Showing papers in "The Economic Journal in 2007"
TL;DR: A rapidly expanding literature on firm heterogeneity and firm level globalisation strategies has developed over the last decade as discussed by the authors, with new insights on why some firms export and others do not, why some fail to survive in export markets and some choose to produce overseas rather than export.
Abstract: A rapidly expanding literature on firm heterogeneity and firm level globalisation strategies has developed over the last decade. There are new insights on why some firms export and others do not, why some firms fail to survive in export markets and some choose to produce overseas rather than export. This article provides a synthesis and evaluation of this literature. It reviews both new theories of firms in an open economy context and the extensive microeconometric evidence base, which has now developed. It highlights the implications of this evidence base for policy and includes an assessment of how the research agenda may evolve.
1,087 citations
619 citations
TL;DR: The authors exploited a quasi-random group formation process to find evidence of peers successfully monitoring and enforcing joint-liability loans, and observed direct evidence that relationships deteriorate after default, and that through successful monitoring, individuals know who to punish and who not to punish after default.
Abstract: Lending to the poor is expensive due to high screening, monitoring and enforcement costs. Group lending advocates believe lenders overcome this by harnessing social connections. Using data from FINCA-Peru, I exploit a quasi-random group formation process to find evidence of peers successfully monitoring and enforcing joint-liability loans. Individuals with stronger social connections to their fellow group members (i.e., either living closer or being of a similar culture) have higher repayment and higher savings. Furthermore, I observe direct evidence that relationships deteriorate after default, and that through successful monitoring, individuals know who to punish and who not to punish after default.
517 citations
TL;DR: In this article, the authors analyse the factors that lead to intergenerational persistence among sons, where this is measured as the association between childhood family income and later adult earnings, and explore the decline in mobility in the UK between the 1958 NCDS cohort and the 1970 cohort.
Abstract: We analyse in detail the factors that lead to intergenerational persistence among sons, where this is measured as the association between childhood family income and later adult earnings. We seek to account for the level of income persistence in the 1970 BCS cohort and also to explore the decline in mobility in the UK between the 1958 NCDS cohort and the 1970 cohort. The mediating factors considered are cognitive skills, non-cognitive traits, educational attainment and labour market attachment. Changes in the relationships between these variables, parental income and earnings are able to explain over 80% of the rise in intergenerational persistence across the cohorts.
484 citations
TL;DR: This paper used the adoption of wrongful-discharge protection by state courts in the US from 1970 to 1999 to evaluate the empirical link between dismissal costs and productivity and found that wrongful discharge protection reduces employment flows and firm entry rates, and plants engage in capital deepening and experience a decline in total factor productivity.
Abstract: Theory predicts that mandated employment protection may reduce productivity by distorting production choices. We use the adoption of wrongful-discharge protection by state courts in the US from 1970 to 1999 to evaluate the empirical link between dismissal costs and productivity. Drawing on establishment-level data from the Census Bureau, our estimates suggest that wrongful-discharge protection reduces employment flows and firm entry rates. Moreover, plants engage in capital deepening and experience a decline in total factor productivity, indicative of altered production techniques. Evidence of strong contemporaneous growth in employment, however, leads us to view our findings as suggestive but tentative. An extensive literature explores the impact of dismissal costs - also frequently called firing costs or employment protection - on the operation of labour markets. Beginning with the seminal work of Lazear (1990), much research has focused on assessing how dismissal costs affect employment levels. Theory suggests, however, that dismissal costs may have ambiguous effects on employment levels. Dismissal costs act as a tax on firing, which reduces dismissals but also reduces hiring. The net effect of these offsetting factors is ambiguous, at least in the short run. It is perhaps not surprising therefore that the empirical literature has found widely varying effects of dismissal costs on employment levels.
478 citations
TL;DR: In this paper, a large-scale systematic analysis of the trade-off between financial performance and outreach of micro-finance institutions is presented, where three empirical contributions provide new insights with respect to why and how joint liability group lending works.
Abstract: Microfinance has received a lot of attention recently, both from policy makers as well as in academic circles. Two of the main topics that have been hotly debated are explaining joint liability group lending and its implications for reducing information asymmetries, and the trade-off between the financial sustainability and outreach of microfinance programmes. This Feature contains three novel empirical contributions providing new insights with respect to why and how joint liability group lending works. It also contains the first large-scale systematic analysis of the trade-off between financial performance and outreach of microfinance institutions.
427 citations
TL;DR: In this paper, the effects of increasing traditional welfare to introducing in-work benefits in the 15 pre-enlargement countries of the European Union were compared, using a labour supply model encompassing responses to taxes and transfers along both the intensive and extensive margins.
Abstract: This article compares the effects of increasing traditional welfare to introducing in-work benefits in the 15 (pre-enlargement) countries of the European Union. We use a labour supply model encompassing responses to taxes and transfers along both the intensive and extensive margins, and the EUROMOD microsimulation model to estimate current marginal and participation tax rates. We quantify the equity-efficiency trade-off for a range of elasticity parameters. In most countries, because of large existing welfare programmes with high phase-out rates, increasing traditional welfare is undesirable unless the redistributive tastes of the government are extreme. In contrast, the in-work benefit reform is desirable in a very wide set of cases.
415 citations
TL;DR: In this article, the authors argue that two-tier labour market reforms have a transitional "honeymoon", job creating effect and predict that in the aftermath of reforms, beyond an increase in employment, there should be a reduction in "employment inaction" and in the mean and cross-sectional variance of labour productivity.
Abstract: Labour market reforms increasing flexibility ‘at the margin’ have been recently paying out in terms of employment growth. This article argues that two-tier labour market reforms have a transitional ‘honeymoon’, job creating effect. In a dynamic model of labour demand under uncertainty, the article predicts that in the aftermath of reforms, beyond an increase in employment, there should be a reduction in ‘employment inaction’ and in the mean and cross-sectional variance of labour productivity. Based on a variety of firm-level data on Italy in the period 1995–2000, we find evidence of our empirical implications.
368 citations
TL;DR: The authors show that the models' repayment implications do not always coincide and that higher correlation of output and borrowers' ability to act cooperatively can raise or lower repayment, depending on the model.
Abstract: Theories rationalising joint liability lending are rich in implications for repayment rates. We exploit this fact to test four diverse models. We show that the models’ repayment implications do not always coincide. For example, higher correlation of output and borrowers’ ability to act cooperatively can raise or lower repayment, depending on the model. Data from Thai borrowing groups suggest that repayment is affected negatively by the joint liability rate (ceteris paribus) and social ties, and positively by the strength of local sanctions and correlated returns. Further, the relative fit of the adverse selection versus informal sanctions models varies by region.
322 citations
TL;DR: In this article, audiences and students were asked to respond to virtual decision and game situations at gametheory.tau.ac.il. Several thousand observations were collected and the response time for each answer was recorded.
Abstract: Lecture audiences and students were asked to respond to virtual decision and game situations at gametheory.tau.ac.il. Several thousand observations were collected and the response time for each answer was recorded. There were significant differences in response time across responses. It is suggested that choices made instinctively, that is, on the basis of an emotional response, require less response time than choices that require the use of cognitive reasoning.
302 citations
TL;DR: This article explored parallels between the debate prompted by Pareto's reformulation of choice theory at the beginning of the twentieth century and current controversies about the status of behavioural economics, and concluded that behavioural economists treat economics as a separate science of rational choice, independent of psychology.
Abstract: This article explores parallels between the debate prompted by Pareto’s reformulation of choice theory at the beginning of the twentieth century and current controversies about the status of behavioural economics. Before Pareto’s reformulation, neoclassical economics was based on theoretical and experimental psychology, as behavioural economics now is. Current discovered preference defences of rational-choice theory echo arguments made by Pareto. Both treat economics as a separate science of rational choice, independent of psychology. Both confront two fundamental problems: to find a defensible definition of the domain of economics, and to justify the assumption that preferences are consistent and stable. One of the most significant developments in economics over the last two decades has been the growth of behavioural economics, which draws on the theoretical and methodological approaches of psychology in explaining economic phenomena. Behavioural economists take pride in grounding their explanations on empirical hypotheses about how human beings really think and act, rather than on deductions from a priori assumptions about rational choice, and in subjecting those hypotheses to experimental test. Viewed in historical perspective, behavioural economists are trying to reverse a fundamental shift in economics which took place from the beginning of the twentieth century: the Paretian turn. This shift, initiated by Vilfredo Pareto and completed in the 1930s and 1940s by John Hicks, Roy Allen and Paul Samuelson, eliminated psychological concepts from economics by basing economic theory on principles of rational choice. From then to the 1980s, almost all the main lines of development in economic theory were aimed at
TL;DR: In this article, the authors present evidence that personal trust between group members and social homogeneity are more important to group loan repayment than general societal trust or acquaintanceship between members, and they also find some evidence of reciprocity: those who have been helped by other group members in the past are more likely to contribute in the future.
Abstract: An important question to microfinance is the relevance of existing social capital in target communities to the performance of group lending. This research presents evidence from field experiments in South Africa and Armenia, in which subjects participate in trust and microfinance games. We present evidence that personal trust between group members and social homogeneity are more important to group loan repayment than general societal trust or acquaintanceship between members. We also find some evidence of reciprocity: those who have been helped by other group members in the past are more likely to contribute in the future. During the past decade, exploring the role that social capital plays in economic behaviour has emerged as one of the most fascinating and fertile areas of economic research. Although precise definitions of social capital are notoriously difficult to pin down, one of the early pioneers of the concept, Coleman (1988), defines social capital as social structure that facilitates certain actions of actors within the structure. In his definition, Coleman specifically highlights the roles of mutual obligation, expectations and trustworthiness, social norms, social sanctions, and the transmission of information. Important studies in both developed and developing countries have analysed the impact of social capital in economic relationships. Putnam’s celebrated work, Making Democracy Work: Civic Traditions in Modern Italy (1993) and Bowling Alone: America’s Declining Social Capital (1995), brought attention to the role that social capital plays in the development of the modern state. Udry’s ground-breaking (1994) work in Nigeria illustrated how the social capital existing in traditional societies may allow for more efficient credit contracts than in developed economies with weaker social
TL;DR: The authors found that there is a strong and significant relationship between top income shares and broader inequality measures, such as the Gini coefficient, which suggests that panel data on top-income shares may be a useful substitute for other measures of inequality over periods when alternative income distribution measures are of low quality, or unavailable.
Abstract: In recent years, researchers have used taxation statistics to estimate the share of total income held by the richest groups, such as the top 10% or the top 1%. Compiling a standardised top income shares dataset for 13 developed countries, I find that there is a strong and significant relationship between top income shares and broader inequality measures, such as the Gini coefficient. This suggests that panel data on top income shares may be a useful substitute for other measures of inequality over periods when alternative income distribution measures are of low quality, or unavailable.
TL;DR: The spokes model of nonlocalized spatial competition as discussed by the authors provides a new analytical tool for dierentiated oligopoly and a representation of spatial monopolistic competition, and it is shown that an increase in the number of …rms leads to lower equilibrium prices when consumers have relatively high product valuations, but, surprisingly, to higher equilibrium prices for in-mediate consumer valuations.
Abstract: The spokes model of nonlocalized spatial competition provides a new analytical tool for dierentiated oligopoly and a representation of spatial monopolistic competition. An increase in the number of …rms leads to lower equilibrium prices when consumers have relatively high product valuations, but, surprisingly, to higher equilibrium prices for in- termediate consumer valuations. New entry alters consumer and social welfare through price, market expansion, and matching eects. With free entry, the market may pro- vide too many or too few varieties from a social welfare perspective, and the equilibrium price remains above marginal cost even when the number of …rms is arbitrarily large.
TL;DR: The authors investigated the long-term effects on immigrant earnings and employment of labour market conditions encountered upon arrival and found that early earnings assimilation depends crucially on a favorable national labour market and exposure to high local unemployment rates also affects individuals for at least ten years.
Abstract: This article investigates the long-term effects on immigrant earnings and employment of labour market conditions encountered upon arrival. We find that early earnings assimilation depends crucially on a favourable national labour market. Exposure to high local unemployment rates also affects individuals for at least ten years. To handle the issue of selective migration, we compare refugees entering Sweden during a severe and unexpected recession to refugees arriving during a preceding economic boom. The analysis of effects at the local level exploits a governmental refugee settlement policy to get exogenous variation in local labour market conditions.
TL;DR: This article investigated the relationship between the location of private sector R&D labs and university research departments in Great Britain and found that the strongest evidence for co-location is for pharmaceuticals, which is disproportionately located near to relevant university research, particularly 5 or 5* rated chemistry departments.
Abstract: We investigate the relationship between the location of private sector R&D labs and university research departments in Great Britain. We combine establishment-level data on R&D activity with information on levels and changes in research quality from the Research Assessment Exercise. The strongest evidence for co-location is for pharmaceuticals R&D, which is disproportionately located near to relevant university research, particularly 5 or 5* rated chemistry departments. This relationship is stronger for foreign-owned labs, consistent with multinationals sourcing technology internationally. We also find some evidence for co-location with lower rated research departments in industries such as machinery and communications equipment.
TL;DR: In this article, an empirical strategy for recovering estimates of spillovers in the presence of unobserved local attributes for a broadly applicable class of equilibrium sorting models is proposed, which relies on an IV strategy derived from the internal logic of the sorting model itself.
Abstract: While there is growing interest in measuring the size and scope of local spillovers, it is well understood that such spillovers cannot be distinguished from unobservable local attributes using solely the observed location decisions of individuals or firms. We propose an empirical strategy for recovering estimates of spillovers in the presence of unobserved local attributes for a broadly applicable class of equilibrium sorting models. Our approach relies on an IV strategy derived from the internal logic of the sorting model itself. We show practically how the strategy is implemented, provide intuition for our instruments, discuss the role of effective choice-set variation in identifying the model, and carry-out a series of Monte Carlo simulations to demonstrate performance in small samples.
TL;DR: This article investigated the impact of employment protection laws on the incidence of temporary employment by demographic group using the International Adult Literacy Survey (IALS) microdata and found that more stringent employment protection for regular jobs is predicted to increase the relative incidence of short-term temporary employment for less experienced and less skilled workers.
Abstract: Using 1994-98 International Adult Literacy Survey (IALS) microdata, this paper investigates the impact of employment protection laws on the incidence of temporary employment by demographic group. More stringent employment protection for regular jobs is predicted to increase the relative incidence of temporary employment for less experienced and less skilled workers. I test this reasoning using IALS data for Canada, Finland, Italy, the Netherlands, Switzerland, the United Kingdom and the United States, countries with widely differing levels of mandated employment protection. Across these countries, the strength of such mandates (as measured by the OECD) is positively associated with the relative incidence of temporary employment for young workers, native women, immigrant women and those with low cognitive ability. These effects largely hold up when I adjust for the possible sample selection due to the fact that employment to population ratios differ across countries. Moreover, the effects of protection on the young, women, and immigrants are stronger in countries with higher levels of collective bargaining coverage, suggesting a connection between binding wage floors and the allocative effects of employment protection mandates.
TL;DR: In this article, the influence of age, gender, profession and medium chosen for participation and the external validity of student behaviour (inside and outside the lab) was analyzed in a three-person bargaining experiment with 5,132 readers of the German weekly Die Zeit.
Abstract: 5,132 readers of the German weekly, Die Zeit, participated in a three-person bargaining experiment. In our data analysis we focus on (1) the influence of age, gender, profession and medium chosen for participation and (2) the external validity of student behaviour (inside and outside the lab). We find that older participants and women care more about equal distributions and that Internet users are more self-regarding than those using mail or fax. Decisions made by students in the lab are rather similar to those made by participants in the newspaper experiment, indicating a high degree of external validity of student data.
TL;DR: The aim of the New Political Economy is to understand important issues that arise in the policy sphere as mentioned in this paper, which is not, as is occasionally hinted, an effort by economists to colonise political science, rather, the main concern is to extend the competence of economists to analyse issues that require some facility with economic and political decision making.
Abstract: The aim of the New Political Economy is to understand important issues that arise in the policy sphere.1 It is not, as is occasionally hinted, an effort by economists to colonise political science. Rather, the main concern is to extend the competence of economists to analyse issues that require some facility with economic and political decision making. At the margin, the New Political Economy reverses the split that occurred between the disciplines of economics and political science at the end of the nineteenth century. This article is not a survey of the field. It is a selective and personal view of some of the themes in the literature. It is framed more as a manifesto presented in the hope that somebody who encounters these ideas for the first time here might be tempted to delve further into the literature and even contribute to it.
TL;DR: This paper investigated how changing the length of school year, leaving the basic curriculum unchanged, affects learning and subsequent earnings, using variation introduced by the West-German short school years in 1966-67, which exposed some students to a total of about two thirds of a year less of schooling while enrolled.
Abstract: This paper investigates how changing the length of school year, leaving the basic curriculum unchanged, affects learning and subsequent earnings. I use variation introduced by the West-German short school years in 1966-67, which exposed some students to a total of about two thirds of a year less of schooling while enrolled. I show that the short school years led indeed to shorter schooling for affected students. Using comparisons across cohorts, states, and secondary school tracks, I find that the short school years increased grade repetition in primary school, but had no adverse effect on the number of students attending the highest secondary school track or earnings later in life.
TL;DR: In this paper, the authors analyzed the impact of retail mergers on product variety and showed that, following a merger, a retailer may want to enhance its buyer power by committing to a "single-sourcing" purchasing strategy.
Abstract: This article analyses the impact of retail mergers on product variety We show that, following a merger, a retailer may want to enhance its buyer power by committing to a 'single-sourcing'purchasing strategy Anticipating further concentration in the retail industry, suppliers will strategically choose to produce less differentiated products, which further reduces product variety If negotiations are efficient, the overall loss in product variety may reduce consumer surplus and total welfare With linear tariffs, however, there may be a countervailing effect as the more powerful retailer passes on lower prices to final consumers © 2007 The Author(s) Journal compilation Royal Economic Society 2007
TL;DR: In this article, the authors present experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation, and the experimental sessions demonstrate considerable persistence and regular cyclical patterns.
Abstract: This article presents experimental evidence from a monetary sticky price economy in which output and inflation depend on expected future inflation. Rational inflation expectations do not allow for persistent deviations of output and inflation following a monetary shock. In the experimental sessions, however, output and inflation display considerable persistence and regular cyclical patterns.
TL;DR: In this article, the authors analyse the globalisation process in a model where firms differ in productivity and quality, and a lower bound to quality emerges, below which firms cannot sell, however low their (local) wage rate.
Abstract: The globalisation process is analysed in a model where firms differ in productivity and quality. A lower bound to quality emerges, below which firms cannot sell, however low their (local) wage rate. The range of quality levels between the maximum and this lower bound shifts upwards when trade is liberalised (the ‘moving window’). The initial phase of globalisation, associated with trade liberalisation, in an initially segmented (but not autarkic) world, may reduce welfare in countries with intermediate levels of capability, but these countries may be the most important gainers as capabilities are transferred in subsequent phases.
TL;DR: In this paper, the effect of regional expenditure and revenue shocks on price differentials for 47 US states and 9 EU countries was studied, using sign restrictions on the dynamics of expenditures, revenues, deficits and output.
Abstract: We study the effect of regional expenditure and revenue shocks on price differentials for 47 US states and 9 EU countries. We identify shocks using sign restrictions on the dynamics of expenditures, revenues, deficits and output and construct two estimates for structural price differentials dynamics, one for the average and one for each unit, which optimally weight information contained in the data for all units. On average, expansionary fiscal disturbances produce positive, while distortionary balance budget shocks produce negative price differential responses. The negative price differentials responses in some units is partially explained by spillovers and labour supply effects.
TL;DR: In this article, the authors examined market power and generator behaviour in the English and Wales wholesale electricity market, known as the Pool, in the second half of the 1990s and found that the two largest generators could have profitably increased their output from the beginning of 1997.
Abstract: This article shows that generators exercised considerable market power in the England and Wales wholesale electricity market in the late 1990s. This is surprising because static oligopoly models predict that falling market concentration should have reduced market power. The article tests the equilibrium assumption of these models that each generator's bids should maximise its short-run profits given the bids of other generators. It finds that the two largest generators could have profitably increased their output from the beginning of 1997. Their behaviour was consistent with tacit collusion. This article examines market power and generator behaviour in the England and Wales (E&W) wholesale electricity market, known as the Pool, in the second half of the 1990s. I show that generators exercised considerable market power in the late 1990s despite falling market concentration. This is surprising because static oligopoly models, which have been widely used to model wholesale electricity markets, predict that falling market concentration should reduce the incentives and ability of generators to raise prices above competitive levels. I further examine the applicability of these models by testing their Nash equilibrium assumption that each generator's bids should maximise its short-run profits given the bids of other generators. Consistent with the market power results, I find significant deviations from static profit-maximising behaviour for the two largest generators, National Power (NP) and PowerGen (PG), from the beginning of 1997 as they could have increased their short-run profits by submitting lower bids and increasing their output. Their behaviour was consistent with tacit collusion, but it could also be explained by an attempt to raise the prices they could negotiate in future hedging contracts by increasing current Pool prices. Figure 1 illustrates the motivation for the article by showing what happened to wholesale electricity prices, market concentration and the prices of two major fuels used in generation during the lifetime of the Pool. Concentration and fuel prices, which are the largest component of generators' marginal costs, fell significantly but average electricity prices changed relatively little. This article focuses on the second half of the 1990s when the fall in concentration and fuel prices was particularly dramatic. The article has two main parts. Section 2 measures the degree of market power being exercised in the Pool from 1995 to 2000 by comparing realised Pool prices with estimates of competitive benchmark prices. I find that, consistent with the suggestive pattern in Figure 1, generators exercised considerable market power from the beginning of 1997. The degree of market power which I find is comparable to that identified by Borenstein et al. (2002) at the height of California's electricity crisis and it is at least
TL;DR: In this article, the authors estimate the dynamic relationship between employment in RD Kydland and Prescott (1982); Christiano and Eichenbaum (1992) and estimate the number of patents per year in the US and Germany.
Abstract: In this article we estimate the dynamic relationship between employment in RD Kydland and Prescott (1982); Christiano and Eichenbaum (1992). From an empirical point of view Jones (2002, p. 92) notices that the secular increase in patented innovations per year (and of scientists and engineers) in the US since 1880 corresponded to a secular growth in labour productivity. Specifically he points out that the 1970s experienced a decline in innovation rates per year (as measured by patent applications) while the 1990s exhibited a significant acceleration in innovations per year. In both cases labour productivity followed a similar pattern. A related interesting empirical observation is that labour productivity in EU countries, after catching up with the US labour productivity at a sustained rate during the 1970s and 1980s (Gordon, 2004; Van Ark et al., 2003), slowed and lost ground beginning with the 1990s and in particular after 1995. Examining the rates of innovation in the US and in Germany as measured by the number of patents per year (Figures 1 and 2), we see how those indicators suggest a possible role of innovation in explaining the productivity patterns. Germany experienced sustained growth of innovation rates until the late 1980s, followed by a decline in the early 1990s, which it had not still fully recovered by the end of the decade. To the contrary, the US had stagnating or declining innovation rates up until the early 1980s, followed by a surge of innovative activity, especially in 1995. These facts suggest that innovation rates, with a possible time lag, might explain productivity accelerations and slowdowns and might also explain the narrowing or widening of productivity gaps.
TL;DR: In this article, the authors show that the patterns of intergenerational earnings mobility in Denmark, Finland and Norway, unlike those for the US and the UK, are highly nonlinear.
Abstract: We show that the patterns of intergenerational earnings mobility in Denmark, Finland and Norway, unlike those for the US and the UK, are highly nonlinear. The Nordic relationship between log earnings of sons and fathers is flat in the lower segments of the fathers earnings distribution ‐ sons growing up in the poorest households have the same adult earnings prospects as sons in moderately poor households ‐ and is increasingly positive in middle and upper segments. This convex pattern contrasts sharply with our findings for the US and the UK, where the relationship is much closer to being linear. As a result, cross-country comparisons of intergenerational earnings elasticities may be misleading with respect to transmission mechanisms in the central parts of the earnings distribution and uninformative in the tails of the distribution. It is now a stylised fact that intergenerational earnings mobility is higher in the Nordic welfare-state economies than in more market-oriented economies such as the US; see,
TL;DR: In this paper, the degree of tax noncompliance using evidence from unaudited tax returns is estimated using evidence derived from the relationship between reported charitable contributions and reported income from wages and salary as compared to alternative reported income sources such as self-employment, farm and other small business income.
Abstract: This article estimates the degree of tax noncompliance using evidence from unaudited tax returns. Measurements of noncompliance are derived from the relationship between reported charitable contributions and reported income from wages and salary as compared to alternative reported income sources such as self-employment, farm and other small business income. Assuming that the source of one's income is unrelated to one's charitable inclinations and that the ratio of true income to taxable income does not vary by income source, any difference in the relationship between charitable contributions and the source of income can be attributed to (relative) underreporting by the individual. We find that the implied amount of noncompliance is significant and that it varies by source of income, as well as between positive and negative values of each type of income. Tax evasion creates horizontal inequity and, if opportunities for evasion are correlated with income, complicates the attempt to achieve vertical equity. Evasion also imposes economic costs because taxpayers expend resources to facilitate evasion and the tax agency expends resources to contain it. The equity and efficiency implications of tax evasion, and optimal policy to address it, depend on its magnitude and nature which, for obvious reasons, is difficult to ascertain. This article contributes to that effort by developing a new method for estimating the extent and nature of tax noncompliance based on evidence from unaudited tax returns. This evidence is derived from the relationship between reported charitable contributions and reported taxable income from various sources such as wages and salaries, selfemployment, nonfarm small-business and farm income, and is based on the assumptions that the source of one's income is unrelated to one's charitable inclinations and that the ratio of true income to taxable income does not vary by income source. We find that the implied amount of noncompliance on non-wageand-salary income is substantial and that it varies among these sources of income as well as between positive and negative values of each type of income. On average, reported positive self-employment, nonfarm small-business and farm income must be multiplied by a factor of 1.54, 4.54 and 3.87, respectively, in order to obtain true income. Even those individuals who report zero income for a specific income source, but file the schedule for that source, are estimated to have true positive income. Finally, those households that report negative schedule income may actually have greater true income than those households that report positive income.
TL;DR: In this article, the authors investigate the determinants of generosity in an experiment on charity to real-life welfare recipients and test the effects of various measures of unconditional altruism and conditional or reciprocal altruism.
Abstract: This article investigates the determinants of generosity in an experiment on charity to real-life welfare recipients. It tests the effects of various measures of unconditional altruism and conditional or reciprocal altruism. The results show strong support for conditional or reciprocal altruism. However, people who are self-reported unconditional altruists make offers that are highly elastic with respect to the apparent worthiness of the recipient. One interpretation of this is that self-reported unconditional altruists have combined desires to help others and to reciprocate; unconditional altruism and reciprocal altruism may not be independent motives. I refer to this combination as empathic responsiveness.