Debt and (Future) Taxes: Financing Intergenerational Public Goods

Transcription

1 Debt and (Future) Taxes: Financing Intergenerational Public Goods J. Forrest Williams Portland State University February 25, 2015 J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

2 Motivation and Literature Motivation Social projects impact current and future generations Environmental quality, infrastructure, educational policies, research grants, etc. Most projects financed partly by future generations Study public goods environment experimentally Can use debt (future player s endowment) to finance Investments in the public good help future group J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

3 Motivation and Literature Literature J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

4 Motivation and Literature Contributions First experimental test of intergenerational PG spillovers Experimental test of endogenous debt and savings in PG J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

5 Motivation and Literature Preview of Results Debt use increases the spillovers from the public good These gains are offset by losses from debt repayment Debt s losses have two causes: 1 Underinvestment in the Public Goods 2 Insufficient savings for the next generation J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

6 Theory Public Goods Game with Intergenerational Debt and Savings Intergenerational Transfers in PG Game Suppose agents borrow from and save for successors Can borrow b it B Can save up to remaining wealth after public good game PG Game { }} { N π it = w it b it 1 + s }{{ it 1 g } it + γ g jt (s it b it ) }{{} Net Starting Endowment j=1 Net Savings for Next Gen. γ is the marginal per capita return (MPCR) b it is amount borrowed in period t by i from her heir s it is amount saved in period t by i for her heir Timing of Actions J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

7 Theory Public Goods Game with Intergenerational Debt and Savings Intergenerational Spillover Contributions impact the wealth of a future generation Assume a constant MPCR of θ for next generation I consider w it+1 = w it + θ(g t τ(w it )) where G t is total contributions τ(w it ) is a threshold J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

8 Theory Public Goods Game with Intergenerational Debt and Savings Two Theoretical Predictions Nash Equilibrium: = B b NE it g NE it = 0 s NE it = 0 Socially Optimal: b SO it g SO it = B = w it + B s SO it = s.t. U (c) it = βγ(u (c) it+1 + βθu (c) it+2 ) J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

9 Theory Public Goods Game with Intergenerational Debt and Savings Methods of Impacting Future Generations 1 Debt 2 Savings 3 Investment in the Public Good Investments over τ( ) increase future players wealth Less than τ( ) lower future players wealth J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

10 Experimental Design Why Use an Experiment Why an Experiment? Controlled Environment Allows a clean test of question Can vary the parameters to test robustness See extra behavioral outcomes theory misses Can be replicated J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

11 Experimental Design Why Use an Experiment Who are the Subjects? Subjects are Texas A&M undergraduates A&M students are a relatively unique population Many care deeply about what it means to be an Aggie 50,000 students with an us against world mentality Have own vocabulary and unusual traditions Arguably have little brother complex J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

12 Experimental Design Why Use an Experiment Overview of Design Two treatments Control No Debt Treatment With Debt Played 10 rounds (one randomly selected for payment) Each round had multiple stages Debt Voting Stage (Treatment Only) PG Game Savings Decision J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

13 Experimental Design Why Use an Experiment Stages of the Control Condition: J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

14 Experimental Design Why Use an Experiment Subjects played game with Tokens Initial tokens (wages) and Net Savings from Previous Player/Group J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

15 Experimental Design Why Use an Experiment 5 Subjects per Group J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

16 Experimental Design Why Use an Experiment Current Groups Connected to Future Players with probability.6 J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

17 Experimental Design Why Use an Experiment Current Groups Plays Public Good Game... J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

18 Experimental Design Why Use an Experiment.. and receives a benefit from investment of γ (MRPC) times total investment G t J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

19 Experimental Design Why Use an Experiment BUT so does the future group of θ (MRPC spillover) times total investment G t J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

20 Experimental Design Why Use an Experiment Additionally - Players can save tokens for future player J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

21 Experimental Design Why Use an Experiment Treatment Same as Control Except: Subjects can take tokens from Future players Timing of Actions 1 Debt Withdrawn (Group Decision) 2 Public Goods (Individual Choice, Group Impacts) 3 Savings for Future Player (Individual Choice) J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

22 Experimental Design Why Use an Experiment All players vote on tokens to withdraw J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

23 Experimental Design Why Use an Experiment Median Amount is then Added to all current players and Subtracted from Future players available tokens J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

24 Experimental Design Debt Voting Debt Voting Stage Subjects allowed to withdraw tokens from future players They could withdraw up to 40% of the starting tokens Median vote selected All group members get that many additional tokens J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

25 Experimental Design Debt Voting J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

26 Experimental Design Public Goods Game Public Goods Game Invest any of their tokens (net starting + withdrawal) Current Generation MPCR, γ =.3 Future Generation MPCR, θ =.08 Threshold τ( ) is 50% of starting tokens. ztree Screen Shot J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

27 Experimental Design Savings Choices Savings Decision Subjects shown five possible outcomes from the PG game One is real Four are randomly generated Each outcome impacts Subject s own tokens Future player s tokens For each outcome subjects make deposit choice Nonparametric Comparison of Random and Real Outcomes J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

28 Experimental Design Savings Choices J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

29 Results Results Subjects borrow less than the amount available Graph Debt leads to slightly higher contributions to public good Subjects insufficiently save to offset debt repayment Debt makes future generations worse off J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

30 Results Summary Statistics Control: Treatment: No Debt With Debt Subjects Starting Tokens Previous Debt N/A 9.37 Previous Savings Tokens Borrowed N/A 16.1 % Available Tokens Borrowed N/A 77.4 Invested Tokens Tokens Saved Total Impact on Next Gen J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

31 Results Kernel Density J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

32 Results J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

33 Results Regression Analysis Table: Regressions on Total Change in Tokens for Next Generation Debt (0.000) (0.000) (0.000) (0.000) Starting Tokens (0.089) (0.122) (0.108) Previous PG Impact (0.000) (0.000) (0.000) Female (0.664) (0.666) Caucasian (0.457) (0.456) Econ Major (0.196) (0.195) Subjects Rounds Round Dummies No No No Yes Additional Demographics No No Yes Yes adj. R p-values in parentheses, Clustered by Subject p < 0.05, p < 0.01, p < Local Polynomial Estimation Graphs J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

34 Results Decomposition of Results Decomposing Negative Effect of Debt 1 Debt is not fully invested in Public Good 2 Savings do not cover future debt obligations To conclusion J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

35 Results Decomposition of Results Table: Determinants of Investment in the Public Good Debt (0.159) (0.174) Net Starting Tokens (0.006) (0.008) Female (0.935) (0.917) Caucasian (0.680) (0.690) Voter (0.565) (0.565) Econ Major (0.425) (0.438) Texan (0.640) (0.634) CRT Fail (0.713) (0.714) Subjects Rounds Round Dummies No Yes adj. R p-values in parentheses, Clustered by Subject p < 0.05, p < 0.01, p < J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

36 Results Decomposition of Results Under-savings Savings in Debt Treatment are higher than the Control They are not, however, enough to cover the debt Finding is counter to Ricardian Equivalence J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

37 Results Decomposition of Results Savings v. Net Impact J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

38 Results Decomposition of Results Concluding Remarks Public Goods have intergenerational spillovers The good itself has a positive spillover Debt-financing is a negative spillover I find debt leads to more contributions to PG Yet Debt harms next generation in net Debt is not fully invested in the public good Savings are not enough to offset debt when it exists J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

39 Supplemental Material J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

40 Timing of Actions t Begins w it, b it 1 s it 1, G t 1 B t G t t Ends b it g it s it, c it where w it = endowment b it = debt s it = savings g it = contribution to public good 1 Born into world G t N g it Back J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

41 Timing of Actions t Begins w it, b it 1 s it 1, G t 1 B t G t t Ends b it g it s it, c it where w it = endowment b it = debt s it = savings g it = contribution to public good 1 Born into world 2 Cast debt vote G t N g it Back J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

42 Timing of Actions t Begins w it, b it 1 s it 1, G t 1 B t G t t Ends b it g it s it, c it where w it = endowment b it = debt s it = savings g it = contribution to public good 1 Born into world 2 Cast debt vote 3 Debt determined via median vote G t N g it Back J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

43 Timing of Actions t Begins w it, b it 1 s it 1, G t 1 B t G t t Ends b it g it s it, c it where w it = endowment b it = debt s it = savings g it = contribution to public good 1 Born into world 2 Cast debt vote 3 Debt determined via median vote 4 PG contribution G t N g it Back J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

44 Timing of Actions t Begins w it, b it 1 s it 1, G t 1 B t G t t Ends b it g it s it, c it where w it = endowment b it = debt s it = savings g it = contribution to public good 1 Born into world 2 Cast debt vote 3 Debt determined via median vote 4 PG contribution 5 G revealed G t N g it Back J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

45 Timing of Actions t Begins w it, b it 1 s it 1, G t 1 B t G t t Ends b it g it s it, c it where Back w it = endowment b it = debt s it = savings g it = contribution to public good G t N g it 1 Born into world 2 Cast debt vote 3 Debt determined via median vote 4 PG contribution 5 G revealed 6 Savings/Consumption Decision J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

46 Additional Information Back to Results J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

47 Additional Information Average Total Impact J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

48 Additional Information Public Goods Stage Design J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

49 Additional Information Back to Total Impact Breakdown J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

50 Additional Information Back to Total Impact Breakdown J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

51 Additional Information Back to Total Impact Breakdown J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

52 Additional Information Back to Total Impact Breakdown J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

53 Additional Information Traditional Ricardian Graph J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

54 Additional Information Fun Graph J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

55 Additional Information J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38

56 Additional Information Back to Savings Round J. Forrest Williams (Portland State) Intergenerational Externalities & Debt February 25, / 38