Notches / Alan S. Blinder, Harvey S. Rosen.

By:

Blinder, Alan S

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Material type: Text

TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w1416.Publication details: Cambridge, Mass. National Bureau of Economic Research 1984.Description: 1 online resource: illustrations (black and white)Subject(s):

E - Macroeconomics and Monetary Economics

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Abstract: Economists have an instinctively negative reaction to any government program that creates a "notch," that is, a discontinuity in a budget constraint. For example, welfare programs like public housing are structured so that a finite lump of benefits is lost all at once when a household's income crosses a certain threshhold. Such notches deserve their bad reputation --they effectively impose a high marginal tax rate over a small income range, which no doubt discourages work and promotes welfare dependency. However,this paper argues that in other contexts, tax and subsidy plans with notches should at least be considered as serious contenders when public policy seeks to encourage or discourage some activity. Using simulations,we show how notch schemes can dominate traditional linear schemes using a standard efficiency criterion.

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Previous	nber w14157 The Value of Life in General Equilibrium /	nber w14158 Short Sales and Trade Classification Algorithms /	nber w14159 Influence, Information Overload, and Information Technology in Health Care /	nber w1416 Notches /	nber w14160 Random Walk or A Run: Market Microstructure Analysis of the Foreign Exchange Rate Movements based on Conditional Probability /	nber w14161 Estimating Derivatives in Nonseparable Models with Limited Dependent Variables /	nber w14162 Edgeworth Cycles Revisited /	Next

August 1984.

Economists have an instinctively negative reaction to any government program that creates a "notch," that is, a discontinuity in a budget constraint. For example, welfare programs like public housing are structured so that a finite lump of benefits is lost all at once when a household's income crosses a certain threshhold. Such notches deserve their bad reputation --they effectively impose a high marginal tax rate over a small income range, which no doubt discourages work and promotes welfare dependency. However,this paper argues that in other contexts, tax and subsidy plans with notches should at least be considered as serious contenders when public policy seeks to encourage or discourage some activity. Using simulations,we show how notch schemes can dominate traditional linear schemes using a standard efficiency criterion.