Notches

37 Pages Posted: 19 Jun 2004

See all articles by Alan S. Blinder

Alan S. Blinder

Princeton University - Department of Economics; National Bureau of Economic Research (NBER)

Harvey S. Rosen

Princeton University - Department of Economics; National Bureau of Economic Research (NBER); CESifo (Center for Economic Studies and Ifo Institute)

Date Written: August 1984

Abstract

Economists have an instinctively negative reaction to any government program that creates a "notch," that is, a discontinuity in a budget constraint. For example, welfare programs like public housing are structured so that a finite lump of benefits is lost all at once when a household's income crosses a certain threshhold. Such notches deserve their bad reputation --they effectively impose a high marginal tax rate over a small income range, which no doubt discourages work and promotes welfare dependency. However,this paper argues that in other contexts, tax and subsidy plans with notches should at least be considered as serious contenders when public policy seeks to encourage or discourage some activity. Using simulations,we show how notch schemes can dominate traditional linear schemes using a standard efficiency criterion.

Suggested Citation

Blinder, Alan S. and Rosen, Harvey S., Notches (August 1984). NBER Working Paper No. w1416, Available at SSRN: https://ssrn.com/abstract=327132

Alan S. Blinder (Contact Author)

Princeton University - Department of Economics ( email )

Princeton, NJ 08544-1021
United States

National Bureau of Economic Research (NBER)

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Harvey S. Rosen

Princeton University - Department of Economics ( email )

001 Fisher Hall
Princeton, NJ 08544
United States

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

CESifo (Center for Economic Studies and Ifo Institute)

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Munich, DE-81679
Germany

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