nep-pbe New Economics Papers
on Public Economics
Issue of 2005‒01‒16
fourteen papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Noncooperative Support of Public Norm Enforcement in Large Societies By Josef Falkinger
  2. Public Education in an Integrated Europe: Studying to Migrate and Teaching to Stay? By Panu Poutvaara
  3. Designing Benefit Rules for Flexible Retirement with or without Redistribution By András Simonovits
  4. Macroeconomic Effects of Social Security Privatization in a Small Unionized Economy By Antonis Adam
  5. Progressive Taxation and Irreversible Investment under Uncertainty By Luis H. R. Alvarez; Erkki Koskela
  6. Demographics and the Political Sustainability of Pay-as-you-go Social Security By Theodore C. Bergstrom; John L. Hartman
  7. The impact of interest-rate subsidies on long-term household debt: evidence from a large program By Nuno Martins; Ernesto Villanueva
  8. Behavioral Biases of Dealers in U.S. Treasury Auctions By David Goldreich
  9. Does Endogenous Technical Change Make a Difference in Climate Policy Analysis? A Robustness Exercise with the FEEM-RICE Model By Marzio Galeotti; Carlo Carraro
  10. How Consistent are Alternative Short-Term Climate Policies with Long-Term Goals? By Valentina Bosetti; Marzio Galeotti
  11. Microsimulating the Effects of Household Energy Price Changes in Spain By Xavier Labandeira; José M. Labeaga; Miguel Rodríguez
  12. On Modeling Household Labor Supply with Taxation By Bargain, Olivier
  13. Politics and Efficiency of Separating Capital and Ordinary Government Budgets By Marco Bassetto; Thomas Sargent
  14. An Index of Labour Market Well-being for OECD Countries By Lars Osberg; Andrew Sharpe

  1. By: Josef Falkinger
    Abstract: In small groups norm enforcement is provided by mutual punishment and reward. In large societies we have enforcement institutions. This paper shows how such institutions can emerge as a decentralized equilibrium. In a first stage, individuals invest in a public enforcement technology. This technology generates a sanctioning system whose effectiveness depends on the aggregate amount of invested resources. In a second stage, in which individuals contribute to the provision of a public good, the sanctioning system imposes penalties and rewards on deviations from the endogenous norm contribution. It is shown that even if group size goes to infinity public norm enforcement is supported in a noncooperative equilibrium. Psychological factors are not necessary but can be favorable for the emergence of effective public norm enforcement.
    Keywords: norm enforcement, public goods, institutions, sanctioning
    JEL: H41 K40 Z13
    Date: 2004
  2. By: Panu Poutvaara
    Abstract: An increasing international applicability of a given type of education encourages students to invest more effort when studying. Governments, on the other hand, face an incentive to divert the provision of public education away from internationally applicable education toward country-specific skills. This would mean educating too few engineers, economists and doctors, and too many lawyers. If the total tax rate is kept constant, then replacing part of existing wage taxes with graduate taxes, collected also from migrants, would improve efficiency. It could even allow for a Pareto-improvement.
    Keywords: graduate taxes, public education, European Union, migration, brain drain and brain gain
    JEL: F22 H24 H52 I28
    Date: 2004
  3. By: András Simonovits
    Abstract: The traditional approach to flexible retirement (e.g. NDC) neglects the impact of asymmetric information on actuarial fairness (neutrality). The mechanism design approach (e.g. Diamond, 2003) gives up the requirement of neutrality and looks for a redistributive second-best benefit-retirement-age schedule. Trying to combine the two approaches, the present paper determines the neutral (redistribution-free) second-best solution. This neutral solution is, however, often Pareto-dominated by the redistributive one.
    Keywords: flexible retirement, asymmetric information, actuarial fairness (neutrality), mechanism design
    JEL: D82 D91 H55
    Date: 2004
  4. By: Antonis Adam
    Abstract: This paper analyses the effects of a pension system privatization in a unionized economy. Using an overlapping-generations framework we show that in an environment characterized by unemployment, a reform towards a private pension system in the steady state may result in lower levels of employment and capital stock. In this case even if the privatization increases the welfare of all future generations, the reduction in the welfare of the elderly due to reduced pension benefits may be greater and a Pareto improving transition to a private system may not be feasible. On the other hand if the reform leads to higher employment then a Pareto-improving pension privatization scheme can be constructed.
    Keywords: public pensions, social security privatization, labour union, unemployment
    JEL: H55 J32 J51
    Date: 2004
  5. By: Luis H. R. Alvarez; Erkki Koskela
    Abstract: We analyze the impact of progressive taxation on irreversible investment under uncertainty. We show that if tax exemption is lower than sunk cost, higher tax rate will decelerate optimal investment by increasing the optimal investment threshold, while if tax exemption exceeds sunk cost, three different regimes arise. For "small" volatilities the optimal investment threshold is a positive function of volatility, but independent of tax rate. For "medium" volatilities it is independent of both tax rate and volatility. Finally, for "high" volatilities the optimal investment threshold depends positively on volatility, but negatively on tax rate so that we have "tax paradox".
    Keywords: irreversible investments under uncertainty, progressive taxation
    JEL: D80 G31 H25
    Date: 2005
  6. By: Theodore C. Bergstrom; John L. Hartman
    Abstract: The net present value of costs and benefits from a pay-as-you-go social security system are negative for young people and positive for the elderly. If people all vote their financial self-interest, there will be a pivotal age such that those who are younger favor smaller social security benefits and those who are older will favor larger benefits. For persons of each age and sex, we estimate the expected present value gained or lost from a small permanent increase in the amount of benefits, where the cost of these benefits is divided equally among the population of working age. Assuming that everyone votes his or her long run financial self-interest, and calculating the number of voters in the population of each age and sex, we can determine whether there is majority support for an increase or a decrease in social security benefits. We use statistics on the age distribution and mortality rates for the United States to explore the sensitivity of political support for social security to alternative assumptions about the discount rate, excess burden in taxation, voter participation rates, and birth, death, and migration rates. We find that a once-and-for-all decrease in benefits would be defeated by a majority of selfish voters under a wide range of parameters. We also study the predicted majority outcomes of votes on changing the retirement age.
    JEL: H53
    Date: 2005
  7. By: Nuno Martins; Ernesto Villanueva
    Abstract: The responsiveness of long-term household debt to the interest rate is a crucial pa-rameter for assessing the effectiveness of public policies aimed at promoting specific types of saving. This paper estimates the effect of a reform of a large program that subsidized mortgage interest rates on long-term household debt. The reform established a ceiling in the price of the house that could be Þnanced through the program, and provides plau- sibly exogenous variation in incentives. Using a unique dataset of matched household survey data and administrative records of debt, we document that loss of access to the subsidy decreased the probability of signing a new loan.
    Keywords: Consumer Borrowing; Mortgage interest rate subsidies; Quasi-natural
    JEL: D91 H20
    Date: 2005–01
  8. By: David Goldreich (London Business School and CEPR)
    Abstract: This paper provides evidence of bounded rationality by large dealers in U.S. Treasury auctions. I argue that these dealers use a heuristic of yield-space bidding which leads to biases manifested in three ways: they submit dominated bids, i.e., those that could be improved without raising the bidding price; they bid in a manner that disregards the unevenly spaced price grid; and they round bids in yield space. Consistent with bounded rationality, I show that bidders are less susceptible to bias when the cost of suboptimal bidding is high. While the literature provides substantial evidence of behavioral biases among individual investors, they are less well documented for large sophisticated institutions that are likely to be important for setting asset prices. These primary bond dealers who regularly bid for billions of dollars in Treasury bill auctions are precisely such economic agents.
    Keywords: Treasury auctions, Behavioral finance
    JEL: H63 H74 D44
    Date: 2004–12
  9. By: Marzio Galeotti (Fondazione Eni Enrico Mattei); Carlo Carraro (Università di Venezia and Fondazione Eni Enrico Mattei)
    Abstract: Technical change is generally considered the key to the solution of environmental problems, in particular global phenomena like climate change. Scientists differ in their views on the thaumaturgic virtues of technical change. There are those who are confident that pollution-free technologies will materialize at some time in the future and will prevent humans from suffering the catastrophic consequences of climate change. Others believe that there are inexpensive technologies already available and argue the case for no-regret adoption policies (e.g. subsidies). Others again believe that the process of technological change responds to economic stimuli. These economic incentives to technological innovation are provided not only by forces that are endogenous to the economic system, but also by suitably designed environmental and innovation policies. In this paper, we consider and translate into analytical counterparts these different views of technical change. We then study alternative formulations of technical change and, with the help of a computerized climate-economy model, carry out a number of optimization runs in order to assess what type of technical change plays a role (assuming it does) in the evaluation of the impact of climate change and of the policies designed to cope with it.
    Keywords: Climate policy, Environmental modeling, Integrated assessment, Technical change
    JEL: H0 H2 H3
    Date: 2004–12
  10. By: Valentina Bosetti (Fondazione Eni Enrico Mattei); Marzio Galeotti (Università di Milano and Fondazione Eni Enrico Mattei)
    Abstract: Choosing long-term goals is a key issue in the climate policy agenda. Targets should be easily measurable and feasible, but also effective in damage control. Once goals are set globally, given the uncertainty affecting long-term strategies and region-specific preferences for different policy instruments, policies will be better represented by a diversified portfolio to be revised over time, rather than “once and forever” decisions. It therefore becomes crucial to understand to what extent different strategies (or policy portfolios) are consistent with long-term targets, that is, when they imply emission paths which do not irreversibly diverge from globally set goals. The present paper aims to investigate emission paths implied by plausible policy scenarios against those derived by imposing alternative long-term targets, comparing, for example, differences in peak periods. Plausible policy scenarios are for instance Kyoto-type targets with or without participation by the U.S. and/or by developing countries. Different long-term targets considered focus on stabilisation of CO2 concentrations, radiative forcing and the increase in atmospheric temperature relative to pre-industrial levels. In order to account for the uncertainty surrounding the climate cycle, for each long-term goal multiple paths of emission - the most probable, the optimistic and the pessimistic ones - are considered in the comparison exercise. Comparative analysis is performed using a newly developed version of the FEEM-RICE model, a regional economy-climate model of optimal economic growth which is based on Nordhaus and Boyer’s RICE model crucially extended in order to account for induced technical change. In particular, both carbon and energy intensity are affected by a new endogenous variable – Technical Progress – which captures both the role of Learning by Researching and of Learning by Doing. These are in turn determined by the optimal levels of Research and Development and of Emission Abatement.
    Keywords: Climate policy, Long-term climate targets, Climate sensitivity uncertainty, capping radiative forcing
    JEL: H0 H2 H3
    Date: 2004–12
  11. By: Xavier Labandeira (Universidade de Vigo); José M. Labeaga (UNED); Miguel Rodríguez (Universidade de Vigo)
    Abstract: In this paper we present a microsimulation model to calculate the effects of hypothetical ex-ante price changes in the Spanish energy domain. The model rests on our prior estimation of a demand system which is especially designed for simultaneous analysis of different energy goods and uses household data from 1973 to 1995. Our objective is to obtain indepth information on the behavioural responses by different types of households, which will allow us to determine the welfare effects of such price changes, their distribution across society and the environmental consequences within the residential sector. Although the model used is able to reproduce any type of price change, we illustrate the paper with an actual simulation of the effects of energy taxes that resemble a 50 Euro tax on CO2 (carbon dioxide) emissions. The results show a significant response by households, sizeable emission reductions, tax revenues, welfare changes and distributional effects. The simulated policy can thus be considered a feasible option to tackle some of the current and severe inefficiencies in Spanish energy and environmental domains.
    Keywords: Energy, Taxation, Demand, Spain
    JEL: C33 H23 H31
    Date: 2004–12
  12. By: Bargain, Olivier (IZA Bonn and DELTA, Paris)
    Abstract: Discrete-choice models provide a simple way of representing utility-maximizing labor supply decisions in the presence of highly nonlinear and possibly non-convex budget constraints. Thus, it is not surprising that they are so extensively used for ex-ante evaluation of taxbenefit reforms. The question asked in this paper is whether it is possible and desirable to get still more flexibility by relaxing some of the usual constraints imposed on household preferences and rationality. We first suggest a model which attains flexibility by making parameters vary freely across hours choices. By embedding the traditional structural approach in this specification, it is shown that the restrictions on underlying well-behaved leisure-consumption preferences are rejected. More fundamentally still, the standard approach, i.e., the assumption of unitary households optimizing statically, is strongly rejected when tested against a general model with price- and income-dependent preferences. In a static environment, the result boils down to a rejection of the unitary model. Interestingly, restrictions from both structural and standard models also imply important discrepancies in estimated elasticities and simulated predictions of responses to a tax reform. In particular, large differences appear between standard models and the general model which possibly encompasses several interpretations including dynamic aspects and intrahousehold negotiation. These findings illustrate the difficulty to conduct policy analysis in a way which reconciles the best explanatory power and a framework consistent with economic theory. The general model we suggest may provide future research with an interesting setting to test some of the dimensions of household behavior.
    Keywords: multinomial logit, household labor supply, taxation, microsimulation, unitary model, collective model
    JEL: C25 C52 H31 J22
    Date: 2005–01
  13. By: Marco Bassetto; Thomas Sargent
    Abstract: We analyze the democratic politics of a rule that separates capital and ordinary account budgets and allows the government to issue debt to finance capital items only. Many national governments followed this rule in the 18th and 19th centuries and most U.S. states do today. This simple 1800s financing rule sometimes provides excellent incentives for majorities to choose an efficient mix of public goods in an economy with a growing population of overlapping generations of long-lived but mortal agents. In a special limiting case with demographics that make Ricardian equivalence prevail, the 1800s rule does nothing to promote efficiency. But when the demographics imply even a moderate departure from Ricardian equivalence, imposing the rule substantially improves the efficiency of democratically chosen allocations. We calibrate some examples to U.S. demographic data. We speculate why in the twentieth century most national governments abandoned the 1800s rule while U.S. state governments have retained it.
    JEL: E6 H6 H7
    Date: 2005–01
  14. By: Lars Osberg; Andrew Sharpe
    Abstract: This report’s objective is the construction of an index of labour market well-being that is capable of measuring the well-being that individuals in a given society at a given point in time can obtain through the labour market. Besides considering simply the average return from working, workers are also typically concerned with inequality in the distribution of earnings, as well as skills acquisition that affects future returns from working and the uncertainty surrounding these future returns due to, for example, the possibilities of job loss, injury and insufficient income in retirement. The index proposed and constructed here hence attempts to incorporate each of these aspects of labour market well-being. The Centre for the Study of Living Standards has developed an Index of Economic Well-being based on trends in consumption flows, stocks of wealth, inequality, and economic security. This framework is applied here, but the focus is on the well-being of individuals as workers. The proposed Index of Labour Market Well-being (ILMW) therefore covers all persons of working age, both employed and unemployed, and includes 1) the average current return from work; 2) the aggregate accumulation of human capital, which enables future returns from work; 3) inequality in current returns from work; and 4) insecurity in the anticipation of future returns from work. Estimates of the proposed Index are developed for 16 OECD countries for the 1980-2001 period.
    Keywords: Well-being, Wellbeing, Well Being, Unemployment, Labour Market Outcomes, Labour Market, Labor Market, Wages, Earnings, Labour Compensation, Labor Compensation, Compensation, Human Capital, Long-term Unemployment, Long Term Unemployment, Earnings Inequality, Low Wage Earners, Living Wage, Retirement, Pensions, Defined Benefit, Defined Contribution, Unemployment Insurance, Workplace Injuries, Workplace Fatalities, Injuries, Fatalities, Workplace Safety, Index of Economic Well-being, IEWB, ILMW
    JEL: O57 I31 E25 J30 J60 J81 J24 J26 J28 H55
    Date: 2003–09

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