Income Segregation from Local Income Taxation When Households Differ in Both Preferences and Incomes

This paper presents a model of an urban area with local income taxes used to finance a local public good. Households differ in both incomes and their taste for housing. The existence of a segregated equilibrium is shown in a calibrated two-community model assuming single-peaked distributions for both income and housing taste. The equilibrium features income segregation of the population across the communities. The segregation is, however, imperfect: some rich households can also be found in poor communities and vice-versa. The calibrated model is able to explain the substantial differences in local income tax levels and average incomes across communities as observed in e.g. Switzerland. The numerical investigation reveals that the ordering of community characteristics critically depends on the substitutability between the public and the private good. The numerical investigation also suggests that taste heterogeneity reduces the distributional effects of local tax differences. The numerical investigation furthermore suggests that the rich community is able to set lower taxes when it is small.Income Segregation, Income Sorting, Fiscal Decentralization, Income Taxation, Local Public Goods

Income Stratifcation in Multi-Community Models

This paper presents necessary conditions for stratification of the population in multi-community models with housing markets and heterogeneous households. The conditions for the sorting of the population according to income classes or other dimensions of heterogeneity are established without explicitly describing the household utility function and budget constraint. They therefore apply to a broad class of models, including models with income taxation and property taxation. The stratification conditions in the existing literature are surveyed using a common framework and a series of new and less specific models are proposed. The analysis suggests that in models with income taxation, stratification can often only be established under very specific assumptions on the household's preferences. Furthermore, stratification cannot be ensured with progressive or regressive tax schemes.stratifcation; fiscal federalism; income taxation; local public goods

Equilibrium and Stratification with Local Income Taxation when Households Differ in both Preferences and Incomes

This paper presents a model of an urban area with local income taxes used to finance a local public good. Households differ in both incomes and their taste for housing. The existence of a stratified equilibrium is shown in a calibrated two-community model assuming realistic single-peaked distributions for income and housing taste. The equilibrium features stratification of households by both incomes and tastes. The high-tax community shows lower housing prices and lower public good provision than the low-tax community. The model is able to explain the substantial differences of the local income tax level and of average income across communities as e.g. observed in Switzerland. The numerical investigation suggests that taste heterogeneity reduces the distributional effects of local tax differences. Tax differences across communities decrease with increasing taste heterogeneity. The numerical investigation also suggests that the relative size of the individual jurisdictions has great impact on the equilibrium situation. The ability of the rich community to set low taxes is higher when this community is physically small. However, a tax 'h(e)aven' need not be small.stratifcation; fiscal federalism; income taxation; local public goods

The Intergenerational Transmission of Divorce: A Fifteen-Country Study with the Fertility and Family Survey

Studies mainly from the United States provide evidence that children of divorced parents face a higher risk of divorce in their own marriages. We estimate and analyze the effects of divorce transmission using comparative individual data from the United Nations for 13 eastern and western European countries as well as for Canada and the United States. We find substantial and highly statistically significant transmission effects in all samples. This shows that the intergenerational transmission of divorce is a widespread phenomenon observed without a single exception in our data covering a large number of countries with differing historical, institutional, and cultural contexts.Divorce, Divorce Risk, Intergenerational Transmission, Consequences of Divorce, Child Well-being

Teaching to do economics with the computer

This paper presents the course "Doing Economics with the Computer" we taught since 1999 at the University of Bern, Switzerland. "Doing Economics with the Computer" is a course we designed to introduce sophomores playfully and painlessly into computational economics. Computational methods are usually used in economics to analyze complex problems, which are impossible (or very difficult) to solve analytically. However, our course only looks at economic models, which can (easily) be solved analytically. This approach has two advantages: First, relying on economic theory students have met in their first year, we can introduce numerical methods at an early stage. This stimulates students to use computational methods later in their academic career when they encounter difficult problems. Second, the confrontation with the analytical analysis shows convincingly both power and limits of numerical methods. Our course introduces students to three types of software: spreadsheet and simple optimizer (Excel with Solver), numerical computation (Matlab) and symbolic computation (Maple). The course consists of 10 sessions, we taught each in a 3-hour lecture. In the 1st part of each session we present the economic problem, sometimes its analytical solution and introduce the software used. The 2nd part, in the computer lab, starts the numerical implementation with step-by-step guidance. In this part, students work on exercises with clearly defined questions and precise guidance for their implementation. The 3rd part is a workshop, where students work in groups on exercises with still very clear defined questions but no help on their implementation. This part teaches students how to practically handle numerical questions in a well-defined framework. The 4th part of a session is a graded take home assignment where students are asked to answer general economic questions. This part teaches students how to translate general economic questions into a numerical task and back into an economically meaningful answer. A short debriefing in the following week is part 5 and completes each session

Estimating the rivalness of state-level inward FDI

Decentralized fiscal decision making is more likely to be optimal if regional tax bases are non-rival, in the sense that one region's gain is no other relevant region's loss. We develop a method for estimating the rivalness of tax bases using the underlying structures of the conditional logit, Poisson and nested logit models. We use this method to estimate the effect of state-level capital taxation on U.S. inward foreign direct investment. While the results are rather noisy, the assumption of perfect non-rivalenss can in some cases be rejected, but the assumption of perfect rivalness cannot. Competition over FDI across U.S. states may well be a zero-sum game.firm location, FDI, conditional logit, nested logit, poisson count model

How Fiscal Decentralization Flattens Progressive Taxes

We study the tension between fiscal decentralization and progressive taxation. We present a multi-community model in which the local income tax rate is determined by an exogenous progressive tax schedule and a tax shifter that can differ across communities. The progressivity of the tax schedule induces a self-sorting process that results in substantial though imperfect income sorting. Rich households are more likely to locate themselves in low tax communities than poor households. The actual tax structure is thus less progressive than the exogenous tax schedule. To investigate the quantitative implications of our model, we calibrate a fully-specified version to the largest metropolitan area in Switzerland. The equilibrium values of the simulation show the same pattern across communities as we observe in this area. The theoretical result is challenged by estimating the actual tax structure faced by the households in this area. We find that the actual tax structure is indeed substantially less progressive than the fixed tax schedule.Progressive Taxation, Fiscal Decentralization, Income Segregation

On the Equivalence of Location Choice Models: Conditional Logit, Nested Logit and Poisson

It is well understood that the two most popular empirical models of location choice - conditional logit and Poisson - return identical coefficient estimates when the regressors are not individual specific. We show that these two models differ starkly in terms of their implied predictions. The conditional logit model represents a zero-sum world, in which one region's gain is the other regions' loss. In contrast, the Poisson model implies a positive-sum economy, in which one region's gain is no other region's loss. We also show that all intermediate cases can be represented as a nested logit model with a single outside option. The nested logit turns out to be a linear combination of the conditional logit and Poisson models. Conditional logit and Poisson elasticities mark the polar cases and can therefore serve as boundary values in applied research.firm location, residential choice, conditional logit, nested logit, Poisson count model

The Effect of Agglomeration Size on Local Taxes

Standard tax competition models predict a ‘race-to-the-bottom’ of corporate tax rates when firms are mobile. Recent theoretical literature has qualified this view by offering a theoretical explanation why this extreme prediction need not occur: central regions with large clusters of economic activity are able to set positive tax rates without fearing to lose firms to peripheral regions as the firms would forego ‘rents’ from agglomeration economies. In this paper, we study whether local policy makers effectively tax such agglomeration rents. We test this with panel data from Swiss municipalities between 1985 and 2005. We find that large urban areas set indeed higher tax rates than small ones. This is consistent with the theoretical prediction. Within urban areas, however, municipal tax rates are unrelated to the size of economic activity in and around municipalities while they are positively related to the size of the political jurisdiction. We see this result as evidence that the standard tax competition model for asymmetric jurisdictions is at work in the competition of municipalities within an urban area. Both results are robust to controlling for reverse causality by using instrumental variables. Controlling for fixed effects in a 20 year panel is non-informative and neither supports nor contradicts these findings. As a robustness check we introduce an new measure of cluster intensity which considers the varying intensities in agglomeration economies across sectors.agglomeration, local taxation, corporate taxes, tax competition

Multistep Predictions for Multivariate GARCH Models: Closed Form Solution and the Value for Portfolio Management

The missing wage rigidity in general equilibrium models of efficiency wages is an artifact of the external wage reference perspective conventionally adopted by the literature. Efficiency wage models based on an internal wage reference perspective are capable of generating strong wage rigidity. We propose a structural model of efficiency wages that is broadly consistent with the reported evidence on fairness in labor relations and rent-sharing. Our model provides a robust explanation for wage rigidity and procyclical effort. It also rationalizes reciprocal behavior by workers and the observation that firm productivity is a significant predictor of wage setting.multivariate GARCH models; volatility forecasts; portfolio optimization; minimum variance portfolio