Three essays in public economics
Gudgeon, Matthew Russell Wietsma
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This dissertation consists of three essays exploring how individuals, groups, and firms respond to public policy changes. The first two chapters focus on labor supply and demand responses to tax and unemployment insurance reforms, while the third explores the effects of reconfiguring political boundaries on ethnic identity and social stability. The first essay (with Simon Trenkle) studies the speed with which workers increase their earnings following a tax break. We do so in Germany, where a large discontinuity in the tax schedule induces sharp bunching in the earnings distribution at the expected cutoff. We analyze earnings responses following two separate reforms that increase this cutoff. While some workers adjust instantly post-reform, others take several years to increase their earnings. Adjustment behavior is strongly correlated within firms. We posit that idiosyncratic differences in labor demand across firms drive cross-firm heterogeneity in adjustment rates, and find support for this channel in the data. The second essay (with Johannes Schmieder, Simon Trenkle, and Han Ye) studies older workers' responses to unemployment insurance (UI) extensions in Germany. Extending UI benefits can affect labor supply along two margins: it can lengthen the unemployment duration of an individual on UI - the intensive margin - and it can alter the inflows into UI - the extensive margin. We document extensive margin responses in the form of bunching in UI entries at precisely the age that ensures workers can transition into retirement immediately following UI expiration. Consequently, we show that standard, intensive margin estimates of the non-employment effect of UI are downward biased. The third essay (with Samuel Bazzi) analyzes the effects of political boundaries on ethnic divisions and conflict. In the early 2000s, Indonesia created hundreds of new local governments, thereby redrawing subnational boundaries and altering each districts' ethnic composition. We argue that such changes in political boundaries can fundamentally reshape ethnic divisions. Exploiting quasi-experimental variation in the timing of redistricting, we show that redistricting along group lines increases social stability, but that these gains are undone and even reversed in newly polarized districts. Our findings show that ethnic divisions are not fixed and instead depend on political boundaries.