A central assumption in public finance is that individuals optimize fully with respect to the incentives created by tax policies. In this paper, we test this assumption using two empirical strategies. First, we conducted an experiment at a grocery store where we posted tax-inclusive prices for 750 products subject to sales tax for a three week period. Using scanner data, we find that posting tax-inclusive prices reduced demand by roughly 8 percent among the treated products relative to control products and stores. Second, we find that state-level increases in excise taxes (which are included in posted prices) reduce aggregate alcohol consumption signi…cantly more than increases in sales taxes (which are added at the register and hence less salient). Both sets of results indicate that tax salience a¤ects behavioral responses. We propose a bounded rationality model to explain why salience matters, and show that it matches our evidence as well as several additional stylized facts. In the model, agents incur second-order (small) utility losses from ignoring some taxes, even though these taxes have first-order (large) effects on social welfare and government revenue. Using this theoretical framework, we develop elasticity-based formulas for the efficiency cost and incidence of commodity taxes when agents do not optimize fully.

Different beliefs about the fairness of social competition and what determines income inequality influence the redistributive policy chosen in a society. But the composition of income in equilibrium depends on tax policies. We show how the interaction between social beliefs and welfare policies may lead to multiple equilibria or multiple steady states. If a society believes that individual effort determines income, and that all have a right to enjoy the fruits of their effort, it will choose low redistribution and low taxes. In equilibrium, effort will be high and the role of luck will be limited, in which case market outcomes will be relatively fair and social beliefs will be self-fulfilled. If instead, a society believes that luck, birth, connections, and/or corruption determine wealth, it will levy high taxes, thus distorting allocations and making these beliefs self-sustained as well. These insights may help explain the cross-country variation in perceptions about income inequality and choices of redistributive policies.

This paper develops a new method of estimating risk aversion using data on labor supply behavior. In particular, I show that existing evidence on labor supply behavior places a tight upper bound on risk aversion in the expected utility model. I derive a formula for the coefficient of relative risk aversion ( ) in terms of (1) the ratio of the income elasticity of labor supply to the wage elasticity and (2) the degree of complementarity between consumption and labor. I bound the degree of complementarity using data on consumption choices when labor supply varies randomly across states. Using labor supply elasticity estimates from thirty-three studies, I find a mean estimate of 1: I then show that generating> 2 would require that wage increases cause sharper reductions in labor supply than estimated in any of the studies.

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Has leisure increased over the last century? Standard measures of hours worked suggest that it has. In this paper, we develop a comprehensive measure of non-leisure hours that includes market work, home production, commuting and schooling for the last 105 years. We also present empirical and theoretical arguments for a definition of “per capita ” that encompasses the entire population. The new measures reveal a number of interesting 20 th Century trends. First, 70 percent of the decline in hours worked has been offset by an increase in hours spent in school. Second, contrary to conventional wisdom, average hours spent in home production are actually slightly higher now than they were in the early part of the 20 th Century. Finally, leisure per capita is approximately the same now as it was in 1900.

This paper studies lifetime aggregate labor supply with endogenous workweek length. Such a theory is needed to evaluate various government policies. A key feature of our model is a nonlinear mapping from hours worked to labor services. This gives rise to an endogenous workweek that can differ across occupations. The theory determines what fraction of the lifetime an individual works, not when. We find that constraints on workweek length have different consequences for total hours than total labor services. Also, we find that policies designed to increase the length of the working life may not increase aggregate lifetime labor supply.

Market work per person is roughly 10 percent higher in the U.S. than in Sweden. However, if we include the work carried out in home production, the totalamountofworkonlydiffers by 1 percent. I set up a model and show that differences in policy — mainly taxes — can account for the discrepancy in both labor supply and home production between Sweden and the U.S. These results are independent of the elasticity of labor supply.

We develop an endogenous growth model with elastic labor supply, in which agents differ in their initial endowments of physical capital. In this context, the growth rate and the distribution of income are jointly determined. We then examine the distributional impact of different ways of financing an investment subsidy. We find that policies aimed at increasing the growth rate tend to result in a more unequal distribution of pre-tax income, consistent with the positive correlation between income inequality and growth observed in the recent empirical literature. However, there seems to be no conflict between efficiency and equity if inequality is measured in terms of the distribution of welfare. JEL Classification: E62, O17, O40.

This paper studies the role of culture in shaping unemployment outcomes. The empirical analysis is based on local comparisons across a language barrier in Switzerland. This Röstigraben separates cultural groups, but neither labor markets nor political jurisdictions. Local contrasts across the language border identify the role of culture for unemployment. Our findings indicate that differences in culture explain differences in unemployment duration on the order of 20 %. Moreover, we find that horizontal transmission of culture is more important than vertical transmission of culture and that culture is about as important as strong changes to the benefit duration. JEL classification: J21, J64, Z10