nep-pbe New Economics Papers
on Public Economics
Issue of 2005‒01‒02
twenty papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Public-Good Valuation and Intrafamily Allocation By Jon Strand
  2. The Value of Non-Binding Announcements in Public Goods Experiments: Some Theory and Experimental Evidence By Michael Berlemann; Marcus Dittrich; Gunther Markwardt
  3. Fiscal and Monetary Interaction: The Role of Asymmetries of the Stability and Growth Pact in EMU By Matteo Governatori; Sylvester Eijffinger
  4. Taxes and the Financial Structure of German Inward FDI By Fred Ramb; Alfons Weichenrieder
  5. Significance and Determination of Fees for Municipal Finance By Peter Friedrich; Anita Kaltschuetz; Chang Woon Nam
  6. Tax Credits, Source Rules, Trade and Electronic Commerce: Behavioral Margins and the Design of International Tax Systems By Harry Grubert
  7. Snow Removal Auctions in Montreal: Costs, Informational Rents, and Procurement Management By Véronique Flambard; Pierre Lasserre; Pierre Mohnen
  8. Tax Evasion and Social Interactions By Bernard Fortin; Guy Lacroix; Marie-Claire Villeval
  9. Information sharing and international taxation By Keen,M.; Ligthart,J.E.
  10. Energy Taxes as a Signaling Device: An Empirical Analysis of Consumer Preferences By Ghalwash, Tarek
  11. Is Economic Analysis of Any Help in Studies of Legitimacy in the EU? By Jan Gunnarsson
  12. Fiscal gimmickry in Europe: one-off measures and creative accounting By Vincent Koen; Paul van den Noord
  13. The Incidence of UK Housing Benefit: Evidence from the 1990s Reforms By Steve Gibbons; Alan Manning
  14. Inequality and Public Good Provision: An Experimental Analysis By Lisa R. Anderson; Jennifer M. Mellor; Jeffrey Milyo
  15. Do Liberals Play Nice? The Effects of Party and Political Ideology in Public Goods and Trust Games By Lisa R. Anderson; Jennifer M. Mellor; Jeffrey Milyo
  16. Revealed Preference for Car Tax Cuts: An Empirical Study of Perceived Fiscal Incidence By Samuel A. Baker; David H. Feldman
  17. Why Executive Power Centralizes Government By Samuel A. Baker
  18. Using State Administrative Data to Measure Program Performance By Peter R. Mueser; Kenneth Troske; Alexey Gorislavsky
  19. Estate and Capital Gains Taxation: Efficiency and Political Economy Considerations By Saku Aura
  20. The Internationalisation of Public Welfare Policy By James Banks; R Disney; Alan Duncan; John Van Reenen

  1. By: Jon Strand
    Abstract: I derive values of marginal changes in a public good for two-person households, measured alternatively by household member i’s willingness to pay (WTP) for the good on behalf of the household, WTPi(H), or by the sum of individual WTP values across family members, WTP(C). Households are assumed to allocate their resources in efficient Nash bargains over private and common household goods. WTPi(H) is then found by trading off the public good against household goods, and WTP(C) by trading the public good off against private goods. I then find that WTPi(H) is higher (lower) when member i has a high (low) marginal valuation of the public good, but on average represents WTP(C) correctly. Individuals then tend to represent households correctly on average when questioned about the household’s WTP for a public good, even when they are purely selfish and answer truthfully. Counting all members’ WTP answers on behalf of the household then leads to double counting. Pure and paternalistic altruism (the latter attached to consumption of the public good) move each member’s WTP on behalf of the household closer to the true aggregate WTP, but only the latter raises aggregate WTP.
    Keywords: public goods, willingness to pay, contingent valuation, intrafamily allocation, Nash bargaining
    JEL: D13 D64 H41 Q26
    Date: 2004
  2. By: Michael Berlemann; Marcus Dittrich; Gunther Markwardt
    Abstract: In this paper we present three simple theoretical models to explain the influence of the possibility to make non-binding announcements on investment behaviour in public goods settings. Our models build on the idea that voluntary contributions to the supply of a public good might be motivated by some form of joy of giving. We show that the possibility to make non-binding announcements has a positive effect on cooperative behaviour, especially if individual announcements and factual investments are communicated to the players after each round. We also show that this result holds true even though the players have an incentive to overstate their true degrees of cooperativeness. Altogether, our theoretical considerations point in the direction that revealing as much information on individual intentions and factual behaviour as possible enhances cooperative behaviour. These conclusions are broadly confirmed by the results of a series of classroom experiments we present.
    Keywords: public goods, announcements, joy of giving, experimental economics
    JEL: C92 D74 H41
    Date: 2004
  3. By: Matteo Governatori; Sylvester Eijffinger
    Abstract: The paper builds a simplified model describing the economy of a currency union with decentralised national fiscal policy, where the main features characterising the policy-making are similar to those in EMU. National governments choose the size of deficit taking into account the two main rules of the Stability and Growth Pact on public finance. Unlike previous literature the asymmetric working of those rules is explicitly modelled in order to identify its impact on the Nash equilibrium of deficits arising from a game of strategic interaction between fiscal authorities in the union.
    Keywords: Stability and Growth Pact, EMU, asymmetric fiscal rules, decentralised fiscal policy
    JEL: E61 H30 H60 H70
    Date: 2004
  4. By: Fred Ramb; Alfons Weichenrieder
    Abstract: The paper analyses the financial structure of German inward FDI. From a tax perspective, intra-company loans granted by the parent should be all the more strongly preferred over equity the lower the tax rate of the parent and the higher the tax rate of the German affiliate. From our study of a panel of more than 8,000 non-financial affiliates in Germany, we find only small effects of the tax rate of the foreign parent. However, our empirical results show that subsidiaries that on average are profitable react more strongly to changes in the German corporate tax rate than this is the case for less profitable firms. This gives support to the frequent concern that high German taxes are partly responsible for the high levels of intra-company loans. Taxation, however, does not fully explain the high levels of intra-company borrowing. Roughly 60% of the cross-border intra-company loans turn out to be held by firms that are running losses.
    Keywords: foreign direct investment, financial structure, taxation, Germany
    JEL: F23 H25
    Date: 2004
  5. By: Peter Friedrich; Anita Kaltschuetz; Chang Woon Nam
    Abstract: The idea of fiscal decentralisation has become increasingly fashionable world-wide. But every country has unique features of the intergovernmental fiscal system. In general municipal expenditures are rapidly growing in European countries. On the other hand local tax increases are not easily enforceable at present, whereas the local fiscal autonomy is unlikely to be guaranteed as long as municipalities are strongly dependent on down-flow grants. In such a fiscal-stress situation an improvement of local fiscal capacity can be achieved from the increase of fees. Four European countries were chosen to survey the recent development of municipal finance: Britain, Germany, Poland and Switzerland. This paper firstly identifies and highlights the similarities and differences in municipal finance in an international context. Secondly it theoretically examines the possibility of enhancing fiscal autonomy of local governments through determining optimal fee level which leads to an increase of revenues from this revenue item.
    Keywords: fiscal decentralisation, local expenditures and taxes, fees, shared taxes, intergovernmental transfers, municipal borrowings, Poland, Britain, Switzerland, Germany
    JEL: H20 H40 H60 H70 H80
    Date: 2004
  6. By: Harry Grubert
    Abstract: The paper provides a framework for designing international tax rules by outlining the various behavioral margins they apply to. It then goes on to analyze three specific policy issues in terms of preserving the neutrality of choices along the relevant margins: (1) Which foreign taxes should be credited against home country tax liabilities? (2) Should the income from intangible assets like patents be taxed by the host country or the country in which it was developed? (3) Should the local sales by a foreign company determine the income tax imposed by the consuming country? Should the rules be changed because of electronic commerce? The analysis shows that the current foreign tax credit rules lack any coherent basis, either in terms of efficiency or fairness. For example, a tax on gross assets should be creditable, as well as a tax on gross income that does not allow deductions for interest. The income from intangible assets like patents should be sourced in the country in which the intangible asset was developed and be subject to its tax rate. That preserves the undistorted choice among alternative locations for exploiting an intangible. The analysis of the relationship between income taxes and trade taxes shows that in extreme cases a tax on imports may be justified to offset the distorting effect of income taxes. But electronic commerce is unlikely to create such a case. It is like any other technical change that lowers transactions costs.
    JEL: H20 H30
    Date: 2004
  7. By: Véronique Flambard; Pierre Lasserre; Pierre Mohnen
    Abstract: Using nonparametric estimation techniques adapted from Guerre et al. [2000], we infer cost distributions and informational rents, from 666 snow removal contracts offered for tender by the City of Montreal. Our results are compatible with standard received theory of competitive auctions: there is a positive correlation between costs and bids; rents increase with the variance of costs and decrease with the number of bidders. Bids and costs have decreased over the sample period, while informational rents remained stable. The City deserves credit for these results. It has succeeded in exploiting economies of scale while maintaining competition; and it was instrumental in promoting above Canadian average technological progress by its design of snow-removal territories. <P>Par des méthodes non paramétriques adaptées de Guerre et al. [2000], nous évaluons la distribution des coûts et les rentes informationnelles correspondant à 666 contrats de déneigement mis aux enchères par la Ville de Montréal. Les résultats sont conformes à la théorie des enchères concurrentielles : corrélation positive entre soumissions et coûts; rentes croissantes avec la variance des coûts et décroissantes avec le nombre d’enchérisseurs. Tant les soumissions que les coûts diminuent au cours de la période, tandis que les rentes sont stables. Ces résultats sont à mettre au crédit de la Ville : elle a su exploiter les économies d’échelle sans réduire la concurrence, et susciter un progrès technologique plus élevé que la moyenne nationale grâce au découpage des territoires.
    Keywords: procurement auction, nonparametric estimation, informational rents, task design, municipal contracts, enchères d’approvisionnement, estimation non paramétrique, rentes d’information, conception des tâches, contrats municipaux
    JEL: D44 H40
    Date: 2004–12–01
  8. By: Bernard Fortin; Guy Lacroix; Marie-Claire Villeval
    Abstract: The paper extends the standard tax evasion model by allowing for social interactions. In Manski’s (1993) nomenclature, our model takes into account social conformity effects (i.e., endogenous interactions), fairness effects (i.e., exogenous interactions) and sorting effects (i.e., correlated effects). Our model is tested using experimental data. Participants must decide how much income to report given their tax rate and audit probability, and given those faced by the other members of their group as well as their mean reported income. The estimation is based on a two-limit simultaneous tobit with fixed group effects. A unique social equilibrium exists when the model satisfies coherency conditions. In line with Brock and Durlauf (2001b), the intrinsic nonlinearity between individual and group responses is sufficient to identify the model without imposing any exclusion restrictions. Our results are consistent with fairness effects but reject social conformity and correlated effects. <P>Cet article généralise le modèle standard de fraude fiscale en permettant la présence d’interactions sociales. Suivant la nomenclature de Manski (1993), notre modèle tient compte des effets de conformité sociale (i.e. interactions endogènes), des effets d’équité (i.e. interactions exogènes) et des effets de sélection (i.e. effets corrélés). Le modèle est testé à l’aide de données expérimentales. Les participants doivent choisir le montant déclaré de leur revenu, étant donné leur taux d’impôt, leur probabilité d’être contrôlé par le fisc et étant donné ceux de leur groupe de référence ainsi que le revenu moyen déclaré par ce dernier. L’estimation se fonde sur un modèle tobit simultané à deux bornes avec des effets fixes de groupe. Un équilibre social unique existe lorsque le modèle satisfait des conditions de cohérence. Suivant en cela Brock et Durlauf (2001b), la non-linéarité intrinsèque entre les réponses individuelles et celles du groupe est suffisante pour identifier le modèle sans avoir à imposer des restrictions d’exclusion. Nos résultats sont cohérents avec la présence d’effets d’équité mais rejettent la conformité sociale ainsi que les effets corrélés.
    Keywords: social, interactions, tax evasion, simultaneous tobit, laboratory experiments., interactions sociales, fraude fiscale, tobit simultané, économie expérimentale
    JEL: H26 D63 C24 C92 Z13
    Date: 2004–12–01
  9. By: Keen,M.; Ligthart,J.E. (Tilburg University, Center for Economic Research)
    Abstract: The sharing between national tax authorities of taxpayer-specific information has emerged over the last few years as a-probably "the"-central issue in the formation of international tax policy. Yet this refocusing of the debate on international taxation-away from parametric tax coordination and towards strengthening information exchange-has gone largely unnoticed in the public finance literature. This paper gives an overview of this increasingly important area of international taxation, reviewing the key economic, legal and practical concepts and issues bearing on the analysis and implementation of information exchange, and providing an account of recent policy initiatives and emerging theoretical insights.
    JEL: H77 H87 F42
    Date: 2004
  10. By: Ghalwash, Tarek (Department of Economics, Umeå University)
    Abstract: This paper presents an econometric study dealing with household demand in Sweden. The main objective is to empirically examine the differences in consumer reaction to the introduction of, or the change, in environmental taxes. Main focus is on environmental taxes as a signaling device. The hypothesis is that the introduction of an environmental tax provides new information about the properties of the directly taxed goods. This in turn may affect consumer preferences for these goods, hence altering the consumption choice. The result from the econometric analysis shows that all goods have negative own-price elasticities, and positive income elasticities. Concerning the signalling effect of environmental taxes the results are somewhat ambiguous. The tax elasticity for energy goods used for heating seems to be significantly higher than the traditional price elasticity, whereas the opposite seems to be the case for energy goods used for transportation.
    Keywords: Household demand; energy tax; tax elasticities; emissions
    JEL: D12 H31 Q41
    Date: 2004–12–22
  11. By: Jan Gunnarsson (Institute of Economics, University of Copenhagen)
    Abstract: The transaction cost approach in economics has been applied in theorizing how Europe is governed. In providing a functionalist explanation of political organization, it encourages beliefs that reforms improving organizational efficiency also increase the legitimacy of European leadership. This paper discusses institutional perspectives on how democratic legitimacy is built by those, who aspire to rule the EU. An economist’s view will be discussed against a background of models of legitimacy by Scharpf and Schmitter. In addition, a governance practice directed to diffusion policy is fenced off and a future empirical study is outlined.
    Keywords: legitimacy; multi-level governance; transaction costs; social norms; institutional leverage
    JEL: H70 L50
    Date: 2004–09
  12. By: Vincent Koen; Paul van den Noord
    Abstract: Accounting conventions usually leave some room for judgment, which governments may be tempted to take advantage of, especially when fiscal rules bite or threaten to do so. The European experience over the past decade documented here in great detail illustrates that fiscal gimmicks come in many different guises, but also that some are less mischievous than others. Logit regression analysis confirms that when deficit rules or, to a lesser extent, debt thresholds tend to become more binding, recourse to gimmicks is more likely. It also suggests that more centralised budget systems are less prone to such gimmickry. The policy implications are clear as regards the virtues of transparent and consistent accounting practices, but more ambiguous regarding the merits or otherwise of one-off measures. <P> Astuces budgétaires en Europe: mesures non récurrentes et créativité comptable <P> En général, les conventions comptables sont sujettes à interprétation, et les gouvernements peuvent être tentés d'en profiter, notamment lorsqu'ils sont contraints, ou en voie de l'être, par des règles budgétaires. L'expérience européenne au cours de la décennie écoulée décrite ici avec force détails montre que les astuces budgétaires sont protéiformes, mais aussi que certaines posent moins de problèmes que d'autres. Des régressions logit confirment que lorsque les règles de déficits ou, dans une moindre mesure, les seuils d'endettement deviennent plus contraignants, la probabilité d'un recours à des astuces augmente. Elles corroborent également l'idée que les astuces tendent à être moins employées dans des systèmes budgétaires plus centralisés. Les implications de politique économique sont claires s'agissant des vertus de la transparence et de la cohérence des comptes, mais plus ambiguës concernant les mérites ou inconvénients des mesures non récurrentes.
    Keywords: Budgets; Economic and Monetary Union; fiscal deficit; fiscal rules; fiscal gimmicks; national accounts; political economy; public debt; Stability and Growth Pact
    JEL: D78 E61 H6 H27 H74 H81 H82 H87
    Date: 2004–12–15
  13. By: Steve Gibbons; Alan Manning
    Abstract: Housing Benefit (HB) in the UK subsidizes the rent of tenants in both the private and publicsectors. Its share in total welfare benefits has risen markedly through time and there iswidespread dissatisfaction with it. But, reform has been very slow. One important issue isthe extent to which the incidence of HB is actually on the tenants. Exploiting two data setsfrom the mid-1990s when the subsidy regime changed for some tenants but not for others,this paper explores the incidence. We find that some of the incidence is on landlords thoughour two data sets differ in the extent to which this is true. We also find evidence in support ofa ¿matching¿ model of the rental market rather tha n a perfectly competitive one.
    Keywords: Housing Subsidies, Tax Incidence
    JEL: H22 R31
    Date: 2003–12
  14. By: Lisa R. Anderson (Department of Economics, College of William and Mary); Jennifer M. Mellor (Department of Economics, College of William and Mary); Jeffrey Milyo (Department of Economics and Truman School of Public Affairs, University of Missouri)
    Abstract: Recent studies report that economic inequality is associated with reduced government expenditures on social programs. Several prominent social scientists, including Putnam [2000], attribute this relationship to the detrimental Òpsychosocial effectsÓ of group heterogeneity on cooperation. We test the hypothesis that inequality within a group reduces individual contributions in a canonical public goods experiment. Unlike previous examinations of inequality and public good provision, our design introduces inequality by manipulating the levels and distributions of fixed payments given to subjects for participating in the experiment. When made salient through public information about each individualÕs standing within the group, inequality in the distribution of fixed payments reduces contributions to the public good for all group members.
    Keywords: Inequality, Heterogeneity, Cooperation, Public goods, Experiments
    JEL: C9 H4
    Date: 2004–12–15
  15. By: Lisa R. Anderson (Department of Economics, College of William and Mary); Jennifer M. Mellor (Department of Economics, College of William and Mary); Jeffrey Milyo (Department of Economics and Truman School of Public Affairs, University of Missouri)
    Abstract: A popular perception among the American electorate is that Democrats and liberals are more caring and kind-hearted than Republicans and conservatives. This stems in part from the consistent finding in opinion surveys that left-leaning individuals tend to support increased public spending on social programs. In this study, we put conventional wisdom to the test by examining differences in the behavior of liberal versus conservative subjects in two classic experimental settings: the public goods game and the bilateral trust game. First, we test whether Democrats or liberals are more likely to contribute to a group account when such actions are contrary to self-interest. Next, we test whether Democrats and liberals choose to trust strangers or to behave in a trustworthy fashion, despite monetary incentives to the contrary. To address the concern that liberals may not behave more compassionately in the artificially egalitarian setting of the laboratory, we induce inequality among subjects by manipulating the show-up fee paid to all participants. We find that despite conventional wisdom and survey evidence, there is no tendency for adherents of either major party to play nice, nor do self-described liberals have a greater tendency to make contributions in a public goods experiment. However, in keeping with conventional wisdom (but not necessarily national survey results), we find some evidence that self-described liberals behave in a more trusting and trustworthy manner.
    Keywords: public goods, experiment, political ideology
    JEL: C9 H4
    Date: 2004–09–30
  16. By: Samuel A. Baker (Department of Economics, College of William and Mary); David H. Feldman (Department of Economics, College of William and Mary)
    Abstract: Voting in an election in which elimination of the local car tax is the central issue shows how a highly visible universal tax cut can prevail in the electoral process even if benefits are skewed toward upper income households. These results are consistent with positive models of fiscal structure choice in which fiscal systems are the consequence of support maximizing politicians attempting to supply net benefits to easily identifiable interest groups without generating significant opposition from other groups.
    Keywords: Targeted universalism, Personal property taxes, Tax revolt
    JEL: H2
    Date: 2004–11–10
  17. By: Samuel A. Baker (Department of Economics, College of William and Mary)
    Abstract: This paper examines the effects of political parties, executive power and efficiency on federal structure, proposing and testing a model of federalism in which different levels of veto power can lead to varying degrees of centralization in the provision of central and local governmental services when executive and legislative branches have disparate preferences over which level should provide services. Results for the US (1982-1992) find state and local spending centralizes with increased veto power because, absent offsetting political party advocacy for decentralization, central government spending interests dominate local government spending interests.
    Keywords: Federalism, Centralization, Political parties, Executive power, Veto
    JEL: H1
    Date: 2004–11–15
  18. By: Peter R. Mueser (Department of Economics, University of Missouri-Columbia); Kenneth Troske (Department of Economics, University of Missouri-Columbia); Alexey Gorislavsky
    Abstract: This paper uses administrative data from Missouri to examine the sensitivity of job training program impact estimates based on alternative nonexperimental methods. In addition to simple regression adjustment, we consider Mahalanobis distance matching and a variety of methods using propensity score matching. In each case, we consider estimates based on levels of post-program earnings as well as difference-in-difference estimates based on comparison of pre and post-program earnings. Specification tests suggest that the difference-in-difference estimator may provide a better measure of program impact. We find that propensity score matching is generally most effective, but the detailed implementation of the method is not of critical importance. Our analyses demonstrate that existing data available at the state level can be used to obtain useful estimates of program impact.
    JEL: H43 I38 I28
    Date: 2004–10–19
  19. By: Saku Aura (Department of Economics, University of Missouri-Columbia)
    Abstract: In this paper a simple dynastic overlapping-generations model with homogeneous agents is used to analyze the optimal use of capital income tax, labor income tax and estate tax. The results of this analysis add to the conventional wisdom about capital income taxation: while it is true that in the long run the estate tax rate should be set to zero, it is also true that other capital income taxation is a usable policy tool even in the steady state. The other contribution of the paper is the building of a simple dynamic political economy model where the structure of capital taxes is determined. In a median-voter framework with no policy commitment, estate taxation is used too heavily as a capital-tax-revenue-collecting tool relative to the second-best optimum for the social planner.
    JEL: H21 H24
    Date: 2004–12–16
  20. By: James Banks; R Disney; Alan Duncan; John Van Reenen
    Abstract: With increasing globalisation of knowledge, there are increased opportunities to 'learn' from the experience ofpolicy interventions elsewhere. This paper presents evidence on the extent of international convergence inpublic policy, with particular focus on labour, welfare, savings and retirement policy. Questions addressed inthis framework include: to what extent is policy diffusion or convergence a real and relevant phenomenon?What role have economists played in the transfer of policy across national domains? Has policy transfer led to'better' public policy? Are there any practical limitations to policy convergence?
    Keywords: welfare policy, internationalisation, globalisation, public policy, policy transfer, OECD
    JEL: C25 H31 J22
    Date: 2004–11

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