Essays in public economics and development

Abstract

I present three essays in this thesis. The first essay provides novel empirical evidence on the evolution of the incentive cost of unemployment benefits during an unemployment spell. Theoretical arguments have been proposed for both inclining and declining benefit profiles. However, empirical evidence on how the incentive cost of unemployment benefits may vary over the spell, which is a key input in evaluating the time profile of benefits, is limited and mixed. I estimate the incentive cost of benefits paid at various points during an unemployment spell and find that the elasticity of unemployment duration with respect to benefits and the incentive cost of UI are smaller for benefits paid later in the spell. I argue that the decline in incentive costs is driven by partially myopic job-search behaviour and non-stationarities in the dynamics of job search. The second essay provides quasi-experimental evidence of the short-term and long-term effects of fiscal stimulus programs in the UK housing and auto markets. In an influential work Mian and Sufi (2012) argue that such temporary incentives are ineffective in boosting market activity in the long-term. I show that a temporary tax cut in UK housing market has had considerable long-term effects. I argue, using a dynamic search model with frictions, that the magnitude of the long-term effect of a stimulus is directly related to its duration. The third essay shows that frequent repayment can act as a screening device in micro-lending under individual liability. A tight repayment schedule can be used to screen out ”risky” borrowers. Borrowers with more volatile profits would prefer contracts with higher interest rate but more flexible repayment schedule, while ”safe” borrowers can afford to repay more frequently. I show that frequent repayment can be used to design a menu of contracts that achieves a separating equilibrium.