UNIVERSITY OF TORONTO

DEPARTMENT OF ECONOMICS

 

ECONOMICS 2601H1S – SPRING 2012

 

PUBLIC ECONOMICS

 

Course Description:

 

This course is the second in a two-part graduate sequence in Public Economics.  This semester, we will be focusing on externalities, public goods theory, and theory and empirics relating to the provision of local public goods.

 

The course this semester is designed to introduce you to the (mainly) microeconomic analysis of issues in Public Economics.  It has three goals: first, to familiarize you with some basic theory that students of Public Economics should know; second, to give you experience critiquing existing research; and third, to introduce you to some of the interesting work in the field with a view to identifying promising areas for future research.

 

Instructor:

 

Robert McMillan

Room 302 (on third floor)

Department of Economics, 150 St. George Street

 

Phone Number:            416-978-4190

Fax Number:                416-978-6713

E-mail:                         mcmillan@chass.utoronto.ca

Web page:                    www.economics.utoronto.ca/mcmillan (linking through to “Economics 2601H1S: Graduate Public Economics” under “Teaching”)

 

Please note: the course web site will be used to make course-related announcements, post questions related to papers we are scheduled to discuss in class, and provide some sample problems.

 

Lectures:

 

Tuesday 4:00pm – 6:00pm in Room GE100, Economics Department, 150 St. George Street.

 

Office hours will be held on Thursday afternoons, 4:00pm – 5:00pm (or email me to fix a time).

 

Grading:

 

            Final Examination                  59%

            Homework Assignments (3)        9%

            Referee Reports (2)                   22%

            Class Participation                 10%

 

The final examination for the course will take place sometime in early-mid April.  It will be based heavily on the material covered in the course, including the papers discussed in class (see below).  In preparation for the final, I will post some sample questions on the course website to give you a feel for the sorts of questions that may appear. 

 

There will be three short homework assignments, each worth 3 percent of the overall grade.  I will give these out during class.  They will be due back the following class.

 

We will spend an increasing proportion of time as the course progresses discussing interesting or important (or both) papers in the field, listed in the Course Outline overleaf.  I will distribute a set of questions related to each paper beforehand to provide a basis for class discussion.  Please read these papers carefully, and work through the corresponding questions.  As incentives for doing so, some of these questions will appear on the final exam, and the “Class Participation” component of the overall grade will be based on your contribution to this class discussion.

 

To formalize the allocation of the 10 percent for class participation, I reserve the right to assign a portion of this to mini-presentations based on the assigned questions from the readings.  That is, students (with non-zero probability) will have to present parts of the assigned questions.  

 

To ensure that your critiquing skills are on track, I will be assigning two referee reports for you to write.  One of these will be assigned in mid-February; you will have a couple of weeks to work on it.  The second will be assigned in late-March and will be due in on the last day of class.  You should find this useful and interesting.  Together, the assignments are worth 18 percent of the total grade: 8 percent for the first and 10 percent for the second.  For the first referee report, students should also submit slides, worth 4 percent.  At least one student will be called on (randomly) to present in class, so everyone should be prepared.

 

There is a paper (optional for MA students, not optional for Ph.D’s) that can be substituted, in part, for the Final Examination.  This is intended for students who wish to get to grips with a strand of literature in Public Economics and to think seriously about improving it.  Under this option, a good research paper would identify an interesting research topic in the field, pose a clear research question, demonstrate that the question remains to be answered, and propose a sensible way of answering it.  (If theory, set out and work through a model.)  Students interested in carrying out research in Public Economics are strongly encouraged to pursue this option, and all Ph.D. students must pursue this.  [Aside: in the past, students have produced some first-rate term papers for the class.]  Any students wishing to pursue this option should make sure they speak to me about their proposed projects before the end of February.   

 

Textbooks:

 

For the first part of the course, I will refer to sections from 

 

Richard Cornes and Todd Sandler, The Theory of Externalities, Public Goods and Club Goods, Second Edition, Cambridge, 1996.

 

For econometric background,

 

Jeffrey M. Wooldridge, Econometric Analysis of Cross Section and Panel Data, MIT Press, 2002

 

is an excellent reference.  I would strongly recommend students interested in carrying out empirical work in economics to buy a copy.  (Wooldridge also has an introductory text that supplies lots of quick intuition, then developed formally in the graduate book listed above.  Both books are worth owning, though they are not cheap.)

 

I also recommend you buy and read

 

Dierdre N. McCloskey, Economical Writing, 2nd edition, Waveland Press, 2000.

 

Why? In economics and in professional life more generally, a premium attaches to being able to write clearly and well.  Thus you should practise and pay lots of attention to the art of writing.  This book gives some good hints, plus it is quite droll.

ECONOMICS 2601H1S – SPRING 2012

 

Graduate Public Economics

 

COURSE OUTLINE – Short Version

 

The Lectures will cover the topics listed below.  We may not get right to the bottom of the list, and additional papers may also be added as we go along. 

 

Starred readings are recommended, providing useful background material.  We will discuss readings marked with a D in class; please read them before the class discussion.  For each of these, I will make a set of questions available beforehand to provide a basis for discussion.

 

All the ‘D’ readings and all the starred readings can be borrowed from me.  Most of the important readings listed below are also available in JSTOR, an online journal archive. 

 

Topic 1:            Preliminaries: Welfare Theorems

 

*Cornes and Sandler, Chapter 2.

 

*Varian, Hal R. (1992), Microeconomic Analysis, 3rd Edition, Norton: Chapter 17 (and for a more general coverage, see Chapter 18).

 

Topic 2:            Externalities - Theory

                       

                        Characterization of Externalities

 

*Cornes and Sandler, Chapter 3.

 

Responses to Externalities

 

D Chu, C.Y. Cyrus and C. Wang (1998), “Economy of Specialization and Diseconomy of Externalities,” Journal of Public Economics, 69: 249-61.

 

*Cornes and Sandler, Chapter 4.

 

*Farrell, Joseph (1987), “Information and the Coase Theorem,” Journal of Economic Perspectives, 1(2): 113-129.

 

                                    D Kandel, Eugene and Edward P. Lazear (1992), “Peer Pressure and Partnerships,” Journal of Political Economy, 100(4): 801-817.

 
Topic 3:      Measuring Externalities - Empirics
 
                  Peer Effects in the Production of Public Goods

     

            D Evans, William, Wallace Oates, and Robert Schwab (1992), “Measuring Peer Group Effects: A Study of Teenage Behavior,” Journal of Political Economy, Vol. 100: 966-991.

 

                  Neighborhood Effects

 

D Borjas, George J. (1992), “Ethnic Capital and Intergenerational Mobility,” Quarterly Journal of Economics, February: 123-50.

 

Borjas, George J. (1995), “Ethnicity, Neighborhoods, and Human-Capital Externalities,” American Economic Review, June: 365-90.

 

D Bertrand, Marianne, Erzo Luttmer, and Sendhil Mullainathan (2000), “Network Effects and Welfare Cultures,” Quarterly Journal of Economics, August.

 

*Cutler, David and Edward Glaeser (1997), “Are Ghettos Good or Bad?” Quarterly Journal of Economics, August.

 

Katz, Lawrence F., Jeffrey R. Kling, and Jeffrey B. Liebman (2000), “Moving to Opportunity in Boston: Early Results of a Randomized Mobility Experiment,” Princeton University Working Paper #441 (http://www.irs.princeton.edu).

 

                  Identification

 

*Angrist, Joshua D. and Alan B. Krueger (2001), “Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments,” Princeton University Working Paper #455 (http://www.irs.princeton.edu).

 

Topic 4:            Public Goods Theory

 

*Atkinson, Anthony B. and Joseph E. Stiglitz (1980), Lectures on Public Economics, Chapter 16, New York: McGraw-Hill.

 

*Samuelson, Paul (1954), “The Pure Theory of Public Expenditures,” Review of Economics and Statistics, 36: 387-9.

 

Topic 5:            Club Theory, Local Public Goods, and the Tiebout Hypothesis

 

*Atkinson, Anthony B. and Joseph E. Stiglitz (1980), Lectures on Public Economics, Chapter 17, New York: McGraw-Hill.

 

*Rubinfeld, Daniel (1987), “The Economics of the Local Public Sector,” Handbook of Public Economics, Vol. II, eds. by A. Auerbach and M. Feldstein, Elsevier, North Holland.

 

Benabou, Rolando (1993), “Workings of a City,” Quarterly Journal of Economics, August: 619-652.

     

Topic 6:      Valuing Local Public Goods

 

                *Bayer, Patrick, Fernando Ferreira, and Robert McMillan (2007), “A Unified Framework for Measuring Preferences for Schools and Neighborhoods,” Journal of Political Economy, 115(4): 588-638.

 

D Black, Sandra E. (1999), “Do Better Schools Matter?  Parental Valuation of Elementary Education,” Quarterly Journal of Economics, May: 577-599.

                             

Topic 7:       Competition between Jurisdictions and the Provision of Public Goods

           

*Bayer, Patrick, and Robert McMillan (2008), “Choice and Competition in Local Education Markets,” revised version of NBER Working Paper 11802.

 

*Clark, Damon (2005), “Politics, Markets, and Schools: Quasi-Experimental Evidence on the Impact of Autonomy and Competition from a Truly Revolutionary UK Reform,” mimeo.

 

D Epple, Dennis, and Alan Zelenitz (1981), “The Implications of Competition among Jurisdictions: Does Tiebout Need Politics?” Journal of Political Economy 89(6): 1197-1217.

 

*Henderson, J. Vernon (1985), “The Tiebout Model: Bring Back the Entrepreneurs,” Journal of Political Economy 93: 248-264.

 

Hoxby, Caroline Minter (2000), “Does Competition Among Public Schools Benefit Students and Taxpayers?” American Economic Review 90(5): 1209-1238.

 

Rothstein, Jesse (2006), “Good Principals or Good Peers?  Parental Valuation of School Characteristics, Tiebout Equilibrium, and the Incentive Effects of Competition among Jurisdictions,” American Economic Review 96(4): 1333-1350.

 

                  Background: Estimating Equilibrium Models of the Local Public Economy

 

            Bayer, Patrick, Robert McMillan, and Kim Rueben (2008), “An Equilibrium Model of Sorting in an Urban Housing Market,” revised version of NBER Working Paper 10865.  Available at

            www.economics.utoronto.ca/mcmillan/methods.pdf.

 

            Epple, Dennis, and Holger Sieg (1999) “Estimating Equilibrium Models of Local Jurisdictions,” Journal of Political Economy, 107(4): 645-681.

 

Additional Education Topics

 

Topic 8:      The Education Production Function

 

*Hanushek, Eric, (1986), “The Economics of Schooling: Production and Efficiency in Public Schools,” Journal of Economic Literature, 24: 1141-77.

 

Rivkin, Steven, Eric Hanushek, and John Kain, (1998), “Teachers, Schools and Academic Achievement,” NBER Working Paper No. 6691, revised April 2001.  Now published in Econometrica, 2005.

 

Lazear, Edward P. (2001), “Education Production,” Quarterly Journal of Economics, August, 116(3): 777-803.

           

Topic 9:      Vouchers

 

*Epple, Dennis, and Richard Romano, (1998), “Competition between Private and Public Schools, Vouchers, and Peer-Group Effects,” American Economic Review, 88: 33-62.

 

Hoyt, William H. and Kangoh Lee (1998), “Education Vouchers, Welfare Effects, and Voting,” Journal of Public Economics, 69: 211-228.

           

            McMillan, Robert (2005), “Competition, Incentives, and Public School Productivity,” Journal of Public Economics, 89: 1133-1154.  Available at www.economics.utoronto.ca/mcmillan/jpubfinal_new.pdf.

 

            D Nechyba, Thomas (2000), “Mobility, Targeting, and Private School Vouchers,” American Economic Review, 90(1): 130-146.