| Summary: | This thesis comprises three chapters, each studying the design of a different economic policy. The first chapter proposes a new industrial policy designed to prevent coordination failures. The second chapter characterizes the design of efficient economic sanctions. The third chapter studies income taxation in the presence of household heterogeneity.
The first chapter proposes a new way that industrial policymakers can design targeted subsidies in the presence of multiple equilibria. Inefficient multiplicity is common in models of agglomeration, even under policies designed according to the standard, Pigouvian rule. I propose a “super-Pigouvian” policy-setting role that simultaneously addresses externalities and selects the efficient equilibrium. The main idea behind this policy is to compensate households for not only their actions’ direct effects but also their indirect effects through influences on other households’ behavior. After demonstrating the theoretical properties of this policy, I quantify its potential effects in an empirical application to South Korea. In a calibrated, dynamic model of structural transformation, super-Pigouvian policy achieves moderate welfare gains compared to the worst equilibrium supported by Pigouvian policy.
The second chapter studies the design of international trade sanctions. Specifically, I ask what trade taxes (tariffs and export taxes) a sanctioning country can use to decrease the economic welfare of a trading partner at the least economic cost to itself. My main result draws a close connection between this problem and the well-understood problem of designing trade taxes for terms-of-trade manipulation. This connection has several useful implications for sanction design: First, small sanctions increase welfare in the sanctioning country. Second, sanctions target the same goods as terms-of-trade manipulation, but with greater intensity. Third, sanctions ignore elasticities of demand and supply in the sanctioning country. Finally, sanctions treat imports and exports asymmetrically.
The third chapter (joint with André Sztutman) considers how income taxes should be designed when one accounts for heterogeneity households’ tax responses. We address this question by providing a test that passes if and only if there exists a weighted utilitarian planner for whom taxes are locally optimal. This test incorporates standard sufficient statistics—such as the shape of the income distribution and mean elasticities of taxable income—as well as a novel ingredient: the variance of elasticities conditional on income. Theoretically, we show that the test fails when these variances are sufficiently high. Empirically, we find they are indeed large in a panel of US tax returns. We thereby conclude, without taking a stance on redistributive preferences, that there are welfare-improving tax reforms.
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