5/ Big takeaway:
In data-poor economies, information is not missing—it’s structural.
Tax systems can be redesigned to use existing registries + network structure → enabling fairer, more robust fiscal policy without intrusive income monitoring.
4/ Why? Because economic topology is informational.
In cohesive networks → better inference → stronger redistribution.
In fragmented networks → higher uncertainty → more cautious (but still robust) policy.
3/ Results are striking:
Network-based tax rules outperform both traditional proxies and ML models without graphs—achieving lower inequality, higher progressivity, and greater robustness under uncertainty.
2/
Key idea: individuals are embedded in networks (education, sector, region, formality).
Using GNNs, we extract structural embeddings that act as sufficient statistics for taxation—capturing opportunity and constraints without observing income.
#EconSky 1/
What if taxation didn’t rely on income at all?
This paper shows that even under severe informational scarcity, redistribution is still possible—by leveraging economic structure, not reported income.
www.emerald.com/jefas/articl...
Stochastic macro shocks do not need to be large.
Even bounded noise can trigger instability when combined with
• network concentration
• nonlinear spillovers
• amplifying reactions
Topology + nonlinearity + randomness = systemic risk.
#EconSky
Nonlinearity matters.
Increasing the diffusion exponent p makes the system more sensitive to local gradients,
which accelerates divergence in heterogeneous networks.
This explains why shocks in real systems often propagate unevenly.
We simulate the model on scale-free networks (Barabási–Albert), which resemble
• financial networks
• supply chains
• innovation systems
• energy networks
Result: hub-driven amplification generates heavy-tailed outcomes even under mild shocks. #EconSky
The most interesting result:
there exists a spectral threshold separating stable vs explosive regimes.
When network concentration is too high, diffusion cannot stabilize the system.
Hubs dominate the dynamics.
This connects stability to the spectrum of the adjacency matrix.
We prove existence and uniqueness of solutions using
• accretive operator theory
• nonlinear semigroups
• stochastic evolution equations
This gives a rigorous foundation for survival dynamics on graphs, something missing in most economic network models.
Key idea:
Stability in networks is not only about parameters.
It depends on topology.
Even with bounded shocks, heterogeneous networks can generate explosive dynamics when amplification dominates diffusion.
The paper introduces a nonlinear diffusion–reaction model on weighted graphs, combining
• p-Laplacian diffusion
• stochastic macro shocks
• node-level hazard dynamics
This leads to a coupled PDE–SDE system defined directly on networks.
Most economic models assume smooth spaces.
Real economies are networks.
Production, finance, trade, and infrastructure form graphs with hubs, bottlenecks, and asymmetries.
This changes everything about stability and shock propagation.
Just published a new paper on nonlinear dynamics on economic networks.
We develop a stochastic evolution framework where survival, diffusion, and amplification interact on heterogeneous graphs. #EconSky
Paper: www.sciencedirect.com/science/arti...
Paper:
Nonlinear Fiscal Transitions and the Dynamics of Public Expenditure Reform
arxiv.org/abs/2603.05563
Comments welcome.
14/
For countries with rigid fiscal structures (many welfare states fall in this category), this perspective may help explain why reforms often appear “expensive” at first.
The costs are not necessarily failure.
They are the price of transition.
13/
More broadly, the paper tries to bridge two literatures:
• descriptive expenditure reviews
• formal dynamic modeling of fiscal transitions
By introducing a nonlinear framework for public expenditure adjustment.
12/
The policy implication is straightforward:
Evaluating fiscal reforms using static budget comparisons is misleading.
What matters is the transition path, not only the final allocation.
Fiscal reform is a dynamic process.
11/
This helps explain an empirical puzzle:
Why many governments talk about expenditure reform…
but fiscal structures change very slowly.
The answer is not only politics.
It is institutional transition costs.
10/
Simulations calibrated to Uruguay’s budget suggest that the transition toward a new expenditure composition can take 5–10 years.
The speed depends heavily on which categories are reformed.
9/
In other words:
Short-run fiscal pressure
→ can increase
even when the reform improves fiscal sustainability in the long run.
This is a purely dynamic effect of institutional adjustment.
8/
Once these transition costs are introduced, an important result emerges:
Fiscal reform produces J-shaped dynamics.
Spending may increase first, before eventually declining as the new allocation becomes operational.
7/
In the model developed in the paper, these costs appear as nonlinear adjustment costs.
Large changes in spending categories generate disproportionately large institutional and administrative costs.
Which means reforms cannot happen instantly.
6/
Fiscal reforms themselves are costly to implement.
Reducing public employment requires severance payments.
Reforming pensions requires transition financing.
Restructuring agencies creates temporary overlaps.
These are real fiscal costs.
5/
So what happens if a government tries to reform the composition of spending?
Standard policy discussions assume something like this:
cut inefficient spending → immediately lower total spending.
But reality works very differently.
4/
In Uruguay’s budget structure, almost half of spending is transfers and pensions, while another large share is public wages.
These are precisely the most rigid categories.
Which means that large parts of the budget simply cannot move quickly.
3/
And most importantly:
these categories have very different institutional rigidities.
For example:
• pensions are governed by legal entitlements
• wages by labor contracts
• investment by multi-year projects
This makes fiscal adjustment fundamentally constrained.
2/
The key issue is not only how much governments spend, but how spending is structured.
Public budgets are composed of very different categories:
• transfers and pensions
• public sector wages
• public investment
• operating expenditures
Each behaves differently.
