Waterloo economics series | 2003

Abstracts of working papers

#03-01 -- Joseph DeJuan and Tony Wirjanto

A direct test of the permanent income hypothesis with an application to the U.S. states (PDF)

(with John J. Seater, North Carolina State University, Dept. of Economics, Raleigh, NC 27695) forthcoming in Journal of Money, Credit, and Banking.


This paper tests the prediction of the Permanent Income Hypothesis (PIH) that news about future income induce a revision in consumption equal to the revision in permanent income. We use time-series data from 48 contiguous U.S. states to perform the test. The empirical results provide some support for the PIH across states.

#03-02 -- John Burbidge

Capital tax competition and returns to scale (PDF)

(with Katherine Cuff, Economics Dept., McMaster University, Hamilton, Ontario, L8S 4M4) August 2002 revised June 2003


That some capital importing regions subsidize units of capital is inconsistent with the standard models of the capital tax competition literature. We maintain the assumption of capital homogeneity and relax the assumption of constant returns to scale. Among other things, we show that symmetric regions in a Nash equilibrium may subsidize capital as may a capital importing region in an asymmetric Nash equilibrium. We also prove that any ine.ciencies in asymmetric Nash equilibria with both capital and head taxes arise entirely from regions’ incentives to manipulate the terms of trade, and not from increasing returns. We also show the result that small regions win tax competitions in Nash equilibria with capital taxes only may not hold with increasing returns.