How to Use One Instrument to Identify Two Elasticities

Arbeitspapier

We show that an insight from taxation theory allows identification of both the supply and demand elasticities with only one instrument. Ramsey (1928) and subsequent models of taxation assume that a tax levied on the demand side only affects demand through the price after taxation. Econometrically, we show that this assumption functions as an additional exclusion restriction. Under the Ramsey Exclusion Restriction (RER) a tax reform can serve to simultaneously identify elasticities of supply and demand. We develop a TSLS estimator for both elasticities, a test to assess instrument strength and a test for the RER. Our result extends to a supply-demand system with J goods, and a setting with supply-side or non-linear taxes. Further, we show that key results in the sufficient statistics literature rely on the RER. One example is Harberger’s formula for the excess burden of a tax. We apply our method to the Norwegian labor market.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 6379

Classification and Topics

• Classification: Wirtschaft ; Multiple or Simultaneous Equation Models: Instrumental Variables (IV) Estimation ; Taxation and Subsidies: Incidence ; Fiscal Policies and Behavior of Economic Agents: Household ; Fiscal Policies and Behavior of Economic Agents: Firm ; Time Allocation and Labor Supply ; Labor Demand
• Subject: tax reform ; instrumental variable ; supply and demand elasticities ; tax incidence ; payroll taxation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gavrilova, Evelina ; Zoutman, Floris ; Hopland, Arnt Ove
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2017

Further information

• Handle: http://hdl.handle.net/10419/155621
• Last update: 10.03.2025, 11:43 AM CET