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What can be the matter? No misfortune at home, I hope?No; but I have just heard something that has shocked me very much. There is an execution at Dales.How hard that poor man has struggled! observed Mr. Burke. And has it even come to this at last?Even so; and through no fault of his own that I can see. They are distraining for the rate. Aye, that is the way Effingham. Thus is our pauper list swelled, year by year. It grows at both ends. Paupers multiple their own numbers as fast as they can, and rate-payers sink down into rate-receivers.Harriet Martineau, Cousin Marshall, 1834Mr. Burke, a character in Harriet Martineaus short story Cousin Marshall, sees his friend, Mr. Effingham, looking unhappy. Mr. Burke asks,

Aye, that is the way Effingham. Thus is our pauper list swelled, year by year. It grows at both ends. Paupers multiple their own numbers as fast as they can, and rate-payers sink down into rate-receivers.Harriet Martineau is talking about paupers choosing not to work because of the English poor laws and taxpayers being driven to bankruptcy because of their cost. In other words, she is talking about the work disincentive effects of the English poor laws. It can be challenging to give people money without eroding the incentive to work and be independent. Its true for welfare recipients, boomerang kids, and the children of millionaires and billionaires. The perfect amount to leave children, according to Warren Buffett, is enough money so that they would feel they could do anything, but not so much that they could do nothing.

Incentive trusts put strings on the distribution of inheritances, making payments conditional on recipients behavior, often rewarding offspring who graduate from college, work in the labor force, get married or refrain from using drugs. Brendan Wood is currently 23 years old. When he was 17 years old, his wealthy parents, Sean and Nora, encouraged him to save money from his lifeguard job at a water park by promising to match his savings dollar for dollar. Suppose Brendans parents died unexpectedly three years later, after having designed an incentive trust to reward Brendan if he completed college and worked steadily in the labor market. After graduating from college, he bought a beach house, Porsche and Jeep with his college bonus. He is an promising, although inexperienced programmer, leading him to be offered a job with a software company where he would be paid $25 an hour for as many hours as he wanted to work. His trust fund pays him $200 per day and an additional dollar for every dollar he earns; every year the trust fund also donates substantial amounts of money to charity.

(a) Illustrate Brendans choice of whether or not to accept the job, assuming first that he accepts it and then doesnt. Labor / Leisure ChoiceIndifference curves: all combinations of leisure and income that yield equal utility. AYAMoneyIncomeLeisure ()

Properties of Indifference curvesindifference curves are downward slopingindifference curves do not intersecthigher indifference curves are associated with higher levels of utilityindifference curves are [strictly] convex to the origin

LeisureAMoneyIncomeTwo Lawyers:Lazy Lawyer (LL)Hardworking Lawyer (HL)LL and HL are both currently at point A. Which lawyer would need more income to compensate him or her for losing one unit of leisure? no such thing quote on 1707LeisureAMoneyIncomeHLLLno such thing quote on 1708ULLLeisureAMoneyIncomeHLLLUHLno such thing quote on 1709U1LeisureAB()Loss in Utility due to less Income(+)Gain in Utility due to more LeisureRearranging, MoneyIncomeMarginal rate of substitution between leisure and money incomeno such thing quote on 17010U1LeisureABMoneyIncomeslope of indifference curveratio of MU with the MU of the good on the horizontal axis in the numerator. Marginal rate of substitution between leisure and income (MRS)no such thing quote on 17011Budget ConstraintAssumptions:Total discretionary time (T) = 16 hours per dayMarket Labor (L) or Leisure (), ignoring, for now, home productionMoney Income = Earnings + Non-Labor Income (YW)

w =$25 per hourYW=$200 per dayTrust: $ for $ match of wBrendan is an promising, although inexperienced programmer, leading him to be offered a job with a software company where he would be paid $25 an hour for as many hours as he wanted to work. His trust fund pays him $200 per day and an additional dollar for every dollar he earns; every year the trust fund also donates substantial amounts of money to charityMoneyIncome($ per day)Leisure(hours per day)TYWBrendan Wood is currently 23 years old. When he was 17 years old, his wealthy parents, Sean and Nora, encouraged him to save money from his lifeguard job at a water park by promising to match his savings dollar for dollar. Suppose Brendans parents died unexpectedly three years later, after having designed an incentive trust to reward Brendan if he completed college and worked steadily in the labor market. After graduating from college, he bought a beach house, Porsche and Jeep with his college bonus. He is an promising, although inexperienced programmer, leading him to be offered a job with a software company where he would be paid $25 an hour for as many hours as he wanted to work. His trust fund pays him $200 per day and an additional dollar for every dollar he earns; every year the trust fund also donates substantial amounts of money to charity. (a) Illustrate Brendans choice of whether or not to accept the job, assuming first that he accepts it and then doesnt. MoneyIncome($ per day)Leisure(hours per day)The Labor Force Participation (LFP) Decision

ULLUHLTMoneyIncome($ per day)Leisure(hours per day)L=LazyH=HardworkingULUH

T=16ULA17T=16ULABrendans Labor Force Participation Decision (LFPD)Do not participateParticipate18How could Sean and Nora have increased the likelihood that Brendan would work after graduating from college? Increase the wage pure substitution effectReduce the daily stipend, assuming that leisure is a normal good. and / orSuppose Sean and Nora had written the incentive trust differently, giving Brendan a stipend of $100 per day and giving him $5 for every $1 of earnings. Illustrate Brendans labor force participation decision before and after the change, assuming that the change would have induced him to work. MoneyIncome($ per day)Leisure(hours per day)MoneyIncome($ per day)Leisure(hours per day)ULULThe Hours of Work DecisionOn a beautiful Southern California morning, Brendan drove his Porsche up the Pacific Coast Highway, stopping for lunch at a caf overlooking the ocean. After finishing his bean salad (with walnuts and feta), he opened up Dreaming in Code, flipped to the first page and started reading.

The story begins when the author was 15 years old and spending gobs of time in NYUs computer labs, free-coding on their dime. Even then, the guy was passionate about writing code: he thought about it constantly, even dreamt about it. Brendan thought about the time he spent in UCLAs computer labshe remembered being obsessed with many of his programs, although he couldnt remember ever dreaming in code. It was a good time in his life, especially when he was together with Meghan.

After reading the first chapter, Brendan flipped back to the beginning and looked at its title, Software Time. He suddenly felt empty, living a life without purpose, alone without Meghan. Software time, Meghan time, he thought, ran out for me when I left UCLA.

It was an epiphany, one that radically altered his indifference curves between leisure and laborhe went from being a leisure-loving, beach bum to a labor-loving, lab nerd. Driving back to LA along the Pacific Coast Highway, he called a couple of friends who majored in computer science and, with his heart pounding, Meghan. A few days later, Brendan called the trustee of his trust fund to tell her to donate his daily stipend of $200 per day to the Halo Trust, both because he believed in its missionclearing Africa of land minesand because he knew it would strengthen the work incentive effects of his trust fund. Illustrate how he reacted to the change, assuming that leisure is a normal good.

MoneyIncome($ per day)Leisure(hours per day)TU1MoneyIncome($ per day)Leisure(hours per day)TU1MoneyIncome($ per day)Leisure(hours per day)TU1U2Illustrate the income and substitution effects of the provision of Brendans trust fund that gives him a dollar for every dollar of earnings holding the stipend constant at $200 per day. MoneyIncome($ per day)Leisure(hours per day)TU1MoneyIncome($ per day)Leisure(hours per day)TU1U2Wage Effect with the Income Effect DominatingMoneyIncome($ per day)Leisure(hours per day)TU1MoneyIncome($ per day)Leisure(hours per day)TU1U2Wage Effect with the Substitution Effect DominatingMoneyIncome($ per day)Leisure(hours per day)TU1U2MoneyIncome($ per day)Leisure(hours per day)TU1U2MoneyIncome($ per day)Leisure(hours per day)TU1U2MoneyIncome($ per day)Leisure(hours per day)TU1U2MoneyIncome($ per day)Leisure(hours per day)TU1U2MoneyIncome($ per day)Leisure(hours per day)TU1U2MoneyIncome($ per day)Leisure(hours per day)TU1U2Hypothetical budget constraintoriginal utility, new wage The substitution effect:to The income effect:to