ResearchResearch Statement [PDF]
Taxation and Volatility
- Optimal Taxation with Volatility a Theoretical and Empirical Decomposition. (Job Market Paper) [ | Paper PDF | Presentation PDF ]
I demonstrate U.S. state tax revenue volatility increased by 500 percent in the 2000s relative to previous decades. State governments' inability to smooth volatile revenue streams, due to self-imposed balanced budget restrictions, has caused this increased volatility to magnify U.S. state budget crises. The theoretical model in this paper demonstrates three possible causes of the increase in volatility: changes in tax rates (which change the tax bases states rely on), economic conditions, or tax bases (e.g., what types of consumption are taxable). Despite amplified business cycles in the 2000s and important tax base changes such as the increase in e-commerce, I find changes in tax rates explain 70 percent of the increase in tax revenue volatility in the 2000s. Motivated by this result, I create a normative model of taxation to consider how governments should tax different volatile tax bases. Typically, taxes are set optimally by minimizing deadweight loss, which in a special case reduces to setting tax rates that are inversely proportional to their elasticities of demand. This model demonstrates that when tax bases are volatile the optimally set tax rates must consider costs from volatile tax revenues and trade these costs off with deadweight loss. I estimate this optimal condition and find thirty-six states in 2005 relied inefficiently on either the income or sales tax, up from twenty-six states in 1965. This increase in inefficiency is due to an increased reliance on the income tax; twelve more states relied inefficiently on the income tax in 2005 than did in 1965. This paper finds strong evidence the increase in tax-revenue volatility state governments recently experienced is due to changes in the tax bases on which governments rely, causing states to expose their revenues to unnecessary levels of risk.
- Welfare Consequences of Volatile Tax Revenue. [ | Paper PDF ]
This study evaluates the impact of volatile tax revenue streams on state governments and the resulting welfare implications, both theoretically and in a calibrated model. Tax-revenue volatility causes the level of public good to be volatile because governments are unable to perfectly smooth volatile revenue streams. However, the government is willing to accept some volatility because it enables them to absorb some of the production risk and lower private consumption volatility. Tax revenue volatility is shown to be of first-order importance, in contrast to deadweight loss which has been shown to be of second-order importance. Therefore even small deviations from the optimal tax policy impacts welfare negatively. The calibrated model uses data from the U.S. Census and the Bureau of Economic Analysis and estimates the welfare loss associated with governments minimizing deadweight loss irrespective of the costs to volatility to be $120 billion.
- Optimal Tax Portfolios An Estimation of Government Tax Revenue Minimum-Variance Frontiers. [ | Paper PDF ]
This paper creates a method for estimating government minimum-variance frontiers by formalizing optimal government portfolio analysis. Each tax base a government can tax (e.g. consumption, personal income, and corporate income) is treated as an asset in which the government can invest. In traditional portfolio analysis the weights an investor puts on different assets has no affect on the asset's mean, variance, and covariance. However, as the government puts more weight on one if its assets by increasing the tax rate, the assets mean, variance, and covariance changes. The theoretical model demonstrates how leakage from deadweight loss and horizontal externalities from other tax bases change the mean, variance, and covariance of the government's assets. If these considerations are not accounted for, the government will systematically underestimate the increase in volatility of its tax revenue from an increase in one of its tax rates. Therefore, leakage and horizontal externalities need to be considered when estimating the minimum-variance frontier for governments. The method I develop in this paper to estimate a government's minimum-variance frontier is demonstrated using data from U.S. state governments from 1951-2010. This application demonstrates how state governments have shifted their tax portfolios and the heterogeneity that exists across states and across time within a state.
Dynamic City Growth
- A Sequential Growth Model of Cities with Rushes. [ | Paper PDF | Presentation CDF (Requires mathematica or free player) ]
This paper models the life-cycle of a city from creation to steady state. In the model, cities are subject to both economies and diseconomies of scale, causing average income within a city to have an inverted U-shape with respect to city population. Cities provide benefits to migrants based on when the migrants enter the city. These rank benefits model the fact that early migrants benefit from being able to choose the best land, establish firms first, and have a larger impact on the institutions within the city. Homogenous individuals, living in existing cities that grow at an exogenous rate, decide in an uncoordinated manner both when to create, and when to migrate to, new cities. The model produces an endogenous pattern of migration that is able to match three empirical facts: 1) most cities continue to grow over time, 2) cities grow sequentially, and 3) some cities experience rushes in migration. Finally, the model demonstrates the impacts of the income and property tax on city creation and growth and compares the life-cycle of a self-organized city with the optimal pattern of city growth.
- Barriers to Migration in a System of Cities. [ | Paper PDF | Presentation PDF ]
This paper creates a model of city creation and growth to analyze how different barriers to migration affect the resulting system of heterogeneous cities. How many and which set of cities are created is shown to differ based on the barriers to migration that exist in the system of cities. In this model individuals create and move across cities to maximize their utility. Barriers to migration affect the fundamental wedge that is created when uncoordinated individuals disregard the impact of their migration decision on people in the city they choose to live in. I find that there exists an optimal level of barriers to migration such that if the barriers are larger or smaller the population distribution and the number and set of cities created are suboptimal. Surprisingly, I find when barriers to migration are capitalized as fees charged to migrants the population is efficiently distributed across the optimal number and set of cities. This result extends Knight's toll road result to the extensive margin in the context of cities.
- The Optimal Population Distribution Across Cities and the Private-Social Wedge. (with David Albouy) [ | Paper PDF ]
The conventional wisdom is that market forces cause cities to be inefficiently large, and that public policy should limit city sizes. This wisdom assumes, unrealistically, that city sites are homogeneous, that land is given freely to incoming migrants, and that federal taxes are neutral. In a general model with city heterogeneity and cross-city externalities, we show that cities may be inefficiently small. This is illustrated in a system of monocentric cities with agglomeration economies in production, where cross-city externalities arise from land ownership and federal taxes. A calibrated model accounting for heterogeneity suggests that in equilibrium, cities may be too numerous and under-populated.
- Frank Knight's New Welfare Theorem: An Investigation and Modern Application (with Steve Salant)
- Unpacking Skill and Luck (with Scott Page) [ | Paper PDF | Presentation PDF ]
In this paper, we construct a model in which two players compete for a payoff. The outcome of the contest depends on the differences in the skills of the agents as well as on luck. The skill of each player depends on her exogenous ability and her effort. We first show how equilibrium effort depends on the amount of luck in the game as well as the payoff and the difference in exogenous ability. We then derive levels of luck that maximize total effort. We then demonstrate show how the ability-skill distortion, the change between realized skill differences and innate ability differences depends on payoffs and levels of luck. that We then extend this game to allow the players to increase or decrease the amount of luck and find that the advantaged player always has an incentive to offset any additional luck created by the weaker player. Finally, we consider multi-stage games, in which the abilities of the player in later rounds depend on the outcomes of earlier rounds.
- The Merger Failure Puzzle: A Tax Wedge Explanation (with Eric Ohrn) [ ]
The existing literature considers a merger to be a failure if the stock value of the acquiring firm does not rise relative to market trends over a given period of time after the merger. By this metric, approximately one half of all mergers and acquisitions fail. That so many mergers and acquisitions fail is a puzzle that has not been sufficiently explained. This paper produces a model that explains this puzzle by redefining a successful merger as a merger that produces a return larger than the opportunity cost rate of return. The opportunity cost rate of return depends on taxation and firm specific investment opportunities. We find that increases in taxation and decreases in firm specific investment opportunities increase the proportion of possible mergers that are successful for firms. The model is tested empirically by exploiting variation in tax rates, firm size, firm ownership, share buy backs, and dividend payments using data from Zephyr and CRSP. Finally, the paper considers welfare implications of tax induced merger behavior. Capital gains and dividend taxation produce a wedge between socially efficient mergers and privately efficient mergers such that increases in these tax rates increase the proportion of mergers that are privately efficient but socially inefficient. Therefore capital gains and dividend taxation cause deadweight loss by inducing inefficient mergers.
TeachingTeaching Statement [PDF]
- Game Theory (Graduate) Economics 602:
Fall 2010 with Prof. Daisuke Nakajima.
Winter 2012 with Prof. Daisuke Nakajima.
- General Equilibrium (Graduate) Economics 603:
Winter 2011 with Prof. Steve Salant.
- Microeconomics preliminary exam summer course:
Summer 2010 and Summer 2011.
- Game Theory (Undergraduate) Economics 409:
Fall 2008 with Prof. Daisuke Nakajima.
- Guest Lecturer:
Public Finance (Graduate) Economics 684.
Urban Economics (Undergraduate) Economics 487.
Natural Resources (Graduate) Economics 661.
Fellowships and Awards
- Rackham one-term fellowship, 2012
- IGERT National Science Foundation Fellowship, 2007 - 2011Top graduate student instructor (economics department), 2011
- Distinction microeconomic preliminary exam, 2008
- Summer Research Apprenticeship, Department of Economics, 2008
Conferences and Invited Talks
- Annual North American Meeting of the Regional Science Association International-UEA.
Presenter, Optimal Taxation with Volatility, Providence, RI, November 2012.
Presenter, Barriers to Migration in a System of Cities, Miami, FL, November 2011.
Presenter, The Dynamic Formation and Growth of Cities, Denver, CO, November 2010.
Presenter, The Optimal City Size, San Francisco, CA, November 2009.
- National Tax Association.
Presenter, Optimal Taxation with Volatility, Providence, RI, November 2012.
Participant, New Orleans, LA, November 2011.
Discussant, Chicago, IL, November 2010.
Participant, Denver, CO, November 2009.
- Congress of the International Institute of Public Finance.
Presenter, Optimal Taxation with Volatility, Dresden, Germany, August 2012.
Participant, Ann Arbor, MI, August 2011.
- U.S. Treasury
Invited Speaker, Optimal Taxation with Volatility, August 2012.
- American Economic Association - AREUEA.
Presenter, The Optimal City Size and the Social-Private Wedge, Denver, CO, November 2011.
- NBER summer Institute-Economics of Real Estate and Local Public Finance.
Participant, Boston, MA, July 2011.
Participant, The Optimal City Size and the Social-Private Wedge, Boston, MA, July 2010.
- Skill vs Luck Disentangling Success in Complex Systems.
Presenter, Unpacking Skill and Luck Ann Arbor, MI, February 2011.
Student-Presenter, Institutional Design, Boston, MA, May 2009.
- Referee: Journal of Public Economics and The Annals of Regional Science.
- Affiliations: American Economic Association, International Institute of Public Finance, National Tax Association, Urban Economics Association.
- 2010 OMnI/Shodor Modeling Workshop at Oberlin College.
- 2009 Research Assistant for Prof. Scott Page.