In this paper we discuss first the measurement of financial inequalities, focusing on top income and wealth shares. We then consider the scope for policy reforms to tackle some of the issues raised.
This short note summarises some key facts about non-doms, and explains the case for
reform to the current regime. It first explains briefly what it means to be a non-dom,
the tax advantages this can bring, the costs associated with use of these tax benefits,
and past reforms to the regime. It then provides some key statistics on non-doms in the
UK. Finally, we explain why the regime is in need of reform.
This CAGE Policy Briefing studies the offshore income and capital gains of the
UK's ‘non-doms’ – individuals who are resident in the UK but who claim on their
tax return that their permanent home (‘domicile’) is abroad. We use de-identified
confidential data accessed via HMRC to analyse all individuals who have claimed
non-dom status between 1997 and 2018. We show non-doms at least £10.9 billion
in offshore income and gains. Most of these unreported income and gains (55%)
belong to non-doms who arrived in the UK in the past five years. Looking at
previous reforms that restricted access to the non-dom regime, we see these led to
very little emigration. Those who did leave were paying hardly any tax.
Consequently, abolishing the non-dom regime would raise at least £3.2 billion even
after accounting for migration and other tax planning, and the loss of existing
revenue from the remittance basis charge.
Using administrative data on the universe of UK taxpayers, we
study the contribution of migrants to the rise in UK top incomes.
We show migrants are over-represented at the top of the income
distribution, with migrants twice as prevalent in the top 0.01%
as anywhere in the bottom 97%. These high incomes are
predominantly from labour, rather than capital, and migrants are
concentrated in only a handful of industries, predominantly finance.
Almost all (90%) of the observed growth in the UK top 1%
income share over the past 20 years has accrued to migrants.
A. Advani, A. Summers, and H. Tarrant (forthcoming),
Journal of the Royal Statistical Society: Series A
[earlier version available as CAGE Working Paper
490
We compare two approaches to measuring UK top income shares—the
share of income going to particular subgroups, such as the top
1%. We set out four criteria that an ideal top share series
should satisfy: (i) comparability between numerator and
denominator; (ii) comparability over time; (iii) international
comparability; and (iv) practical sustainability. Our preferred
approach meets three of these; by contrast the approach
currently used to produce UK fiscal income series meets none of
them. Changing to our preferred approach matters quantitatively:
the share of income going to the top 1% is 2 percentage points
higher, but rising more slowly, than under the alternative.
A. Advani, T. Ooms, and A. Summers (2022), Journal of Social Policy
Policymakers tend to ‘treasure what is measured’ and overlook
phenomena that are not. In an era of increased reliance on
administrative data, existing policies also often determine what
is measured in the first place. We analyse this two-way
interaction between measurement and policy in the context of the
investment incomes and capital gains that are missing from the
UK’s official income statistics. We show that these ‘missing
incomes’ change the picture of economic inequality over the past
decade, revealing rising top income shares during the period of
austerity. The underestimation of these forms of income in
official statistics has diverted attention from tax policies
that disproportionately benefit the wealthiest. We urge a
renewed focus on how policy affects and is affected by
measurement.
Top incomes have grown rapidly in recent decades and this growth
has sparked a debate about rising inequality in Western
societies. This column combines data from UK tax records with
new information on migrant status to show that that migrants are
highly represented at the top of the UK’s income distribution.
Indeed, migration can account for the majority of top-income
growth in the past two decades and can help explain why the UK
has experienced an outsized increase in top incomes.
This CAGE Policy Briefing summarises new research on the taxes
paid by the UK’s richest individuals, using anonymised data
collected from the personal tax returns of everyone who received
over £100,000 in total remuneration (taxable income plus taxable
capital gains). It shows how tax paid as a share of income or
total remuneration varies across individuals. It shows effective
tax rates are much lower than headline rates, regressive at high
levels of income or remuneration, and vary by up to a factor of
five across people with the same remuneration. An
Alternative Minimum Tax of 35% could raise around £11bn,
equivalent to 2p on the basic rate or 5p on both the higher and
additional rates.
This CAGE Policy Briefing summarises new research on the impact
of capital gains – which are excluded from existing income
statistics – on measured inequality in the UK. It shows gains
are highly concentrated, are persistent for a minority, and are
rising. The richest have a larger share of total resources than
previously thought, and it has been growing over time.
Capital gains (the profits from disposing of an asset for more
than it was worth when you acquired it) are generally excluded
from analysis of incomes in the UK, despite being a significant
driver of some people’s lifetime living standards. This
Resolution Foundation Report looks at what we know about taxable
capital gains; how our understanding of top income shares
changes if we include capital gains in our analysis; and whether
definitions of income used in official statistics should be
changed or supplemented.
Aggregate taxable capital gains in UK have tripled in past
decade. Using confidential administrative data on the universe
of UK taxpayers, we show that including gains changes the
picture of UK inequality over the past two decades. These
taxable gains are largely repackaged income, so their exclusion
biases the picture of inequality. Including them changes who is
at the top of the distribution, adding more business owners and
older people. The share of income plus gains (both pre- and
post-tax) going to the top 1% is 3pp higher than for
income only, and this gap has been steadily rising.
This CAGE Policy Briefing studies the individuals who make up the UK's
Sunday Times Rich List (STRL). These are the 1000 richest people or
families with strong ties to the UK. We link together information in the
STRL with multiple other data sources to analyse the foreign connections
of STRL members, the industries with which they are associated, and their
corporate ties to UK land and property. One in seven appear not to be UK
resident for tax purposes. Among billionaires, one in seven are located
in tax havens. Collectively they own almost £2 trillion in UK wealth.
This report presents the final findings of the Wealth Tax
Commission into whether the UK should have a wealth tax. It
concludes that if the government chooses to raise taxes in
response to COVID, it should implement a one-off wealth tax in
preference to increasing taxes on work or consumption.
In this paper we discuss first the measurement of financial inequalities, focusing on top income and wealth shares. We then consider the scope for policy reforms to tackle some of the issues raised.
The latest statistics on Household Total Wealth in Great Britain from the ONS are a welcome but limited insight into what has been happening to wealth in Great Britain. Limitations in survey response means they will underestimate the share of wealth at the top. While they will not tell us what has happened as a result of the pandemic, we can use them to provide an educated guess.
A. Advani, E. Chamberlain and A. Summers (2021), Tax Journal
A thoughtful analysis appeared in this journal of
our final report
on a wealth tax for the UK (‘The Wealth Tax Commission’s final report’
(P Barclay, G Price & T Schlee), Tax Journal, 8 January 2021).
For a full discussion of the final report, we would refer
readers to the
frequently asked questions
that deal with some of the misunderstandings that have emerged
and the
longer final report
(or for a quick read the
executive summary). However, we here respond to some specific points raised in
the article.
Household wealth is profoundly important for living standards.
We show that wealth inequality in the UK is high and has
increased slightly over the past decade as financial asset
prices increased in the wake of the financial crisis. But data
deficiencies are a major barrier in understanding the true
distribution, composition and size of household wealth. We find
that the most comprehensive survey of household wealth in the UK
does a good job of capturing the vast majority of the wealth
distribution, but that nearly £800 billion of wealth held
by the very wealthiest UK households is missing. We also find
tentative evidence to suggest that survey measures of
high-wealth families undervalue their assets – our central
estimate of the true value of wealth held by households in the
UK is 5% higher than the survey data suggests.
In this paper we model the revenue that could be raised from an
annual and a one-off wealth tax of the design recommended by
Advani, Chamberlain and Summers (2020). We examine the distributional effects of the tax, both in
terms of wealth and other characteristics. We also estimate the
share of taxpayers who would face liquidity constraints in
meeting their tax liability. We find that an annual wealth tax
charging 0.18% on wealth above £500,000 could generate
£10 billion in revenue, before admin costs. Alternatively, a
one-off tax charging 4.8% (effectively 0.96% per
year, paid over a 5-year period) on wealth above the same
threshold, would generate £250 billion in revenue. To put our
revenue estimates into context, we present revenue estimates and
costings for some commonly-proposed reforms to the existing set
of taxes on capital.
This report introduces the UK Wealth Tax Commission, which will
evaluate whether a wealth tax for the UK would be desirable and
deliverable. To do this we have commissioned a series of
Evidence Papers that will study each of the key issues in
detail. In this report we set out initial evidence on what has
been happening to wealth and wealth taxation in the UK. We
examine the provisional case for a wealth tax, and map some of
the difficulties in implementing it. Our intention here is not
to provide the answers, but to illustrate the key issues this
project will address and set out the path to our final report in
December, which will contain our conclusions on whether or not
the UK should have a wealth tax, and if so, how it should be
designed.
This CAGE Policy Briefing studies the offshore income and capital gains of the
UK's ‘non-doms’ – individuals who are resident in the UK but who claim on their
tax return that their permanent home (‘domicile’) is abroad. We use de-identified
confidential data accessed via HMRC to analyse all individuals who have claimed
non-dom status between 1997 and 2018. We show non-doms at least £10.9 billion
in offshore income and gains. Most of these unreported income and gains (55%)
belong to non-doms who arrived in the UK in the past five years. Looking at
previous reforms that restricted access to the non-dom regime, we see these led to
very little emigration. Those who did leave were paying hardly any tax.
Consequently, abolishing the non-dom regime would raise at least £3.2 billion even
after accounting for migration and other tax planning, and the loss of existing
revenue from the remittance basis charge.
This CAGE Policy Briefing studies the UK's ‘non-doms’ – individuals who
are resident in the UK but who claim on their tax return that their permanent
home (‘domicile’) is abroad. We use de-identified confidential data accessed via
HMRC to analyse all individuals who have claimed non-dom status between 1997
and 2018. We show non-doms are globally connected and economically elite: almost
all were either born abroad or have lived abroad for substantial periods, and their
incomes are very high. Non-doms are highly likely to work in finance and other ‘City’
jobs. They tend to come from Western Europe, India and the US. Within the UK they
largely reside in and around London, although there are sizeable shares in Oxford and
Cambridge, working in research and education, and in Aberdeen, working in oil.
In this paper we show the importance of international ties amongst the UK’s global economic elite, by exploiting administrative data derived from tax records. We show how this data can be used to shed light on the kind of transnational dynamics which have long been hypothesised to be of major significance in the UK, but which have previously proved intractable to systematic study. Our work reveals the enduring and distinctive influence of long-term imperial forces, especially to the former ‘white settler’ ex-dominions which have been called the ‘anglosphere’. These are allied to more recent currents associated with European integration and the rise of Asian economic power. Here there are especially strong ties to the ‘old EU-6’ nations of France, Germany, Netherlands, Belgium, Luxembourg, and Italy. The incredible detail and universal coverage of our data means that we can study those at the very top with a level of granularity that would be impossible using traditional survey sources. We find compelling support for the public perception that non-doms are disproportionately highly affluent individuals who can be viewed as a part of a global elite. However, whilst there is some evidence for the stereotype of the global wealthy parking themselves in the UK, this underplays the significance of the working rich. Our analysis also reveals the remarkable concentration of non-doms in central areas of London.
In this paper we discuss first the measurement of financial inequalities, focusing on top income and wealth shares. We then consider the scope for policy reforms to tackle some of the issues raised.
Capital gains are particularly complex to tax given their
infrequency, the different ways in which they are generated, and
worries about harming productivity. There are theoretical
arguments in support of everything from zero rates to high rates
of tax on capital. In this paper, I first discuss the impact of
capital gains on inequality, which often motivates discussions
about how gains should be taxed. I then set out the principles
that determine how gains should be taxed, in particular how the
tax rate should relate to income tax rates. I propose that
capital gains tax rates be equalized with income tax rates,
subject to provisions to allow gains to be ‘smoothed’ over time
and to remove inflation from the tax base. I highlight key
transitional issues in moving to such a tax structure. Finally,
I discuss the specific lessons for Canada.
This CAGE Policy Briefing studies alternatives to the
government’s new Health and Social Care Levy. Using publicly
accessible tax data from HMRC, we find that removing the current
National Insurance exemptions for investment income and people
of pension age would raise £12 billion. This is the same amount
of revenue as the Government is targeting from its new Levy.
Equalising National Insurance on higher earnings with the rates
already paid by lower earners could raise an additional £20
billion. This would be enough to fund a cut in the main rate of
NICs by 1.25p, instead of raising these rates, as the government
is planning. Under this alternative package of reforms, more of
the revenue would come from London and the South East, and from
older, wealthier individuals.
This paper introduces a special issue on a Wealth Tax, which
draws together the latest thinking on wealth taxes with the aim
of filling this gap. It draws heavily on international
experience and evidence, applying these insights to the UK
context. The papers build on work undertaken for the Wealth Tax
Commission, which delivered its final report in December 2020.
The contributors to this special issue include tax practitioners
and academic lawyers as well as economists, reflecting our view
that this range of expertise is essential to evaluating the
practice, as well as principles, of a wealth tax. In this paper
we touch upon some common themes arising across the papers. We
also highlight some important remaining gaps in the evidence
base on wealth taxes, particularly on the measurement of wealth
and behavioural responses at the very top of the wealth
distribution.
In this paper we model the revenue that could be raised from an
annual and a one-off wealth tax of the design recommended by
Advani, Chamberlain and Summers (2020). We examine the distributional effects of the tax, both in
terms of wealth and other characteristics. We also estimate the
share of taxpayers who would face liquidity constraints in
meeting their tax liability. We find that an annual wealth tax
charging 0.18% on wealth above £500,000 could generate
£10 billion in revenue, before admin costs. Alternatively, a
one-off tax charging 4.8% (effectively 0.96% per
year, paid over a 5-year period) on wealth above the same
threshold, would generate £250 billion in revenue. To put our
revenue estimates into context, we present revenue estimates and
costings for some commonly-proposed reforms to the existing set
of taxes on capital.
In this paper, we review the existing empirical evidence on how
individuals respond to the incentives created by a net wealth
tax. Variation in the overall magnitude of behavioural responses
is substantial: estimates of the elasticity of taxable wealth
vary by a factor of 800. We explore three key reasons for this
variation: tax design, context, and methodology. We then discuss
what is known about the importance of individual margins of
response and how these interact with policy choices. Finally, we
use our analysis to systematically narrow down and reconcile the
range of elasticity estimates. We argue that a well-designed
wealth tax would reduce the tax base (of reported wealth) by
7-17% if levied at a tax rate of 1%.
Aggregate taxable capital gains in UK have tripled in past
decade. Using confidential administrative data on the universe
of UK taxpayers, we show that including gains changes the
picture of UK inequality over the past two decades. These
taxable gains are largely repackaged income, so their exclusion
biases the picture of inequality. Including them changes who is
at the top of the distribution, adding more buiness owners and
older people. The share of income plus gains (both pre- and
post-tax) going to the top 1% is 3pp higher than for
income only, and this gap has been steadily rising.
A. Advani, W. Elming, and J. Shaw (forthcoming),
Review of Economics and Statistics
(earlier versions appeared as
CAGE Working Paper 414
and IFS Working Paper W17/24)
We study the effects of audits on long run compliance behaviour,
using a random audit program covering more than 53,000 tax
returns. We find that audits raise reported tax liabilities for
five years after audit, effects are longer lasting for more
stable sources of income, and only individuals found to have
made errors respond to audit. 60-65% of revenue from
audit comes from the change in reporting behaviour. Extending
the standard model of rational tax evasion, we show these
results are best explained by information revealed by audits
constraining future misreporting. Together these imply that more
resources should be devoted to audits, audit targeting should
account for reporting responses, and audit threat letters miss a
key benefit of audit
We use administrative tax data from audits of self-assessment
tax returns to understand what types individuals are most likely
to be non-compliant. Non-compliance is common, with one-third of
taxpayers underpaying by some amount, although half of aggregate
under-reporting is done by just 2% of taxpayers. Third
party reporting reduces non-compliance, while working in a
cash-prevalent industry increases it. However, compliance also
varies significantly with individual characteristics:
non-compliance is higher for men and younger people. These
results matter for measuring inequality, for understanding
taxpayer behaviour, and for targeting audit resources.
This IFS Briefing note uses data from HMRC’s random audit
programme to show which types of people are more likely to be
under-reporting taxes and how their behaviour changes after a
tax audit. The results are based on data from audits covering
tax returns for the years 1999–2009.
This SMF-CAGE Briefing Paper explains which types of individuals
are most likely to be non-compliant on their tax returns, and
what can be done to improve compliance and raise tax revenue.
Policy Brief
summarising some of the policy implications.
Using administrative data on the globally connected super-rich in the UK, we study the effect of a large tax reform on migration behaviour. Prior to 2017, offshore investment returns for ‘non-doms’ – individuals tax resident in the UK but with connections to other countries – were untaxed. Average offshore investment returns for these individuals exceeded £420,000; even without considering other types of income, this puts them in the top 0.2% of the population. A reform in 2017 brought long-stayers and UK-born non-doms into the standard tax system, reducing their effective net of average tax rate by between 8.8% and 13.0%. We find that migration responses were limited: our central estimate of the migration elasticity is 0.02, and across a range of specifications we can rule out elasticities larger than 0.5. Using reforms for the UK-born super-rich who were living abroad, we find that migration elasticities are limited even for recent arrivals, for whom our central estimate is 0.18. Assuming similar elasticities for all non-doms, abolition of the preferential regime would increase tax revenue collected from non-doms by £3.2bn (84%).
In this paper we study the contribution of migrants to the rise
in UK top incomes. Using administrative data on the universe of
UK taxpayers we show migrants are over-represented at the top of
the income distribution, with migrants twice as prevalent in the
top 0.1% as anywhere in the bottom 97% These high
incomes are predominantly from labour, rather than capital, and
migrants are concentrated in only a handful of industries,
predominantly finance. Almost all (85%) of the growth in
the UK top 1% income share over the past 20 years can be
attributed to migration.
Top incomes have grown rapidly in recent decades and this growth
has sparked a debate about rising inequality in Western
societies. This column combines data from UK tax records with
new information on migrant status to show that that migrants are
highly represented at the top of the UK’s income distribution.
Indeed, migration can account for the majority of top-income
growth in the past two decades and can help explain why the UK
has experienced an outsized increase in top incomes.
How does economics compare to other social sciences in its study
of issues related to race and ethnicity? We assess this using a
corpus of 500,000 academic publications in economics, political
science, and sociology. Using an algorithmic approach to
classify race-related publications, we document that economics
lags far behind the other disciplines in the volume and share of
race-related research, despite having higher absolute volumes of
research output. Since 1960, there have been 13,000 race-related
publications in sociology, 4,000 in political science, and 3,000
in economics. Since around 1970, the share of economics
publications that are race-related has hovered just below 2%
(although the share is higher in top-5 journals); in political
science the share has been around 4% since the mid-1990s, while
in sociology it has been above 6% since the 1960s and risen to
over 12% in the last decade. Finally, using survey data
collected from the Social Science Prediction Platform, we find
economists tend to overestimate the amount of race-related
research in all disciplines, but especially so in economics.
In the wake of last summer’s Black Lives Matter protests, many
have asked themselves what they are doing to tackle racial
injustice. For economists, one central question is the extent to
which the profession has examined the causes and consequences of
racial inequality. This column reports evidence that
race-related research in economic journals constitutes a far
lower share than in comparable publications in sociology and
political science. What’s more, economists over-estimate the
extent of race-related research done by the profession.
Understanding why economists produce so little race-related
research is essential if the discipline is going to be able to
reform.
Economists are central to policymaking in the UK, and to
providing the research that underpins that policymaking. Despite
having this important role in society, economists are not very
representative of society, with a well-documented
under-representation of women in the profession. In this
briefing note, we examine the ethnic diversity of academic
economists who provide much of the research that ultimately
feeds into policymaking. We use data from the Higher Education
Statistics Agency (HESA) to look at which groups are more or
less well represented as academic economic researchers. We then
examine economics students, to understand both the source of
current under-representation and the prospects for change.
Finally, we study some of the barriers faced by economics
students. We are not able to examine diversity among the large
number of economists who work outside academia, due to a lack of
data.
The future of UK economics is looking predominantly male and
disproportionately privately educated. This column introduces
#DiscoverEconomics – a campaign to increase diversity in
economics led by the Royal Economic Society and with the support
of a wide range of institutions involved in economic research,
communication and policymaking, including the Bank of England,
the Government Economic Service, the Society of Professional
Economists and many leading research institutions. The campaign
aims to attract more women, ethnic minority students, and
students from state schools and colleges to study the subject at
university.
The gender pay gap opens up immediately after graduation, with
male graduates earning 5% more than female graduates on average
at age 25. Ten years after graduation – before most graduates
start having children – the gender pay gap stands at 25%. Most
of the initial gap can be explained by university subject choices,
with women less likely to study subjects that lead to high-paying
jobs: women make up just a third of graduates in economics, the
subject with the highest financial returns, and two thirds of
graduates in creative arts, the subject with the lowest returns.
Subject choice continues contribute to the gender pay gap over
time, but its relative importance fades as other factors (like
having children and working part-time) come into play.
A. Advani, S. Sen and R. Warwick (2021), IFS Observation
The economics profession – and the current student population
studying economics – is not representative of society, with
women, some ethnic minorities, and state school students
underrepresented. While more than 7% of private school boys
doing an undergraduate degree were studying economics in
2018/19, less than 1% of state school girls were. We highlight
that interventions aimed at changing this picture need to
consider the choices students make early on in their educational
career. A Level Economics is a key gateway to further study in
the subject, but access to and take-up of this qualification
varies substantially according to a student’s background. As a
result, improving representation within the economics profession
in the long-term must include steps to ensure young students
understand what the subject involves and the opportunities it
provides, and have the chance to study it before university.
The future of UK economics is looking predominantly male and
disproportionately privately educated. This column introduces
#DiscoverEconomics – a campaign to increase diversity
in economics led by the Royal Economic Society and with the
support of a wide range of institutions involved in economic
research, communication and policymaking, including the Bank
of England, the Government Economic Service, the Society of
Professional Economists and many leading research
institutions. The campaign aims to attract more women, ethnic
minority students, and students from state schools and
colleges to study the subject at university.
A. Advani, D. Prinz, A. Smurra and R. Warwick (2021), IFS
Observation
Carbon pricing will be one of the most talked about policy
options at COP26. The idea of carbon pricing is that putting a
price on the emission of greenhouse gases (GHGs) to reflect the
social costs of climate change should provide producers and
consumers with strong incentives to reduce such emissions. In
this observation, we consider the opportunities and risks from
introducing carbon taxes in developing countries, with reference
to Ethiopia and Ghana as case studies.
Current UK energy use policies, which primarily aim to reduce
carbon emissions, provide abatement incentives which vary by
user and fuel, creating inefficiency. Distributional concerns
are often given as a justification for the lower carbon price
faced by households, but there is little rationale for carbon
prices associated with the use of gas to be lower than those for
electricity. We consider reforms that raise carbon prices faced
by households, and reduce the variation in carbon prices across
gas and electricity use, improving the efficiency of emissions
reduction. We show that the revenue raised from this can be
recycled in a way that ameliorates some of the distributional
concerns. Whilst such recycling is not able to protect all
poorer households, existing policy also makes distributional
trade-offs, but does this in an opaque and inefficient way.
The report analyses and assesses: the rationale and objectives
of energy policy; the current policy landscape faced by UK
energy users; how current and future policy has led to
inconsistencies in the implicit carbon prices faced by different
users; and potential ways in which to improve policy affecting
domestic and business energy users.
Government wants both to reduce carbon emissions and to reduce
‘fuel poverty’. Energy prices have risen in part because of a
multitude of policies aimed at reducing emissions. There are
also multiple policies aimed at ameliorating these effects.
Altogether, this leads to a complex policy landscape,
inefficient pricing and opaque distributional effects.
In this report, we show the effects of energy price rises over
the recent past, look at what current policies mean for
effective carbon prices and their impact on bills, and consider
the distributional consequences of a more consistent approach to
carbon pricing, alongside possible changes to the tax and
benefit system that could mitigate these effects.
A. Advani, D. Prinz, A. Smurra and R. Warwick (2021), IFS
Observation
Carbon pricing will be one of the most talked about policy
options at COP26. The idea of carbon pricing is that putting a
price on the emission of greenhouse gases (GHGs) to reflect the
social costs of climate change should provide producers and
consumers with strong incentives to reduce such emissions. In
this observation, we consider the opportunities and risks from
introducing carbon taxes in developing countries, with reference
to Ethiopia and Ghana as case studies.
Poor households regularly borrow and lend to smooth consumption,
yet we see much less borrowing for investment. This cannot be
explained by a lack of investment opportunities, nor by a lack
of resources available for investment. This paper provides a
novel explanation for this puzzle: informal risk sharing can
crowd out investment. I extend the canonical model of limited
commitment in risk-sharing networks to allow for lumpy
investment. The key insight is that the cost of losing insurance
is lower for a household that has invested, since it has an
additional stream of income. This limits its ability to credibly
promise future transfers, and so limits its ability to borrow
from other households. The key prediction of the model is a
non-linear relationship between total income and investment at
the network level – namely there is a network level poverty
trap. I test this prediction using a randomised control trial in
Bangladesh, that provided capital transfers to the poorest
households. The data covers 27,000 households from 1,400
villages, and contain information on risk-sharing networks,
income and investment. I exploit variation in the number of
program recipients in a network to identify the threshold level
of capital provision needed at the network level for the program
to move the network out of a poverty trap and generate further
investment. I also verify additional predictions of the model
and rule out alternative explanations. My results highlight how
capital transfer programs can be made more cost-effective by
targeting communities at the threshold of the aggregate poverty
trap.
A. Advani, T. Kitagawa and T. Słoczyński (2019),
Journal of Applied Econometrics
We consider two recent suggestions for how to perform an
empirically motivated Monte Carlo study to help select a
treatment effect estimator under unconfoundedness. We show
theoretically that neither is likely to be informative except
under restrictive conditions that are unlikely to be satisfied
in many contexts. To test empirical relevance, we also apply the
approaches to a real-world setting where estimator performance
is known. Both approaches are worse than random at selecting
estimators which minimise absolute bias. They are better when
selecting estimators that minimise mean squared error. However,
using a simple bootstrap is at least as good and often better.
For now researchers would be best advised to use a range of
estimators and compare estimates for robustness.
A. Advani and B. Malde (2018),
Journal of Economic Surveys
Understanding whether and how connections between agents
(networks) such as declared friendships in classrooms,
transactions between firms, and extended family connections,
influence their socio-economic outcomes has been a growing area
of research within economics. Early methods developed to
identify these social effects assumed that networks had
formed exogenously, and were perfectly observed, both of which
are unlikely to hold in practice. A more recent literature, both
within economics and in other disciplines, develops methods that
relax these assumptions. This paper reviews that literature. It
starts by providing a general econometric framework for linear
models of social effects, and illustrates how network
endogeneity and missing data on the network complicate
identification of social effects. Thereafter, it discusses
methods for overcoming the problems caused by endogenous
formation of networks. Finally, it outlines the stark
consequences of missing data on measures of the network, and
regression parameters, before describing potential solutions.
A. Advani and B. Malde (2018),
Swiss Journal of Economics and Statistics (solicited)
In many contexts we may be interested in understanding whether
direct connections between agents, such as declared friendships
in a classroom or family links in a rural village, affect their
outcomes. In this paper we review the literature studying
econometric methods for the analysis of linear models of social
effects, a class that includes the `linear-in-means' local
average model, the local aggregate model, and models where
network statistics affect outcomes. We provide an overview of
the underlying theoretical models, before discussing conditions
for identification using observational and
experimental/quasi-experimental data.
In many contexts we may be interested in understanding whether
direct connections between agents, such as declared friendships
in a classroom or family links in a rural village, affect their
outcomes. In this paper we review the literature studying
econometric methods for the analyis of social networks. We begin
by providing a common framework for models of social effects, a
class that includes the ‘linear-in-means’ local average model,
the local aggregate model, and models where network statistics
affect outcomes. We discuss identification of these models using
both observational and experimental/quasi-experimental data. We
then discuss models of network formation, drawing on a range of
literatures to cover purely predictive models, reduced form
models, and structural models, including those with a strategic
element. Finally we discuss how one might collect data on
networks, and the measurement error issues caused by sampling of
networks, as well as measurement error more broadly.