Public Finance and Regulation

Assistant Professor Sean Gailmard, with Thomas R. Palfrey (California Institute of Technology), completed a Harris School working paper, “An Experimental Comparison of Collective Choice Procedures for Excludable Public Goods,” in which he offers theoretical predictions and experimental tests of several procedures for allocating costs for “excludable” public goods (e.g., parks, stadiums, targeted security, cable TV). He found that a simple hybrid procedure does better than a complicated procedure that forces the individual to tell the truth about the project’s value or worth.

The taxation of returns from financial assets, such as stocks, is distinct from many other forms of taxation in that an investor pays taxes if there is a positive return and can receive a tax deduction with a loss. Professor Raaj Sah, with K. Wada, studies some of the implications of this distinction in “Can Government Collect Resources without Hurting Investors? Taxation of Returns from Assets,” an essay in a forthcoming edited volume entitled Imperfect Economics (Richard Arnott, editor, MIT Press, 2003). He presents the possibility that the government may be able to collect resources, without hurting investors, by introducing or changing particular types of taxes and subsidies on gains from different classes of financial assets.

Investments and the volatility of financial markets are also the topic of Sah’s article, “Mood Fluctuations, Projection Bias, and Volatility of Stock Prices,” coauthored with R. Mehra, in the Journal of Economic Dynamics and Control (volume 26, May 2002). In that article, Sah draws from psychology and other disciplines in focusing on the effects of mood fluctuations among groups of individuals on the volatility of asset prices. Sah finds that small fluctuations in moods have potentially large effects on the volatility of equity prices.

Intellectual property regulation is the topic of a forthcoming article in the Journal of Economics by Professor Tomas Philipson and Frank Lichtenberg (Columbia University), “The Dual Effects of Intellectual Property Regulations: Within- and Between-Patent Competition in the U.S. Pharmaceuticals Industry.” The authors examine the effects of regulation on research and development and sales in the pharmaceutical industry, specifically the effect of competition from those making a better version of the same drug, which is not protected under the IP regulations. The paper is featured in a Harris School policy brief (see accompanying policy brief in this report).