We study an equilibrium two-sector occupational choice model – agents can be (formal or informal)... more We study an equilibrium two-sector occupational choice model – agents can be (formal or informal) entrepreneurs or workers. An informal entrepreneur faces taxation determined by the combination of her capital choice and society’s tolerance of informality. Our model is consistent with many empirical findings regarding the informal sector in Brazil, a developing economy with a large informal sector. With a calibrated version of our model, we show that as society’s tolerance of informality decreases, the informal sector employs less capital and labor, and informality decreases. We conduct several counterfactual exercises. Informality is substantially lower in economies that are less tolerant of informal activities, formal entrepreneurs have more access to financial markets, and taxation of output and labor is lower. We extend the model to consider stochastic taxation of informal activities – a higher (average) informal output taxation and its variability reduce informality.
We introduce an irregular network structure into a model of frictional, on-the-job search in whic... more We introduce an irregular network structure into a model of frictional, on-the-job search in which workers find jobs through their network connections or directly from firms. We show that jobs found through network search have wages that stochastically dominate those found through direct contact. In irregular networks, heterogeneity in the worker's position within the network leads to heterogeneity in wage and employment dynamics: better-connected workers climb the job ladder faster. Despite this rich heterogeneity from the network structure, the mean-field approach allows the problem of our workers to be formulated tractably and recursively. We then calibrate a quantitative version of our mechanism, showing it is consistent with several empirical findings regarding networks and labor markets: jobs found through networks have higher wages and last longer. Finally, we present new evidence consistent with our model that job-to-job switches at higher rungs of the ladder are more likely to use networks.
We study the macroeconomic effects of a time-varying inflation target (IT), which stochastic vola... more We study the macroeconomic effects of a time-varying inflation target (IT), which stochastic volatility follows an autoregressive process. We show that the quantitative economic effects of IT uncertainty shocks depend crucially on the Taylor-rule type adopted by the monetary authority. Following this kind of disturbance, a less severe recession and deflation is observed under a more reactive interest rate rule, while an empirical plausible degree of interest rate smoothing leads output, unemployment, and inflation to react more strongly causing the recession to be more severe and deflationary.
This paper examines the effects of weather shocks and climate change in the economy when rising t... more This paper examines the effects of weather shocks and climate change in the economy when rising temperatures independently affect household preferences and production technology. Direct temperature damages to the agent's preferences amplify the negative economic and welfare effects of temporary and permanent temperature increases. In our model, households value nature and dislike energy use in production. Temperature anomalies increase the disutility of energy use leading agents to reduce its use more dramatically when temperature increases. The short-run response of welfare to an unanticipated change in temperature is remarkably different when temperature directly affects preferences-welfare rises initially and then decreases as it returns to its steady state along with the temperature anomaly. Results of our analysis suggest that the consumption equivalent welfare for a 2.0 • C permanent increase in temperature is approximately 3 percent of GDP.
125 p.Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 2007.The third essay investigat... more 125 p.Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 2007.The third essay investigates the role played by tax enforcement policies in explaining labor supply behavior. Tax distortions can be offset by informal activities because households can substitute from market work into informal or non-taxed work. The formal sector TFP plays an important role in explaining agents' time allocation. Informal activities and tax enforcement policies can potentially explain the pattern of market work and tax rates in OECD countries; this has important welfare implications.U of I OnlyRestricted to the U of I community idenfinitely during batch ingest of legacy ETD
We study optimal human and health linear policies when there is a paternalistic motive to overcom... more We study optimal human and health linear policies when there is a paternalistic motive to overcome present bias problems of agents with heterogeneous cognitive skills. The paternalistic intervention rewards individuals for physical capital accumulation and the combined effect of health and human capital on future earnings. Our results highlight a novel effect of paternalistic policies due to the interaction between present-biased preferences and cognitive skills. We illustrate numerically that this policy package is the most effective and we analyze the relevance of agent's cognitive skills and present-biased preferences for the determination of first-best and constrained first-best optimal policies.
We model a federation of two heterogeneous jurisdictions where agents value consumption vs. natur... more We model a federation of two heterogeneous jurisdictions where agents value consumption vs. nature differently. Consumption obtained through pollution-inducing production also generates a negative externality on neighbors. We show that even with a decentralized policy we can obtain first-best efficiency by choosing a combination of pollution taxes in both regions and lump-sum transfers. Moreover, we show that optimal pollution taxes are determined only by the externality parameters, independent of agents' preferences for consumption and nature.
We introduce an irregular network structure into a model of frictional, on-the-job search in whic... more We introduce an irregular network structure into a model of frictional, on-the-job search in which workers find jobs through their network connections or directly from firms. We show that jobs found through network search have wages that stochastically dominate those found through direct contact. In irregular networks, heterogeneity in the worker’s position within the network leads to heterogeneity in wage and employment dynamics: better-connected workers climb the job ladder faster. Despite this rich heterogeneity from the network structure, the mean-field approach allows the problem of our workers to be formulated tractably and recursively. We then calibrate a quantitative version of our mechanism, showing it is consistent with several empirical findings regarding networks and labor markets: jobs found through networks have higher wages and last longer. Finally, we present new evidence consistent with our model that job-to-job switches at higher rungs of the ladder are more likely...
We study the macroeconomic effects of a pandemic-induced time-varying job separation rate (JSR). ... more We study the macroeconomic effects of a pandemic-induced time-varying job separation rate (JSR). Governments have imposed mandatory stay-at-home orders to reduce the spread of COVID-19. Uncertainties affecting labor market dynamics and the economy are tied to uncertainties surrounding the pandemic and stay-at-home orders. We compare the pandemic-induced JSR with other events that generated large increases in unemployment. We show that the economic effects of unexpected changes in the JSR and the dispersion of these changes depend crucially on the Taylor-rule type adopted by the monetary authority - more severe recessions following JSR shocks under rules with no interest rate smoothing. The generosity of fiscal policy alleviates the negative effects of pandemic-induced job separation shocks.
Limited tax capacity creates evasion opportunities that weakens the production efficiency argumen... more Limited tax capacity creates evasion opportunities that weakens the production efficiency argument. Motivated by the SIMPLES tax reform in Brazil that led to heterogeneous responses on revenues and production costs of upstream versus downstream informal firms, we characterize the optimal taxation of firms in a limited tax capacity economy to compare with the optimal value-added and turnover taxes. We show that the elasticities of misreported sales and purchase gaps to policy instruments are behavioral statistics that complement the traditional Diamond and Mirrlees (1971)’s mechanical effect of taxation. Numerical results suggest turnover taxes can be welfare enhancing vis-a-vis a value-added system.
We study an equilibrium two-sector occupational choice model – agents can be (formal or informal)... more We study an equilibrium two-sector occupational choice model – agents can be (formal or informal) entrepreneurs or workers. An informal entrepreneur faces taxation determined by the combination of her capital choice and society’s tolerance of informality. Our model is consistent with many empirical findings regarding the informal sector in Brazil, a developing economy with a large informal sector. With a calibrated version of our model, we show that as society’s tolerance of informality decreases, the informal sector employs less capital and labor, and informality decreases. We conduct several counterfactual exercises. Informality is substantially lower in economies that are less tolerant of informal activities, formal entrepreneurs have more access to financial markets, and taxation of output and labor is lower. We extend the model to consider stochastic taxation of informal activities – a higher (average) informal output taxation and its variability reduce informality.
We develop a two-agent model where agents have preferences over consumption, leisure, independent... more We develop a two-agent model where agents have preferences over consumption, leisure, independent and interdependent tax preferences - personal (own tax payments) and interpersonal (average tax payments in the economy). We characterize the optimal labor income taxation under different assumptions regarding tax preferences (tax affinity, hostility, conformity and opposition). We find that tax preferences can either amplify or reduce the marginal tax increase of the low-ability type. When individuals can hide a fraction of their earnings at a resource cost, the link between consumption and tax payments is broken. Tax evasion affects the aggregate measure of taxes and what people take into account and care about when making their optimal decisions. We find that the trade-off associated with tax preferences and consumption have their effects intensified in the optimal low-ability income tax. With evasion, the marginal income tax of high-ability types is no longer zero - it is optimal to...
In this paper we investigate how households time allocations decisions between formal and informa... more In this paper we investigate how households time allocations decisions between formal and informal sectors are related to publicly provided goods with and without market substitutes. A simple static public provision model motivates our analysis. Households consume a normal private good and a quasi-private (education) good. Household needs some public utility services to consume the private good and supply labor to formal and informal sectors. Using data from the PNAD (National Household Sample Survey) for the period 2007-2015 we construct indexes of access to three groups of publicly provided goods: (I) basic infrastructure or public utility services, (II) basic education and (III) higher education. Our logit results show a positive effect of access to public education (basic and higher) on the probability of evasion. Differently from public utility services, that affect negatively the probability of evasion, the consumption of these goods present substitute in the private sector. W...
High testosterone levels in men may inhibit tax evasion. From a laboratory experiment with 121 yo... more High testosterone levels in men may inhibit tax evasion. From a laboratory experiment with 121 young men, we present suggestive evidence of a weakly significant (at 10%) treatment effect, controlling for individual characteristics, prenatal and pubertal testosterone exposure, personality traits, medication and drugs use. Putative markers of prenatal and pubertal testosterone exposure and some personality traits might predict the decision of evading taxes. Reinforced by permutation tests for the treatment variable, a lower prevalence of tax evasion in the treated group is in line with recent results that suggest testosterone may increase prosocial or less selfish behavior.
The Automatic Exchange of Information (AEoI) is a tax standard that governs how tax authorities o... more The Automatic Exchange of Information (AEoI) is a tax standard that governs how tax authorities of participating countries exchange information related to taxpayers’ foreign investments. We quantify the mismatch between costs and benefits of information exchange agreements and investigate the impact of foreign investment taxation and costs associated with information reporting requirements on the welfare of compliant countries. This paper shows that AEoI-abiding economies would entail substantial welfare losses. For any combination of interest rate, foreign earnings taxation and compliance cost, the welfare costs of AEoI are larger for the source (small open) economy than the revenue is for the residence country. Without commitment and enforcement, countries might be tempted to deviate from such agreements and share information only partially. The paper’s result provides a rationale for sharing of AEoI infrastructure costs among jurisdictions.
We study an equilibrium two-sector occupational choice model – agents can be (formal or informal)... more We study an equilibrium two-sector occupational choice model – agents can be (formal or informal) entrepreneurs or workers. An informal entrepreneur faces taxation determined by the combination of her capital choice and society’s tolerance of informality. Our model is consistent with many empirical findings regarding the informal sector in Brazil, a developing economy with a large informal sector. With a calibrated version of our model, we show that as society’s tolerance of informality decreases, the informal sector employs less capital and labor, and informality decreases. We conduct several counterfactual exercises. Informality is substantially lower in economies that are less tolerant of informal activities, formal entrepreneurs have more access to financial markets, and taxation of output and labor is lower. We extend the model to consider stochastic taxation of informal activities – a higher (average) informal output taxation and its variability reduce informality.
We introduce an irregular network structure into a model of frictional, on-the-job search in whic... more We introduce an irregular network structure into a model of frictional, on-the-job search in which workers find jobs through their network connections or directly from firms. We show that jobs found through network search have wages that stochastically dominate those found through direct contact. In irregular networks, heterogeneity in the worker's position within the network leads to heterogeneity in wage and employment dynamics: better-connected workers climb the job ladder faster. Despite this rich heterogeneity from the network structure, the mean-field approach allows the problem of our workers to be formulated tractably and recursively. We then calibrate a quantitative version of our mechanism, showing it is consistent with several empirical findings regarding networks and labor markets: jobs found through networks have higher wages and last longer. Finally, we present new evidence consistent with our model that job-to-job switches at higher rungs of the ladder are more likely to use networks.
We study the macroeconomic effects of a time-varying inflation target (IT), which stochastic vola... more We study the macroeconomic effects of a time-varying inflation target (IT), which stochastic volatility follows an autoregressive process. We show that the quantitative economic effects of IT uncertainty shocks depend crucially on the Taylor-rule type adopted by the monetary authority. Following this kind of disturbance, a less severe recession and deflation is observed under a more reactive interest rate rule, while an empirical plausible degree of interest rate smoothing leads output, unemployment, and inflation to react more strongly causing the recession to be more severe and deflationary.
This paper examines the effects of weather shocks and climate change in the economy when rising t... more This paper examines the effects of weather shocks and climate change in the economy when rising temperatures independently affect household preferences and production technology. Direct temperature damages to the agent's preferences amplify the negative economic and welfare effects of temporary and permanent temperature increases. In our model, households value nature and dislike energy use in production. Temperature anomalies increase the disutility of energy use leading agents to reduce its use more dramatically when temperature increases. The short-run response of welfare to an unanticipated change in temperature is remarkably different when temperature directly affects preferences-welfare rises initially and then decreases as it returns to its steady state along with the temperature anomaly. Results of our analysis suggest that the consumption equivalent welfare for a 2.0 • C permanent increase in temperature is approximately 3 percent of GDP.
125 p.Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 2007.The third essay investigat... more 125 p.Thesis (Ph.D.)--University of Illinois at Urbana-Champaign, 2007.The third essay investigates the role played by tax enforcement policies in explaining labor supply behavior. Tax distortions can be offset by informal activities because households can substitute from market work into informal or non-taxed work. The formal sector TFP plays an important role in explaining agents' time allocation. Informal activities and tax enforcement policies can potentially explain the pattern of market work and tax rates in OECD countries; this has important welfare implications.U of I OnlyRestricted to the U of I community idenfinitely during batch ingest of legacy ETD
We study optimal human and health linear policies when there is a paternalistic motive to overcom... more We study optimal human and health linear policies when there is a paternalistic motive to overcome present bias problems of agents with heterogeneous cognitive skills. The paternalistic intervention rewards individuals for physical capital accumulation and the combined effect of health and human capital on future earnings. Our results highlight a novel effect of paternalistic policies due to the interaction between present-biased preferences and cognitive skills. We illustrate numerically that this policy package is the most effective and we analyze the relevance of agent's cognitive skills and present-biased preferences for the determination of first-best and constrained first-best optimal policies.
We model a federation of two heterogeneous jurisdictions where agents value consumption vs. natur... more We model a federation of two heterogeneous jurisdictions where agents value consumption vs. nature differently. Consumption obtained through pollution-inducing production also generates a negative externality on neighbors. We show that even with a decentralized policy we can obtain first-best efficiency by choosing a combination of pollution taxes in both regions and lump-sum transfers. Moreover, we show that optimal pollution taxes are determined only by the externality parameters, independent of agents' preferences for consumption and nature.
We introduce an irregular network structure into a model of frictional, on-the-job search in whic... more We introduce an irregular network structure into a model of frictional, on-the-job search in which workers find jobs through their network connections or directly from firms. We show that jobs found through network search have wages that stochastically dominate those found through direct contact. In irregular networks, heterogeneity in the worker’s position within the network leads to heterogeneity in wage and employment dynamics: better-connected workers climb the job ladder faster. Despite this rich heterogeneity from the network structure, the mean-field approach allows the problem of our workers to be formulated tractably and recursively. We then calibrate a quantitative version of our mechanism, showing it is consistent with several empirical findings regarding networks and labor markets: jobs found through networks have higher wages and last longer. Finally, we present new evidence consistent with our model that job-to-job switches at higher rungs of the ladder are more likely...
We study the macroeconomic effects of a pandemic-induced time-varying job separation rate (JSR). ... more We study the macroeconomic effects of a pandemic-induced time-varying job separation rate (JSR). Governments have imposed mandatory stay-at-home orders to reduce the spread of COVID-19. Uncertainties affecting labor market dynamics and the economy are tied to uncertainties surrounding the pandemic and stay-at-home orders. We compare the pandemic-induced JSR with other events that generated large increases in unemployment. We show that the economic effects of unexpected changes in the JSR and the dispersion of these changes depend crucially on the Taylor-rule type adopted by the monetary authority - more severe recessions following JSR shocks under rules with no interest rate smoothing. The generosity of fiscal policy alleviates the negative effects of pandemic-induced job separation shocks.
Limited tax capacity creates evasion opportunities that weakens the production efficiency argumen... more Limited tax capacity creates evasion opportunities that weakens the production efficiency argument. Motivated by the SIMPLES tax reform in Brazil that led to heterogeneous responses on revenues and production costs of upstream versus downstream informal firms, we characterize the optimal taxation of firms in a limited tax capacity economy to compare with the optimal value-added and turnover taxes. We show that the elasticities of misreported sales and purchase gaps to policy instruments are behavioral statistics that complement the traditional Diamond and Mirrlees (1971)’s mechanical effect of taxation. Numerical results suggest turnover taxes can be welfare enhancing vis-a-vis a value-added system.
We study an equilibrium two-sector occupational choice model – agents can be (formal or informal)... more We study an equilibrium two-sector occupational choice model – agents can be (formal or informal) entrepreneurs or workers. An informal entrepreneur faces taxation determined by the combination of her capital choice and society’s tolerance of informality. Our model is consistent with many empirical findings regarding the informal sector in Brazil, a developing economy with a large informal sector. With a calibrated version of our model, we show that as society’s tolerance of informality decreases, the informal sector employs less capital and labor, and informality decreases. We conduct several counterfactual exercises. Informality is substantially lower in economies that are less tolerant of informal activities, formal entrepreneurs have more access to financial markets, and taxation of output and labor is lower. We extend the model to consider stochastic taxation of informal activities – a higher (average) informal output taxation and its variability reduce informality.
We develop a two-agent model where agents have preferences over consumption, leisure, independent... more We develop a two-agent model where agents have preferences over consumption, leisure, independent and interdependent tax preferences - personal (own tax payments) and interpersonal (average tax payments in the economy). We characterize the optimal labor income taxation under different assumptions regarding tax preferences (tax affinity, hostility, conformity and opposition). We find that tax preferences can either amplify or reduce the marginal tax increase of the low-ability type. When individuals can hide a fraction of their earnings at a resource cost, the link between consumption and tax payments is broken. Tax evasion affects the aggregate measure of taxes and what people take into account and care about when making their optimal decisions. We find that the trade-off associated with tax preferences and consumption have their effects intensified in the optimal low-ability income tax. With evasion, the marginal income tax of high-ability types is no longer zero - it is optimal to...
In this paper we investigate how households time allocations decisions between formal and informa... more In this paper we investigate how households time allocations decisions between formal and informal sectors are related to publicly provided goods with and without market substitutes. A simple static public provision model motivates our analysis. Households consume a normal private good and a quasi-private (education) good. Household needs some public utility services to consume the private good and supply labor to formal and informal sectors. Using data from the PNAD (National Household Sample Survey) for the period 2007-2015 we construct indexes of access to three groups of publicly provided goods: (I) basic infrastructure or public utility services, (II) basic education and (III) higher education. Our logit results show a positive effect of access to public education (basic and higher) on the probability of evasion. Differently from public utility services, that affect negatively the probability of evasion, the consumption of these goods present substitute in the private sector. W...
High testosterone levels in men may inhibit tax evasion. From a laboratory experiment with 121 yo... more High testosterone levels in men may inhibit tax evasion. From a laboratory experiment with 121 young men, we present suggestive evidence of a weakly significant (at 10%) treatment effect, controlling for individual characteristics, prenatal and pubertal testosterone exposure, personality traits, medication and drugs use. Putative markers of prenatal and pubertal testosterone exposure and some personality traits might predict the decision of evading taxes. Reinforced by permutation tests for the treatment variable, a lower prevalence of tax evasion in the treated group is in line with recent results that suggest testosterone may increase prosocial or less selfish behavior.
The Automatic Exchange of Information (AEoI) is a tax standard that governs how tax authorities o... more The Automatic Exchange of Information (AEoI) is a tax standard that governs how tax authorities of participating countries exchange information related to taxpayers’ foreign investments. We quantify the mismatch between costs and benefits of information exchange agreements and investigate the impact of foreign investment taxation and costs associated with information reporting requirements on the welfare of compliant countries. This paper shows that AEoI-abiding economies would entail substantial welfare losses. For any combination of interest rate, foreign earnings taxation and compliance cost, the welfare costs of AEoI are larger for the source (small open) economy than the revenue is for the residence country. Without commitment and enforcement, countries might be tempted to deviate from such agreements and share information only partially. The paper’s result provides a rationale for sharing of AEoI infrastructure costs among jurisdictions.
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Papers by Marcelo Arbex