Tài liệu 128753494 jonathan gruber public finance and public policy 3 rd edition 2010

Public Finance and Public Policy This page intentionally left blank THIRD EDITION Public Finance and Public Policy Jonathan Gruber Massachusetts Institute of Technology Worth Publishers To Andrea, Sam, Jack, and Ava Senior Publisher: Craig Bleyer Senior Acquisitions Editor: Sarah Dorger Development Editor: Jane Tufts Media Development Editor: Marie McHale Senior Marketing Manager: Scott Guile Assistant Supplements Editor: Tom Acox Associate Managing Editor: Tracey Kuehn Project Editor: Leo Kelly, Macmillan Publishing Solutions Production Manager: Barbara Anne Seixas Art Director: Babs Reingold Cover Design: Kevin Kall Interior Design: Lissi Sigillo Photo Editor: Cecilia Varas Composition: MPS Limited, A Macmillan Company Printing and Binding: RR Donnelley Cover Photographs: Capitol Building: Photodisc; Image of “Sign Here” Sign on Tax Form: © David Arky/Corbis; Image of man guiding steel truss: © Rich LaSalle/Getty Images; Image of businessman holding “Need Work! Work for Food!” Sign: © Michael N. Paras/Corbis; Image of surgery: © Darren Kemper/Corbis; Image of elderly people practicing tai chi: © Peter Mumford/Alamy ISBN-13: 978-1-4292-1949-5 ISBN-10: 1-4292-1949-1 Library of Congress Control Number: 2006937926 © 2011, 2007, 2005 Worth Publishers All rights reserved Printed in the United States of America First printing, 2010 Worth Publishers 41 Madison Avenue New York, NY 10010 www.worthpublishers.com About the Author Dr. Jonathan Gruber is a Professor of Economics at the Massachusetts Institute of Technology, where he has taught since 1992. He is also the Director of the Health Care Program at the National Bureau of Economic Research, where he is a research Associate. He is a co-editor of the Journal of Public Economics and an Associate Editor of the Journal of Health Economics. Dr. Gruber received his B.S. in Economics from MIT and his Ph.D. in Economics from Harvard. He has received an Alfred P. Sloan Foundation Research Fellowship, a FIRST award from the National Institute on Aging, and the Kenneth Arrow Award for the Best Paper in Health Economics in 1994. He was also one of 15 scientists nationwide to receive the Presidential Faculty Fellow Award from the National Science Foundation in 1995. Dr. Gruber was elected to the Institute of Medicine in 2005, and in 2006, he received the American Society of Health Economists’ Inaugural Medal for the best health economist in the nation aged 40 and under. Dr. Gruber’s research focuses on the areas of public finance and health economics. He has published more than 125 research articles and has edited six research volumes. During the 1997–1998 academic year, Dr. Gruber was on leave from MIT, serving as Deputy Assistant Secretary for Economic Policy at the U.S. Treasury Department. He was a key architect of Massachusetts’s ambitious health reform effort, and in 2006, he became an inaugural member of the Health Connector Board, the main implementing body for that effort. In that year, he was named the nineteenth-most powerful person in health care in the United States by Modern Healthcare Magazine. He acted as a consultant on several presidential campaigns and is considered by the Washington Post to be one of the “most influential” health care experts in America. Brief Contents Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . xxvii PART I Introduction and Background Why Study Public Finance? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .1 Theoretical Tools of Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25 3 Empirical Tools of Public Finance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .63 4 Budget Analysis and Deficit Financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .91 1 2 PART II Externalities and Public Goods 5 6 7 8 9 10 11 Externalities: Problems and Solutions . . . . . . . . . . . . . . . . . . . . . . . . . . . . .121 Externalities in Action: Environmental and Health Externalities . . . . . . . . . . . .149 Public Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .181 Cost-Benefit Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .205 Political Economy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .227 State and Local Government Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . .261 Education . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .289 PART III Social Insurance and Redistribution 12 13 14 15 16 17 Social Insurance: The New Function of Government . . . . . . . . . . . . . . . . . . .319 Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .353 Unemployment Insurance, Disability Insurance, and Workers’ Compensation .389 Health Insurance I: Health Economics and Private Health Insurance . . . . . . . .419 Health Insurance II: Medicare, Medicaid, and Health Care Reform . . . . . . . . .453 Income Distribution and Welfare Programs . . . . . . . . . . . . . . . . . . . . . . . . .489 PART IV Taxation in Theory and Practice 18 19 20 21 22 23 24 25 Taxation in the United States and Around the World . . . . . . . . . . . . . . . . . . .523 The Equity Implications of Taxation: Tax Incidence . . . . . . . . . . . . . . . . . . . .557 Tax Inefficiencies and Their Implications for Optimal Taxation . . . . . . . . . . . .589 Taxes on Labor Supply . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .623 Taxes on Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .647 Taxes on Risk Taking and Wealth . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .675 Corporate Taxation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .701 Fundamental Tax Reform . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .737 Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . G-1 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . R-1 Name Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NI-1 Subject Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SI-1 vi Contents Preface . . . . . . . . . . . . . . . . . . . . xxvii . . . . . . . . . . . . . . . . CHAPTER 1 Why Study Public Finance? . . . . . . . . . . . . . . . 1.1 The Four Questions of Public Finance . . . . . . . . . . . . . . . . . 1 3 When Should the Government Intervene in the Economy? 3 Application: The Measles Epidemic of 1989–1991 5 How Might the Government Intervene? 6 What Are the Effects of Alternative Interventions? 7 Application: The Congressional Budget Office: Government Scorekeepers 8 Why Do Governments Do What They Do? 9 PART I Introduction and Background 1.2 Why Study Public Finance? Facts on Government in the United States and Around the World . . . . . . . . . . . . . . . . . . . . . . . 10 The Size and Growth of Government 10 Decentralization 12 Spending, Taxes, Deficits, and Debts 12 Distribution of Spending 13 Distribution of Revenue Sources 17 Regulatory Role of the Government 19 1.3 Why Study Public Finance Now? Policy Debates over Social Security, Health Care, and Education . . . . . . . . . . . . . . . . . . . 20 Social Security 20 Health Care 21 Education 21 1.4 Conclusion Highlights . . . . . . . . . . . . . . Questions and Problems Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 . . . . . . . . . . . . . . . . . . . . . . . . . . 23 . . . . . . . . . . . . . . . . . . . . . . . . . . 24 CHAPTER 2 Theoretical Tools of Public Finance 2.1 Constrained Utility Maximization . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 . 26 Preferences and Indifference Curves 27 Utility Mapping of Preferences 29 Budget Constraints 31 Putting It All Together: Constrained Choice 33 The Effects of Price Changes: Substitution and Income Effects 35 vii 2.2 Putting the Tools to Work: TANF and Labor Supply Among Single Mothers . . . . . . . . . . . . . . . . . . . . . . . 37 . . . . . . . . . . . . . . . . . 43 Identifying the Budget Constraint 38 The Effect of TANF on the Budget Constraint 39 2.3 Equilibrium and Social Welfare . . Demand Curves 44 Supply Curves 46 Equilibrium 48 Social Efficiency 49 Competitive Equilibrium Maximizes Social Efficiency 50 From Social Efficiency to Social Welfare: The Role of Equity 52 Choosing an Equity Criterion 54 2.4 Welfare Implications of Benefit Reductions: The TANF Example Continued . . . . . . . . . . . . . . . . . . . . . . . 55 2.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 . . . . . . . . . . . . . . . . . . . . . . . . . . 58 . . . . . . . . . . . . . . . . . . . . . . . . . . 59 . . 60 . . . Questions and Problems Advanced Questions . . . APPENDIX TO CHAPTER 2 The Mathematics of Utility Maximization CHAPTER 3 Empirical Tools of Public Finance . . . . . . . . . . . 63 3.1 The Important Distinction Between Correlation and Causality . . . . . . . . . . . . . . . . . . . . . . . . 64 . . . . . . . . . 66 . . . . . . . . . 71 . The Problem 65 3.2 Measuring Causation with Data We’d Like to Have: Randomized Trials . . . . . . . . . . . . . . . . . . . . . Randomized Trials as a Solution 67 The Problem of Bias 67 Randomized Trials of ERT 69 Randomized Trials in the TANF Context 69 Why We Need to Go Beyond Randomized Trials 70 3.3 Estimating Causation with Data We Actually Get: Observational Data . . . . . . . . Time Series Analysis 72 Cross-Sectional Regression Analysis 75 Quasi-Experiments 80 Structural Modeling 83 viii . . . . . . . . . . . . 3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85 . . . . . . . . . . . . . . . . . . . . . . . . . . 85 . . . . . . . . . . . . . . . . . . . . . . . . . . 86 APPENDIX TO CHAPTER 3 Cross-Sectional Regression Analysis . . . . . 88 . . . Questions and Problems Advanced Questions . . . CHAPTER 4 Budget Analysis and Deficit Financing 4.1 Government Budgeting . . . . . . . . 91 . . . . . . 93 4.2 Measuring the Budgetary Position of the Government: Alternative Approaches . . . . . . . . . . . . . . . . . . . . . . . . . . . 98 . . . . . . . . . . . . . . . . . . The Budget Deficit in Recent Years 93 The Budget Process 94 Application: Efforts to Control the Deficit 95 Budget Policies and Deficits at the State Level 97 Real vs. Nominal 98 The Standardized Deficit 99 Cash vs. Capital Accounting 100 Static vs. Dynamic Scoring 102 4.3 Do Current Debts and Deficits Mean Anything? A Long-Run Perspective . . . . . . . . . . . . . . . . . . . . . . . . . . 103 . . . . . . . . . 113 Background: Present Discounted Value 103 Why Current Labels May Be Meaningless 104 Alternative Measures of Long-Run Government Budgets 105 What Does the U.S. Government Do? 109 Application: The Financial Shenanigans of 2001 112 4.4 Why Do We Care About the Government’s Fiscal Position? . . . . . . . . . . . . . . . . . . . . . Short-Run vs. Long-Run Effects of the Government on the Macroeconomy 113 Background: Savings and Economic Growth 114 The Federal Budget, Interest Rates, and Economic Growth 115 Intergenerational Equity 117 4.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 119 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 120 Highlights . . . . . . ix PART II CHAPTER 5 Externalities: Problems and Solutions Externalities and Public Goods 5.1 Externality Theory . . . . . . . . . . . . . . . . . . . . . . . . . . 121 . . . . . . . 123 . . . . . . . 130 . . . . . . . 134 . . . . . . . 137 Economics of Negative Production Externalities 123 Negative Consumption Externalities 126 Application: The Externality of SUVs 127 Positive Externalities 128 5.2 Private-Sector Solutions to Negative Externalities The Solution 130 The Problems with Coasian Solutions 132 5.3 Public-Sector Remedies for Externalities . . . . . . Corrective Taxation 135 Subsidies 136 Regulation 137 5.4 Distinctions Between Price and Quantity Approaches to Addressing Externalities . . . . . . . . . . . . . . . . . Basic Model 137 Price Regulation (Taxes) vs. Quantity Regulation in This Model 139 Multiple Plants with Different Reduction Costs 140 Uncertainty About Costs of Reduction 143 5.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 146 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 147 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 148 Highlights . . . . . . CHAPTER 6 Externalities in Action: Environmental and Health Externalities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149 6.1 Acid Rain . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 150 The Damage of Acid Rain 150 History of Acid Rain Regulation 151 Empirical Evidence: Estimating the Adverse Health Effects of Particulates 152 Has the Clean Air Act Been a Success? 154 6.2 Global Warming . . . . . . . . . . . . . . . Application: The Montreal Protocol 157 The Kyoto Treaty 158 Can Trading Make Kyoto More Cost-Effective? 158 What Does the Future Hold? 161 Application: Congress Takes on Global Warming 162 x . . . . . . . . . . . . 155 6.3 The Economics of Smoking . . . . . . . . . . . . . . . . . . . . . 165 The Externalities of Smoking 166 Should We Care Only About Externalities, or Do “Internalities” Matter Also? 170 6.4 The Economics of Other Addictive Behaviors . . . . . . . . . . . 173 Drinking 173 Illicit Drugs 174 Application: Public Policy Toward Obesity 174 Summary 177 6.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 178 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 178 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 179 Highlights . . . . . . CHAPTER 7 Public Goods . . . . . . . . 7.1 Optimal Provision of Public Goods . . . . . . . . . . . . . . . 181 . . . . . . . . . . . . . . . . 182 . . . . . . . . . . . . . . . . 187 Optimal Provision of Private Goods 183 Optimal Provision of Public Goods 185 7.2 Private Provision of Public Goods . Private-Sector Underprovision 188 Application: The Free Rider Problem in Practice 189 Can Private Providers Overcome the Free Rider Problem? 190 Application: Business Improvement Districts 190 When Is Private Provision Likely to Overcome the Free Rider Problem? 192 7.3 Public Provision of Public Goods . . . . . . . . . . . . . . . . . 194 Private Responses to Public Provision: The Problem of Crowd-Out 195 Measuring the Costs and Benefits of Public Goods 197 How Can We Measure Preferences for the Public Good? 197 Empirical Evidence: Measuring Crowd-Out 198 7.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 199 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 200 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 201 . . . . . . . . . . 202 Highlights . . . . . . APPENDIX TO CHAPTER 7 The Mathematics of Public Goods Provision . . . . . . . . . . . . . . . . . . . . xi CHAPTER 8 Cost-Benefit Analysis . . . . . 8.1 Measuring the Costs of Public Projects . . . . . . . . . . . . . 205 . . . . . . . . . . . . . 206 8.2 Measuring the Benefits of Public Projects . . . . . . . . . . . . 210 . The Example 207 Measuring Current Costs 208 Measuring Future Costs 209 Valuing Driving Time Saved 210 Application: The Problems of Contingent Valuation 213 Empirical Evidence: Valuing Time Savings 214 Valuing Saved Lives 215 Application: Valuing Life 215 Discounting Future Benefits 220 Cost-Effectiveness Analysis 220 8.3 Putting It All Together . . . . . . . . . . . . . . . . . . . . . . . 221 Other Issues in Cost-Benefit Analysis 221 8.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 223 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 224 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 225 Highlights . . . . . . CHAPTER 9 Political Economy . . . . . . . . . . 9.1 Unanimous Consent on Public Goods Levels . . . . . . . . . . . . . . . 227 . . . . . . 229 . . . . . . 232 . . . . . . 241 Lindahl Pricing 229 Problems with Lindahl Pricing 231 9.2 Mechanisms for Aggregating Individual Preferences Application: Direct Democracy in the United States 232 Majority Voting: When It Works 234 Majority Voting: When It Doesn’t Work 236 Arrow’s Impossibility Theorem 237 Restricting Preferences to Solve the Impossibility Problem 237 Median Voter Theory 239 The Potential Inefficiency of the Median Voter Outcome 239 Summary 240 9.3 Representative Democracy . . . . . . . . . . . . . . . Vote-Maximizing Politicians Represent the Median Voter 241 Assumptions of the Median Voter Model 242 Lobbying 244 Application: Farm Policy in the United States 245 Evidence on the Median Voter Model for Representative Democracy 247 Empirical Evidence: Testing the Median Voter Model 248 xii 9.4 Public Choice Theory: The Foundations of Government Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . 249 Size-Maximizing Bureaucracy 249 Problems with Privatization 250 Application: Contracting Out with Non-Competitive Bidding 251 Leviathan Theory 253 Corruption 254 Application: Government Corruption 254 Empirical Evidence: Government Failures and Economic Growth 257 The Implications of Government Failure 258 9.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 258 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 259 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 260 Highlights . . . . . . CHAPTER 10 State and Local Government Expenditures 10.1 Fiscal Federalism in the United States and Abroad . . . . 261 . . . . . . 263 . . . . . . . 267 Spending and Revenue of State and Local Governments 264 Fiscal Federalism Abroad 265 10.2 Optimal Fiscal Federalism . . . . . . . . . . . . . . The Tiebout Model 267 Problems with the Tiebout Model 269 Evidence on the Tiebout Model 271 Optimal Fiscal Federalism 273 Empirical Evidence: Evidence for Capitalization from California’s Proposition 13 274 10.3 Redistribution Across Communities . . . . . . . . . . . . . . . 275 Should We Care? 276 Tools of Redistribution: Grants 277 Redistribution in Action: School Finance Equalization 282 Empirical Evidence: The Flypaper Effect 283 Application: School Finance Equalization and Property Tax Limitations in California 285 10.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 285 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 286 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 286 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 287 Highlights . . . . . . . xiii CHAPTER 11 Education . . . . . . . . . . . . . . . . . . . . . . . . 289 11.1 Why Should the Government Be Involved in Education? . . . . . . . . . 292 11.2 How Is the Government Involved in Education? . . . . . . . . 294 . . . . . . . . 304 . . . . 307 . . . . . . . . . . . . . . . . . . . . . . . Productivity 292 Citizenship 293 Credit Market Failures 293 Failure to Maximize Family Utility 293 Redistribution 294 Free Public Education and Crowding Out 295 Solving the Crowd-Out Problem: Vouchers 297 Problems with Educational Vouchers 300 11.3 Evidence on Competition in Education Markets Direct Experience with Vouchers 304 Experience with Public School Choice 304 Empirical Evidence: Estimating the Effects of Voucher Programs 305 Experience with Public School Incentives 306 Bottom Line on Vouchers and School Choice 307 11.4 Measuring the Returns to Education . . . . . . . . . . Effects of Education Levels on Productivity 308 Effect of Education Levels on Other Outcomes 309 Empirical Evidence: Estimating the Return to Education and Evidence for Screening 310 The Impact of School Quality 310 11.5 The Role of the Government in Higher Education . . . . . . . 311 Empirical Evidence: Estimating the Effects of School Quality 312 Current Government Role 313 What Is the Market Failure and How Should It Be Addressed? 314 11.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 316 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 316 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 317 Highlights PART III Social Insurance and Redistribution xiv . . . . . . . CHAPTER 12 Social Insurance: The New Function of Government . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 What Is Insurance and Why Do Individuals Value It? What Is Insurance? 321 Why Do Individuals Value Insurance? 322 Formalizing This Intuition: Expected Utility Model 323 . . . . . . . . . 319 . 321 12.2 Why Have Social Insurance? Asymmetric Information and Adverse Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . 326 Asymmetric Information 326 Example with Full Information 327 Example with Asymmetric Information 327 The Problem of Adverse Selection 329 Does Asymmetric Information Necessarily Lead to Market Failure? 330 Application: Adverse Selection and Health Insurance “Death Spirals” 331 How Does the Government Address Adverse Selection? 332 12.3 Other Reasons for Government Intervention in Insurance Markets . . . . . . . . . . . . . . . . . . . . . . . . 333 . . . . . . . 337 . . . . . . . . 342 12.6 Putting It All Together: Optimal Social Insurance . . . . . . . 346 12.7 Conclusion . . . Externalities 333 Administrative Costs 333 Redistribution 334 Paternalism 334 Application: Flood Insurance and the Samaritan’s Dilemma 334 12.4 Social Insurance vs. Self-Insurance: How Much Consumption Smoothing? . . . . . . . . . . . Example: Unemployment Insurance 337 Lessons for Consumption-Smoothing Role of Social Insurance 341 12.5 The Problem with Insurance: Moral Hazard . . . Application: The Problems with Assessing Workers’ Compensation Injuries 343 What Determines Moral Hazard? 344 Moral Hazard Is Multidimensional 344 The Consequences of Moral Hazard 345 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 346 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 347 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 348 Highlights . . . . . . . APPENDIX TO CHAPTER 12 Mathematical Models of Expected Utility . . . . . . . . . . . . . . . . . . . . . . . 350 CHAPTER 13 Social Security . . . . . . . . . . . . . . . . . . . . . . 353 13.1 What Is Social Security and How Does It Work? . . . . . . . . 354 . . . . . . Program Details 355 Application: Why Choose 35 Years? 355 xv How Does Social Security Work Over Time? 359 Application: Ida May Fuller 360 How Does Social Security Redistribute in Practice? 362 13.2 Consumption-Smoothing Benefits of Social Security . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 364 . . . . . . . . . . . . . . . . 367 . . . . 374 Rationales for Social Security 364 Does Social Security Smooth Consumption? 365 Social Security and Private Savings 366 Living Standards of the Elderly 366 13.3 Social Security and Retirement . Theory 367 Empirical Evidence: Measuring the Crowd-Out Effect of Social Security on Savings 368 Evidence 369 Application: Implicit Social Security Taxes and Retirement Behavior 372 Implications 374 13.4 Social Security Reform . . . . . . . . . . . . . . . . . . Reform Round I: The Greenspan Commission 375 Application: The Social Security Trust Fund and National Savings 376 Incremental Reforms 377 Fundamental Reforms 379 Application: Company Stock in 401(k) Plans 383 Application: Mixed Proposals for Social Security Reform 384 13.5 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 385 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 386 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 387 Highlights . . . . . . . CHAPTER 14 Unemployment Insurance, Disability Insurance, and Workers’ Compensation . . . . . . . . . . . . . . 389 14.1 Institutional Features of Unemployment Insurance, Disability Insurance, and Workers’ Compensation . . . . . . . . . . . . . . . . . . . . . . . 391 . 397 Institutional Features of Unemployment Insurance 391 Institutional Features of Disability Insurance 393 Institutional Features of Workers’ Compensation 394 Comparison of the Features of UI, DI, and WC 395 Application: The Duration of Social Insurance Benefits Around the World 396 14.2 Consumption-Smoothing Benefits of Social Insurance Programs xvi . . . . . . . . . . . . . . . . . . . . . . 14.3 Moral Hazard Effects of Social Insurance Programs . . . . . . 398 Moral Hazard Effects of Unemployment Insurance 398 Empirical Evidence: Moral Hazard Effects of Unemployment Insurance 400 Evidence for Moral Hazard in DI 402 Evidence for Moral Hazard in WC 403 Empirical Evidence: Moral Hazard Effects of DI 404 Empirical Evidence: Krueger’s Study of Workers’ Compensation 405 14.4 The Costs and Benefits of Social Insurance to Firms . . . . . 406 The Effects of Partial Experience Rating in UI on Layoffs 406 The “Benefits” of Partial Experience Rating 408 Application: The “Cash Cow” of Partial Experience Rating 408 Workers’ Compensation and Firms 409 14.5 Implications for Program Reform . . . . . . . . . . . . . . . . 410 Benefits Generosity 410 Targeting 410 Experience Rating 411 Worker Self-Insurance? 411 Application: Reforming UI 412 14.6 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 413 Questions and Problems . . . . . . . . . . . . . . . . . . . . . . . . . . 414 Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . 414 APPENDIX TO CHAPTER 14 Advanced Quasi-Experimental Analysis . . 416 Highlights . . . . . . . CHAPTER 15 Health Insurance I: Health Economics and Private Health Insurance . . . . . . . . . . . . . . 15.1 An Overview of Health Care in the United States . . . . . . 419 . . . . . . . 421 . . . . . . . 432 How Health Insurance Works: The Basics 422 Private Insurance 423 Medicare 427 Medicaid 427 TRICARE/CHAMPVA 428 The Uninsured 428 Empirical Evidence: Health Insurance and Mobility 430 15.2 How Generous Should Insurance Be to Patients? Consumption-Smoothing Benefits of Health Insurance for Patients 432 Moral Hazard Costs of Health Insurance for Patients 433 Application: The Problem with McAllen, Texas 436 xvii How Elastic Is the Demand for Medical Care? The RAND Health Insurance Experiment 438 Empirical Evidence: Estimating the Elasticity of Demand for Medical Care 439 Optimal Health Insurance 440 Why Is Insurance So Generous in the United States? 441 Application: Health Savings Accounts 442 15.3 How Generous Should Insurance Be to Medical Providers? . . 445 . . 448 Managed Care and Prospective Reimbursement 445 The Impacts of Managed Care 447 How Should Providers Be Reimbursed? 448 15.4 Conclusion Highlights . . . . . . . . . . . . Questions and Problems Advanced Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 449 . . . . . . . . . . . . . . . . . . . . . . . . . 449 . . . . . . . . . . . . . . . . . . . . . . . . . 450 CHAPTER 16 Health Insurance II: Medicare, Medicaid, and Health Care Reform . . . . . . . . . . . . . . . . . . . . . . . . 453 16.1 The Medicaid Program for Low-income Mothers and Children . . . . . . . . . 455 16.2 What Are the Effects of the Medicaid Program? . . . . . . . . 457 . . . . . . . . . . . . . . . . . . How Medicaid Works 455 Who Is Eligible for Medicaid? 456 What Health Services Does Medicaid Cover? 456 How Do Providers Get Paid? 457 How Does Medicaid Affect Health? A Framework 457 How Does Medicaid Affect Health? Evidence 458 Empirical Evidence: Using State Medicaid Expansions to Estimate Program Effects 461 16.3 The Medicare Program . . . . . . . . . 462 16.4 What Are the Effects of the Medicare Program? . . . . . . . . 466 . . . . . . . . . . . . . . How Medicare Works 462 Application: The Medicare Prescription Drug Debate 463 The Prospective Payment System 466 Empirical Evidence on the Move to the PPS 467 Problems with PPS 467 Lesson: The Difficulty of Partial Reform 469 Medicare Managed Care 469 Should Medicare Move to a Full Choice Plan? Premium Support 472 Application: A Premium Support System for Medicare 472 Gaps in Medicare Coverage 474 xviii