nep-pbe New Economics Papers
on Public Economics
Issue of 2005‒01‒23
eight papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Application of Granger Causality Tests to Revenue and Expenditure of Swiss cantons By Krishnakumar Jaya; Martin Marc-Jean; Soguel Nils
  2. Optimal Redistributive Taxation in a Search Equilibrium Model By Hungerbühler, Mathias; Lehmann, Etienne; Parmentier, Alexis; Van der Linden, Bruno
  3. Insuring Against Terrorism: The Policy Challenge By Kent Smetters
  4. Measuring Social Security's Financial Problems By Jagadeesh Gokhale; Kent Smetters
  5. The jobs challenge in Poland: policies to raise employment By Andrew Burns; Przemyslaw Kowalski
  6. A Re-Examination of the 'Underground Economy' in the United States; A Comment on Tanzi By Edgar L. Feige
  8. Investing in Health: The Long-Term Impact of Head Start By Kathryn Anderson; James Foster; David Frisvold

  1. By: Krishnakumar Jaya; Martin Marc-Jean; Soguel Nils
    Abstract: This paper applies Granger causality tests to Swiss Cantonal Revenue and Expenditure in levels. It is the first study for Switzerland at the individual regional level and on the basis of vector error correction models distinguishing between long-term and short-term causality. The long-term relation observed either extends from revenue to expenditure, extends from expenditure to revenue, is non-existent or mutual depending on the canton. This confirms the unsuitability of performing the analysis at the aggregate level (all cantons) and shows that policy implications on deficit control and theoretical explanations of public sector growth differ according to the causality observed.
    Keywords: Local budget and expenditure, Budget systems and institutional requirements, Deficit, Multiple equation model.
    JEL: H72 H61 H62 C32
    Date: 2004–12
  2. By: Hungerbühler, Mathias (IRES, Catholic University of Louvain and ERMES, University of Paris 2); Lehmann, Etienne (ERMES, University of Paris 2, IRES, Catholic University of Louvain and IZA Bonn); Parmentier, Alexis (EUREQua, University of Paris 1 and ERMES, University of Paris 2); Van der Linden, Bruno (IRES, Catholic University of Louvain, FNRS, Belgium, ERMES, University of Paris 2 and IZA Bonn)
    Abstract: This paper characterizes optimal non-linear income taxation in an economy with a continuum of unobservable productivity levels and endogenous involuntary unemployment due to frictions in the labor markets. Redistributive taxation distorts labor demand and wages. Compared to their efficient values, gross wages, unemployment and participation are lower. Average tax rates are increasing. Marginal tax rates are positive, even at the top. Finally, numerical simulations suggest that redistribution is much more important in our setting than in a comparable Mirrlees (1971) setting.
    Keywords: optimal income taxation, unemployment, wage bargaining, matching
    JEL: D82 H21 H24 J64
    Date: 2005–01
  3. By: Kent Smetters
    Abstract: Terrorist attacks worldwide during the past several years have spurned an interest in understanding not only how governments can mitigate terrorism risk but also how governments might help finance future losses. This interest was buttressed by the seemingly failure of the private insurance market to provide coverage for terrorism losses after the attack on September 11, 2001. This paper surveys the evidence of the supposed private market failures after 9/11 and the arguments for government provision of terrorism insurance. The paper argues that mostly unfettered insurance and capital markets are capable of insuring large terrorism losses. If there is any "failure," it rests with government tax, accounting, and regulatory policies that have made it costly for insurers to hold surplus capital. Government policy has also hindered the implementation of instruments that could securitize the underlying risks. Correcting these policies would likely enable private insurers to cover both terrorism and war risks.
    JEL: H0 H2
    Date: 2005–01
  4. By: Jagadeesh Gokhale; Kent Smetters
    Abstract: The U.S. Social Security system has helped keep many retirees out of poverty. However, according to the Social Security and Medicare Trustees, Social Security faces a future financial shortfall of $10.4 trillion in present value. This enormous imbalance has received little attention in public debates about Social Security. Instead, the media and policymakers continue to focus on the program's trust fund and several other ad-hoc measures that create a misleading impression of the size of Social Security's financial problem. Although the Social Security Trust Fund is not projected to be exhausted until 2042, Social Security's $10.4 trillion present value imbalance is accruing interest and will grow by $600 billion during 2004 alone. The current cash-flow federal budget, however, is biased against reforms that would improve Social Security's finances. As shown herein, a new federal accounting system would remove this bias.
    JEL: H0 H6
    Date: 2005–01
  5. By: Andrew Burns; Przemyslaw Kowalski
    Abstract: With almost 50 per cent of the working age population not working, improving labour market performance represents an essential and daunting challenge for Poland. While some of today’s joblessness is cyclical in nature, most of it appears to be structural. This paper argues that to increase employment levels policy will need to focus on reducing significantly the inactivity traps inherent in the Polish personal transfer system, while improving the efficiency and targeting of social transfers to ensure resources flow to those truly in need. Simultaneously, efforts must be extended to increase firms' propensity to hire the outofwork, by lowering the costs of low-skill labour, reducing associated administrative and regulatory costs and in the longer term by providing graduates with more relevant skills. This paper outlines reforms in each of these areas which, if implemented, would serve to reverse the recent decline in employment and improve the fairness of income distribution, thereby reducing poverty, raising the rate of growth of incomes, and speeding economic convergence with the rest of the OECD.This Working Paper relates to the 2004 OECD Economic Survey of Poland ( <P> Le défi de l’emploi en Pologne: politiques en faveur de l’emploi <P> Alors que près de 50 pour cent de la population d’âge actif est sans emploi, améliorer les performances du marché du travail représente pour la Pologne un formidable défi. Une partie du non-emploi est certes conjoncturelle mais, pour l’essentiel, c’est un phénomène structurel. L’idée développée dans cette étude est que, pour élever le niveau de l’emploi, il faudra s’attacher à réduire notablement les pièges à l’inactivité liés au système des transferts sociaux en Pologne, tout en améliorant l’efficience et le ciblage des transferts de façon que les flux de ressources aillent vers ceux qui en ont véritablement besoin. Parallèlement, il faudra redoubler d’efforts pour inciter davantage les entreprises à embaucher les personnes sans emploi, en abaissant le coût de la main-d’œuvre peu qualifiée, en réduisant les coûts administratifs et réglementaires connexes et, à plus long terme, en orientant les étudiants vers des qualifications plus pertinentes. Cette étude présente des réformes dans chacun de ces domaines qui, si elles étaient mises en œuvre, aideraient à enrayer le récent déclin de l’emploi et amélioreraient l’équité de la distribution des revenus, contribuant, par là même, à réduire la pauvreté, intensifier la progression des revenus et accélérer la convergence économique avec le reste de la zone de l’OCDE. Ce Document de travail se rapporte à l'Etude économique de l'OCDE de la Pologne, 2004 (
    Keywords: Poland; labour market policies; personal transfer system;labour costs; active labour market;policies; flexibility of working rules; education
    JEL: E24 H52 J20 J21 J22 J23 J24 J26 J31 J32 J65 O52 O57
    Date: 2004–12–23
  6. By: Edgar L. Feige (University of Wisconsin-Madison)
    Abstract: This paper examines alternative specifications of a general currency ratio (GCR)model used to obtain macroeconomic estimates of the size and growth of the 'underground economy'. Tanzi's approach to estimating the underground economy is shown to be a variation of the GCR model. However both his conceptual specification and his empirical implementation of the model are shown to flawed, leading to significant underestimation of the size and growth of unreported income in the US economy. The paper appears in the International Monetary Fund Staff Papers, Vol. 33 No. 4 December, 1986
    Keywords: Underground economy, unreported income, currency demand, tax evasion.
    JEL: E41 C51 H26
    Date: 2005–01–18
  7. By: Edgar L. Feige (University of Wisconson-Madison)
    Abstract: Many public policy decisions require analytical and empirical knowledge concerning the size, growth, causes and consequences of the ‘underground economy”. This paper seeks to clarify the meaning of underground activity, updates various discrepancy and fiscal estimates of its size and growth, and examines the empirical implications of new evidence concerning the growing use of US currency (dollarization) throughout the world for indirect estimates of the underground economy in the U.S. The paper examines all indirect and direct methods of estimating the amount of US currency held abroad and concludes that between 40% -45% of US currency is held abroad. This result stands in sharp contrast to the estimates presented by Porter and Judson (1996) who claim that as much as 55% -70% of US currency is held abroad. The new estimates of overseas currency are used to derive a domestic currency series which is the appropriate variable for use in currency demand models that purport to provide estimates of the size of the underground economy. This paper appears in Exploring the Underground Economy: Studies of Illegal and Unreported Activity. Susan Pozo (ed.) W.E Upjohn Institute for Employment Research, Kalamazoo, MI, 1996
    Keywords: currency abroad, underground economy, unreported income, unrecorded income, non-observed income, currency demand, demand for money, money supply.
    JEL: E41 H26 E52 F3 O17
    Date: 2005–01–18
  8. By: Kathryn Anderson (Department of Economics, Vanderbilt University); James Foster (Department of Economics, Vanderbilt University); David Frisvold (Graduate Student at Vanderbilt University)
    Abstract: Head Start is a comprehensive, early childhood development program designed to augment the human capital and health capital levels of disadvantaged children. Grossman's (1972) health capital model suggests that early investments of this type should have lasting effects on health outcomes. This research evaluates the impact of Head Start on long-term health by comparing health outcome and behavioral indicators of adults who attended Head Start with those of siblings who did not. The results suggest that there are long-term health benefits from participation in Head Start and that these benefits result from lifestyle changes.
    Keywords: Early childhood education, Head Start, health, health capital, health disparities, human capital, program evaluation
    JEL: H51 I12 I21 I38
    Date: 2004–12

This nep-pbe issue is ©2005 by Joao Carlos Correia Leitao. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.