract: This paper is a first attempt to provide a quantitative evaluation of the welfare gains resulting from the introduction of flat income taxation in Bulgaria in 2008. Using a calibrated micro-founded endogenous growth model with physical and human capital accumulation to Bulgarian data, a computational experiment is performed to quantify the dynamic welfare effect of progressive income taxation vis-a-vis flat income taxation. The model demonstrates that significant welfare gains, measured in terms of per-period consumption, can be realized with the introduction of flat income taxation. In addition, these welfare gains increase proportionally with the length of the time horizon considered. Finally, sensitivity analysis was performed to demonstrate that the results obtained are robust.
    Keywords: taxation,endogenous growth,human capital,welfare gains
    JEL: D91 O41
    Date: 2015
  4. By: Bingley, Paul (Danish National Centre for Social Research (SFI)); Cappellari, Lorenzo (Università Cattolica del Sacro Cuore); Tatsiramos, Konstantinos (University of Nottingham)
    Abstract: This paper studies the influence of family, schools and neighborhoods on life-cycle earnings inequality. We develop an earnings dynamics model linking brothers, schoolmates and teenage parish neighbors using population register data for Denmark. We exploit differences in the timing of family mobility and the partial overlap of schools and neighborhoods to separately identify sorting from community and family effects. We find that family is far more important than community in influencing earnings inequality over the life cycle. Neighborhoods and schools influence earnings only early in the working life and this influence falls rapidly and becomes negligible after age 30.
    Keywords: sibling correlations, neighborhoods, schools, life-cycle earnings, inequality
    JEL: D31 J62
    Date: 2016–07
  5. By: Vasilev, Aleksandar
    Abstract: We show that in a exogenous growth model with informal economy calibrated to Bulgarian data under the progressive taxation regime (1993-2007), the economy exhibits equilibrium indeterminacy due to the the presence of an unofficial production. These results are in line with the findings in Benhabib and Farmer (1994, 1996) and Farmer (1999). Also, the findings in this paper are in contrast to Guo and Lansing (1988) who argue that progressive taxation works as an automatic stabilizer. Under the flat tax regime (2008-14), the economy calibrated to Bulgarian data displays saddle-path stability. The decrease in the average effective tax rate addresses the indeterminacy issue and eliminates the "sink" dynamics.
    Keywords: Progressive taxation,Informal economy,Equilibrium (in)determinacy
    JEL: D91 J46
    Date: 2016
  6. By: Vahagn Galstyan (Department of Economics, Trinity College Dublin); Adnan Velic (Dublin Institute of Technology)
    Abstract: This paper investigates the effects of public debt and distortionary labour taxation on the long-run behaviour of Irish relative non-traded goods prices. We highlight that higher public debt, acting through higher taxes, has an equivocal impact on the relative supply of non-traded goods and, correspondingly, relative prices. Our empirical analysis for Ireland suggests that taxes and public debt play significant roles in the long run, comoving negatively with the relative price of non-tradables. Accordingly, shifts in public debt and taxation bear implications for the country's international price competitiveness.
    Keywords: labour taxation, distortionary, government spending, public debt, real exchange rate, relative non-traded prices
    JEL: F00 F41
    Date: 2016–07
  7. By: Flagmeier, Vanessa; Müller, Jens
    Abstract: We examine whether companies voluntarily disclose additional information about tax loss carryforwards when the recoverability is more uncertain. With this study, we aim to explain part of the huge cross-sectional variation in the tax footnote. To assess disclosure behavior, we hand collect data from notes of large German firms' IFRS financial statements and identify voluntarily disclosed information beyond the requirements of IAS 12. We find that uncertainty about the usability of tax losses has a significantly negative relation to the amount and quality of disclosure, controlling for other disclosure determinants derived from prior literature. These findings are robust for several indicators representing information and income uncertainty. Our findings suggest that managers anticipate the investors' need for more private information and disclose them voluntarily to send a signal of credibility to the market participants. It can be assumed that disclosing this information is less costly than facing potential risk premiums demanded by investors leading to higher cost of capital. This result indicates that part of the cross-sectional variation in the tax footnote can be explained by differing expectations to use the tax losses.
    Keywords: tax loss carryforwards,disclosure,uncertainty,capital cost,deferred taxes
    Date: 2016
  8. By: Richard Bird (University of Toronto, Department of Economics); Michael Smart (University of Toronto, Department of Economics); Jorge Martinez-Vazquez
    Abstract: The introduction of the VAT in Canada, initially in the form of the federal GST in 1991, did not signify a major change in the tax mix even after most provincial sales taxes also became VATs. Canadians do not pay much if any more in taxes on their consumption than they did 25 years ago. Although the GST and its provincial companions are not perfect, the evidence is that they create fewer barriers to investment and growth than the taxes they replaced so that Canadians appear as a whole to be better off than they were before setting off down the road to VAT. Nonetheless, perhaps in part because the VAT in Canada unlike in other countries is generally quoted separately (like retail sales taxes in the US) and hence highly visible, it continues to be politically unpopular and considered undesirably regressive. The major contribution of this paper is to examine in some detail and with some new evidence the incidence of Canada’s sales and excise taxes, a question that has received surprisingly little analysis. Because the share of total consumption taxes coming from sales rather than excise taxes has increased, these taxes are now less regressive than they were before the move to VAT, regardless of how incidence is measured. More importantly, there are solid arguments for using consumption than income as a basis for evaluating the progressivity of consumption taxes, and on this measure the GST and its companion taxes appear to be mildly progressive. However because the remaining excises are quite regressive even on this basis, on the whole the sales and excise system remains mildly regressive.
    Keywords: sales tax, excise tax, value-added tax, incidence, progressivity
    Date: 2016–03
  9. By: Bettina Brueggemann (Goethe University Frankfurt)
    Abstract: This paper contributes to the recent and growing literature on optimal top marginal income tax rates. It computes optimal marginal tax rates for top earners in a Bewley-Aiyagari type economy explicitly accounting for entrepreneurs. Entrepreneurs make up more than one third of the highest-earning one percent in the income distribution despite representing less than ten percent of the population. They are thus disproportionately affected by an increase in the top marginal income tax rate. Since entrepreneurs overall also employ half of the private-sector workforce, such policy changes can have important repercussions for aggregate labor demand and productivity. Nonetheless, the welfare maximizing top marginal tax rate amounts to 82.5 percent, and the revenue maximizing one to 90 percent. A steady state comparison between the benchmark economy featuring the current US tax system and the economy with the welfare maximizing top marginal tax rate illustrates the underlying mechanisms. The substantial increase in taxes leads to a large degree of redistribution, yielding sizable welfare gains for low-income households. Lower equilibrium wages benefit medium-sized entrepreneurs and enable them to grow, such that all entrepreneurs except those directly affected by the higher tax experience considerable welfare gains.
    Date: 2016
  10. By: Pietro Battiston; Denvil Duncan; Simona Gamba; Alessandro Santoro
    Abstract: Tax evasion is a major problem faced by governments across the world, and many strategies have been attempted to minimize its extent. One such strategy is the “fiscal blitz”, consisting in clusters of unexpected tax verification activities targeting businesses. Blitzes have been widely implemented in Italy: the ones taking place in the last years shared many common features, but differed in the level of publicity they received on the media. We use confidential data on Value Added Tax payments at the sector level in two cities to estimate the effect of such publicity on tax compliance of local sellers. By employing a Difference-in-Differences identification strategy, we find that the publicity of the blitz has a positive effect on fiscal declarations made shortly after. The results suggest that increasing awareness on future audits via the media can be an important instrument in the hands of tax authorities.
    Keywords: Tax evasion, Natural experiment, Audit publicity
    JEL: H32 K34 E62
    Date: 2016–07
  11. By: Johannes Buckenmaier; Eugen Dimant (Philosophy, Politics and Economics, University of Pennsylvania); Luigi Mittone
    Abstract: We experimentally study the effectiveness of a principal witness regulation on tax compliance when tax evasion is nested within a corruption framework. Subjects repeatedly declare taxes in institutional environments with and without a principal witness regulation. Our experimental design allows us not only to compare tax compliance under both regimes, but also to investigate whether a transition from one regime to the other can increase compliance or break up established collusive patterns. The results suggest that tax compliance is higher in the presence of a principal witness regulation when the regime is fixed. However, the transition towards a regime with a principal witness regulation has the opposite effect, i.e. introducing it in later rounds causes a drop in compliance. We provide evidence that the effectiveness of new political measures cannot reliably be judged in isolation, but must be considered in view of the actual institutional history, that is the particular institutional framework in place before the measure is introduced.
    Keywords: Corruption, Institutions, Principal Witness Regulation, Tax Compliance, Tax Evasion
    JEL: D03 D73 D81 H26
    Date: 2016–07
  12. By: Centre for European Economic Reserach (ZEW)
    Abstract: The study delivers qualitative assessments of the sensitivity mechanisms at work as well as quantitative results. Tax systems are related with interest and inflation rates through various mechanisms which sometimes act in qualitatively different directions. Such a mechanism is, for example, that usually nominal returns are taxed rather than real returns. The Devereux/Griffith model incorporates these mechanisms of real world tax systems and allows for precise quantification.The broad range of figures produced in this study helps to illustrate and indicate the levels of effective tax burdens in different countries for a series of relevant situations. For comparing tax systems in the member states, common assumptions on interest and inflation rates are essential. Although there are no “universally true values” for effective tax levels in the member states, the analysis shows that the base case gives a good indication of the member states’ effective tax levels and member states’ relative position in a cross-country comparison.
    Keywords: corporate taxation, effective tax rates, inflation, interest rates, tax burden
    JEL: H21 H26 E43
    Date: 2016–08
  13. By: Canta, Chiara; Cremer, Helmuth; Gahvari, Firouz
    Abstract: We study the role and design of private and public insurance programs when informal care is uncertain. Children's degree of altruism is represented by a parameter which is randomly distributed over some interval. The level of informal care on which dependent elderly can count is therefore random. Social insurance helps parents who receive a low level of care, but it comes at the cost of crowding out informal care. Crowding out occurs both at the intensive and the extensive margins. We consider two types of LTC policies. A topping up (TU ) scheme provides a transfer which is non exclusive and can be supplemented. An opting out (OO) scheme is exclusive and cannot be topped up. TU will involve crowding out both at the intensive and the extensive margins, whereas OO will crowd out solely at the extensive margin. However, OO is not necessarily the dominant policy as it may exacerbate crowding out at the extensive margin. Finally, we show that the distortions of both policies can be mitigated by using an appropriately designed mixed policy.
    Keywords: Long term care, uncertain altruism, private insurance, public insurance, topping up, opting out.
    JEL: H2 H5
    Date: 2016–07
  14. By: Ali Enami (Department of Economics, Tulane University); Nora Lustig (Department of Economics, Tulane University); Alireza Taqdiri (Department of Economics, University of Akron)
    Abstract: Using the Iranian Household Expenditure and Income Survey (HEIS) for 2011/12, we apply the marginal contribution approach to determine the impact and effectiveness of each fiscal intervention, and the fiscal system as a whole, on inequality and poverty. Net direct and indirect taxes combined reduce the Gini coefficient by 0.0644 points and the headcount ratio by 61 percent. When the monetized value of in-kind benefits in education and health are included, the reduction in inequality is 0.0919 Gini points. Based on the magnitudes of the marginal contributions, we find that the main driver of these reductions is the Targeted Subsidy Program, a universal cash transfer program implemented in 2010 to compensate individuals for the elimination of energy subsidies. The main reduction in poverty occurs in rural areas, where the headcount ratio declines from 44 to 23 percent. In urban areas, fiscally-induced poverty reduction is more modest: the headcount ratio declines from 13 to 5 percent. Taxes and transfers are similar in their effectiveness in achieving their inequality-reducing potential. By achieving 40 percent of its inequality-reducing potential, the income tax is the most effective intervention on the revenue side. On the spending side, Social Assistance transfers are the most effective and they achieve 45 percent of their potential. Taxes are especially effective in raising revenue without causing poverty to rise, indicating that the poor are largely spared from being taxed. In contrast, since the bulk of transfers are not targeted to the poor, they are not very effective: the most effective ones achieve 20 percent of their poverty reduction potential. The effectiveness of the Targeted Subsidy Program could be improved by eliminating the transfer to top deciles and re-allocating the freed funds to the poor.
    Keywords: Inequality, poverty, marginal contribution, CEQ framework, policy simulation.
    JEL: D31 H22 I38
    Date: 2016–07
  15. By: Borissov, Kirill (European University of St. Petersburg); Bosi, Stefano (University of Evry); Ha-Huy, Thai (University of Evry); Modesto, Leonor (Universidade Catolica Portuguesa, Lisbon)
    Abstract: We extend the Lucas' 1988 model introducing two classes of agents with heterogeneous skills, discount factors and initial human capital endowments. We consider two regimes according to the planner's political constraints. In the first regime, that we call meritocracy, the planner faces individual constraints. In the second regime the planner faces an aggregate constraint, redistributing. We find that heterogeneity matters, particularly with redistribution. In the meritocracy regime, the optimal solution coincides with the BGP found by Lucas (1988) for the representative agent's case. In contrast, in the redistribution case, the solution for time devoted to capital accumulation is never interior for both agents. Either the less talented agents do not accumulate human capital or the more skilled agents do not work. Moreover, social welfare under the redistribution regime is always higher than under meritocracy and it is optimal to exploit existing differences. Finally, we find that inequality in human capital distribution increases in time and that, in the long run, inequality always promotes growth.
    Keywords: human capital, heterogeneous skills
    JEL: J24 O15 O40
    Date: 2016–07
  16. By: Christoph Freudenberg (Institute of Public Finance Freiburg University); Tamás Berki (Magyar Nemzeti Bank, Central Bank of Hungary); Ádám Reiff (Magyar Nemzeti Bank, Central Bank of Hungary)
    Abstract: This paper studies the effect of Hungarian pension reforms between 2009-2012 on the adequacy and long-term fiscal stability of the Hungarian public pension system. For the adequacy analysis, we use a micro simulation model to project future initial pension levels relative to future gross wages. For the analysis of fiscal stability, we use a generational accounting-based macro model to forecast future yearly cash balances and calculate implicit pension liability (IPL) indicators. We find that major recent reforms have stabilized the public pension system until around 2035, but after this, mainly due to unfavorable demographic developments, we project increasing deficits that reach about 4% of GDP by 2060.
    Keywords: Pension reforms, Sustainability of pension systems, Micro simulation
    JEL: H55
    Date: 2016
  17. By: König, Johannes; Schröder, Carsten
    Abstract: We solve the problem of a social planner who seeks to minimize inequality via transfers with a fixed public budget in a distribution of exogenously given incomes. The appropriate solution method depends on the objective function: If it is convex, as in the case of the absolute mean deviation, it can be solved by an interior-point algorithm. If it is quasiconvex, as in case of the Gini coefficient, the bisection method can be used. We implement the procedures using artificial and real-world data, and show that the optimal transfer scheme need not comply with a transfer scheme that perfectly equalizes incomes at the bottom of the distribution.
    Keywords: redistribution,public transfers,inequality,optimization methods,interior-point algorithm,bisection method
    JEL: C61 D63 H23 H53 I38
    Date: 2016
  18. By: Krueger, Dirk; Mitman, Kurt; Perri, Fabrizio
    Abstract: How big are the welfare losses from severe economic downturns, such as the U.S. Great Recession? How are those losses distributed across the population? In this paper we answer these questions using a canonical business cycle model featuring household income and wealth heterogeneity that matches micro data from the Panel Study of Income Dynamics (PSID). We document how these losses are distributed across households and how they are affected by social insurance policies. We find that the welfare cost of losing one's job in a severe recession ranges from 2% of lifetime consumption for the wealthiest households to 5% for low-wealth households. The cost increases to approximately 8% for low-wealth households if unemployment insurance benefits are cut from 50% to 10%. The fact that welfare losses fall with wealth, and that in our model (as in the data) a large fraction of households has very low wealth, implies that the impact of a severe recession, once aggregated across all households, is very significant (2.2% of lifetime consumption). We finally show that a more generous unemployment insurance system unequivocally helps low-wealth job losers, but hurts households that keep their job, even in a version of the model in which output is partly demand determined, and therefore unemployment insurance stabilizes aggregate demand and output.
    Keywords: great recession; Social Insurance; Wealth Inequality
    JEL: E21 E32 J65
    Date: 2016–07
  19. By: Giuseppe Fiori (North Carolina State University); Domenico Ferraro (Arizona State University)
    Abstract: We investigate the consequences of demographic change for the effects of tax cuts in the United States over the post-WWII period. Using narratively identified tax changes as proxies for structural shocks, we establish that the responsiveness of unemployment rates to tax changes largely varies across age groups: the unemployment rate response of the young is nearly twice as large as that of prime-age workers. Such heterogeneity is the channel through which shifts in the age composition of the labor force impact the response of the aggregate U.S. unemployment rate to tax cuts. We find that the aging of the Baby Boomers considerably reduces the effects of tax cuts on unemployment.
    Date: 2016
  20. By: Daniel Teles (Department of Economics, Tulane University)
    Abstract: The majority of U.S. states have implemented tax credits that encourage donating to specific classes of nonprofits. However, the effect on the nonprofits themselves is unknown. This paper estimates the causal effect of two of the costliest programs. Arizona’s Working Poor Tax Credit (WPTC) and the Endow Iowa Tax Credit (“Endow Iowa†) provide stark contrast for analysis. The WPTC, the largest tax credit for charitable giving in terms of tax expenditure, provides a broadly targeted 100 percent credit with a cap of $200 per person. Endow Iowa provides a sharply targeted 25 percent credit with a cap of $300,000 per tax-payer. A model of donor budget constraints and preferences suggests that Endow Iowa has greater potential to induce large increases in contributions to its targeted charities than does the WPTC. Using synthetic control methods to construct counterfactuals, I estimate a 125 percent increase in contributions to community foundations in Iowa. In contrast, I find no evidence that the WPTC increased contributions to the targeted Arizona nonprofits. Evidence suggests that the growth in contribution levels in Iowa included increases in both the number of community foundations and the level of contributions per foundation.
    Keywords: Tax credits, tax incentive, subsidies, state taxation, charity, nonprofits, philanthropy.
    JEL: D64 L30 L38 H24 H71
    Date: 2016–06
  21. By: Philipp Poppitz
    Abstract: This paper examines subjective social status to test whether individual comparisons are driven by income and wealth, or social and cultural capital as defined by Bourdieu. The empirical analysis uses a cross-sectional data set of 18 European countries and a mixed model with an MCMC estimation method. The results show that material factors are just as important as non-material factors. Besides income and wealth, other dimensions of inequality including education, occupational prestige, parental background and working status are important factors to explain the gap between the income distribution and subjective social status. The most relevant institutions to explain the cross-country differences within Europe are the GDP level, average health and the education system, which also moderates the relevance of wealth on subjective social status.
    Keywords: Inequality, Perception, Social Status, Bourdieu, Education
    JEL: D31 C21 I24 Z13
    Date: 2016
  22. By: Redding, Stephen J.; Weinstein, David E.
    Abstract: The measurement of price changes, economic welfare, and demand parameters is currently based on three disjoint approaches: macroeconomic models derived from time-invariant utility functions, microeconomic estimation based on time-varying utility (demand) systems, and actual price and real output data constructed using formulas that differ from either approach. The inconsistencies are so deep that the same assumptions that form the foundation of demand-system estimation can be used to prove that standard price indexes are incorrect, and the assumptions underlying standard exact and superlative price indexes invalidate demand-system estimation. In other words, we show that extant micro and macro welfare estimates are biased and inconsistent with each other as well as the data. We develop a unified approach to demand and price measurement that exactly rationalizes observed micro data on prices and expenditure shares while permitting exact aggregation and meaningful macro comparisons of welfare over time. We show that all standard price indexes are special cases of our approach for particular values of the elasticity of substitution, constant preferences for each good, and a constant set of goods. In contrast to these standard index numbers, our approach allows us to compute changes in the cost of living that take into account both changes in the preferences for individual goods and the entry and exit of goods over time. Using barcode data for the U.S. consumer goods industry, we show that allowing for the entry and exit of products, changing preferences for individual goods, and a value for the elasticity of substitution estimated from the data yields substantially different conclusions for changes in the cost of living from standard index numbers.
    Keywords: consumer valuation bias; elasticity of substitution; new goods; price index; welfare
    JEL: D11 D12 E01 E31
    Date: 2016–07

This nep-pbe issue is ©2016 by Thomas Andrén. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.