Essays on Public Economics

Abstract

The three chapters of this dissertation study topics on Public Economics. In the first chapter I analyze the feasibility of Universal Basic Income based on the Mirrlees model. In Chapter 2, together with my co-author, we study the role that demographics played in the great recession. Finally, in Chapter 3, I analyze the financing of public universities in Paraguay. In Chapter 1, I analyze the convenience of a cash transfer program, or universal basic income (UBI), combined with a flat or linear marginal tax rate on income. Proponents of a policy of cash transfers argue that if combined with a simplification of welfare programs and the tax system, it could generate enough benefits through a reduction of administrative costs and a reduction of distortions, especially in the labor market. This idea is not new in economics, and numerical results in models as in Mirrlees (1971) have lump-sum components that can be interpreted as UBI. Also, Mirrlees has noted that the optimal marginal non-linear tax rate is close to a linear tax system. I start by double-checking Mirrlees’ calculations and determining that those numbers hold for a wide range of parameters. For a utilitarian planner, if a simplification of the tax system results in a value of 0.18% - 0.5% of GDP, a linear tax system is desirable. Second, I analyze the effects of introducing uncertainty in the optimal non-linear tax system. I introduce uncertainty in the preference of the agent. I show that heterogeneity could be a factor in making the optimal non-linear tax system closer to a linear tax system. In the extreme case where heterogeneity increases to its maximum possible value, the optimal tax system tends toward a linear tax system. In Chapter 2, jointly with Fausto Patiño Peña, we study the role of demographics in the Great Recession. Since the Great Recession, output and labor diverted from their pre-crisis long term trends. We show that demographics is able to explain a significant portion of the gap between the long-term trend and the data, for both output and labor. An important reason why demographics play an important role during the crisis's recovery period is that the Great Recession coincides with the “baby boomers” entering the age cohorts associated with lower levels of labor force participation. Accounting for these demographic changes, we document that labor is converging to a different employment trend. Furthermore, we modify the standard growth model and calibrate it to capture the demographic features of the data for the period 1990 - 2015. Our results show that by 2015 the output and labor gap have been reduced by just 2.5% and 1.2% respectively. In Chapter 3, I study the effects of tuition-free public universities in Paraguay. The funding of tuition-free public universities is highly regressive in Paraguay. Most of the students come from families that belong to the top of the income distribution. In this paper, I analyze the current free tuition system and study the effects of an alternative financing method. In the alternative system, the student does not pay anything while he is in school and returns the cost of his education in the future if he earns more than a certain amount. I estimate that this change in funding would reduce the cost for the government of financing tertiary education by 75 percent, an amount that would be covered by graduates who achieve high incomes in the future.