People are different and those differences can and should have an impact on economic policy. For example, raising taxes on gasoline would affect the economic welfare of different individuals differently. This proposed research is about allowing for individual differences in estimating economic effects. Previous research has allowed for such differences in quite limited ways. The research outlined here will allow for very general differences across individuals.

Three topics will be considered in the proposed research. The first topic is how to allow for people to be different when estimating the average welfare effect of price increases. This research will be applied to gasoline demand in the US. There the average effect of various price increases will be estimated from recent data. The results will be useful for evaluating the welfare effects of potential increases in gasoline taxes.

The second topic is allowing for individual differences in estimating the effect of taxes on taxable income. The investigators will develop methods for estimating the effect of the tax structure on the average of labor income. This research is applied to US and Swedish data. The effect of changing the taxes on labor income in the US and Sweden will be estimated. Others have tried to estimate these effects but have only allowed for individual differences in restrictive ways. This research will be the first to allow for general differences in people. This work is useful for predicting how changes in the tax structure would affect average taxable income. These results could help understand how changing taxes to reduce the deficit could affect the income level in the economy.

The third topic is about how to use repeated data on individuals to estimate economic policy effects, while allowing people to be different in a general way. The approach and methods developed in this research should a broad impact on panel data methods in statistics and economics. These methods are used to estimate important economic effects in many settings. In previous research they have been used to estimate the effect of unions on the distribution of wages and the effect of children on labor participation of women. There are also many other important applications of economics where these methods and models can be used.

National Science Foundation (NSF)
Division of Social and Economic Sciences (SES)
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Georgia Kosmopoulou
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Massachusetts Institute of Technology
United States
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