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Now, it seems like you
couldn't do that.
But, in fact, the US did that.
In the 1970s, we ran what was
called the negative income tax
experiment where we literally
assigned people different wage
rates through taxing them
by different amounts.
And that was part of what gave
us this very convincing
evidence from 40 years ago
of these responses.
So where we get this is from
a real experiment we
ran 40 years ago.
The problem is that's a pretty
hard experiment to run.
It's pretty expensive, and
there's some ethical issues.
So what do you do today
to estimate that?
What you can do today is say,
well, we can't run the
experiment.
But the government runs
it for us every time
they change tax rates.
Because if you take two people
that are identical--
so let's say you and you
were identical--
and I change your tax rate
because you live in
Massachusetts.
I don't change your tax rate
because you live in New York.
I can see what happens to
you relative to you.
Because I've now essentially
run this experiment by the
government changing
someone's tax rate
and not someone else's.
That's the way we do it if we
can't run a true, randomized
experiment.
And that gives very, very
similar answers.
Let me stop there.
And we will come back.
Next lecture we'll talk about
applying this model.
So I guess in section
on Friday, we
review for the exam.
In section on Friday, we
review for the exam.
So show up to that.
And the exam is next week.
The exam will cover through
my next lecture.
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