IDEAS home Printed from https://ideas.repec.org/a/aea/aejapp/v12y2020i1p1-31.html
   My bibliography  Save this article

Estimating Adjustment Frictions Using Nonlinear Budget Sets: Method and Evidence from the Earnings Test

Author

Listed:
  • Alexander M. Gelber
  • Damon Jones
  • Daniel W. Sacks

Abstract

We introduce a method for estimating the cost of adjusting earnings, as well as the earnings elasticity with respect to the net-of-tax share. Our method uses information on bunching in the earnings distribution at convex budget set kinks before and after policy-induced changes in the magnitude of the kinks: the larger is the adjustment cost, the smaller is the absolute change in bunching from before to after the policy change. In the context of the Social Security Earnings Test, our results demonstrate that the short-run impact of changes in the effective marginal tax rate can be substantially attenuated.

Suggested Citation

  • Alexander M. Gelber & Damon Jones & Daniel W. Sacks, 2020. "Estimating Adjustment Frictions Using Nonlinear Budget Sets: Method and Evidence from the Earnings Test," American Economic Journal: Applied Economics, American Economic Association, vol. 12(1), pages 1-31, January.
    • Handle: RePEc:aea:aejapp:v:12:y:2020:i:1:p:1-31
    DOI: 10.1257/app.20170717
    as

    Download full text from publisher

    File URL: https://www.aeaweb.org/doi/10.1257/app.20170717
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/app.20170717.data
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/app.20170717.appx
    Download Restriction: no
    File URL: https://www.aeaweb.org/doi/10.1257/app.20170717.ds
    Download Restriction: Access to full text is restricted to AEA members and institutional subscribers.
    File URL: https://libkey.io/10.1257/app.20170717?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    More about this item

    JEL classification:

    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • H31 - Public Economics - - Fiscal Policies and Behavior of Economic Agents - - - Household
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:aea:aejapp:v:12:y:2020:i:1:p:1-31. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Michael P. Albert (email available below). General contact details of provider: https://edirc.repec.org/data/aeaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.