nep-pbe New Economics Papers
on Public Economics
Issue of 2005‒04‒30
nine papers chosen by
Joao Carlos Correia Leitao
Universidade da Beira Interior

  1. Has the Stability and Growth Pact Stabilised? Evidence from a Panel of 12 European Countries and Some Implications for the Reform of the Pact By Carlos Fonseca Marinheiro
  2. Lobbying and Compromise By Gil S. Epstein; Shmuel Nitzan
  3. Educational Standards in Private and Public Schools By Giorgio Brunello; Lorenzo Rocco
  4. Excludable and Non-Excludable Public Inputs: Consequences for Economic Growth By Ingrid Ott; Stephen Turnovsky
  5. The Role of Government in Anti-Social Redistributive Activities By Konstantinos Angelopoulos; Apostolis Philippopoulos
  6. Optimal Redistributive Taxation when Government’s and Agents’ Preferences Differ By Sören Blomquist; Luca Micheletto
  7. Intra-Generational Externalities and Inter-Generational Transfers By Martin Kolmar; Volker Meier
  8. A Case for Taxing Education By Tomer Blumkin; Efraim Sadka
  9. The Sustainability of Fiscal Policy in the United States By Henning Bohn

  1. By: Carlos Fonseca Marinheiro
    Abstract: Ever since its inception EMU has been subject to controversy. The fiscal policy rules embedded in the Treaty on European Union, and clarified in the Stability and Growth Pact (SGP), are probably the most contentious. The SGP is being accused of being too rigid and of forcing pro-cyclicality in fiscal policy. We test the impact of the SGP rules on the cyclical properties of fiscal policy for a panel of 12 European countries. We conclude that contrary to what might have been expected the euro fiscal rules have reinforced the counter-cyclicality of fiscal policy. However, the results also show that the SGP is not being applied symmetrically over the cycle, leading to insufficient fiscal consolidation during economic upswings. This explains the recent difficulties of Portugal, Germany and France in complying with SGP requirements. Based on these conclusions we argue for the creation of independent national technical committees that would define an appropriate deficit target on an annual basis.
    Keywords: fiscal policy, stabilisation, EMU, Stability and Growth Pact reform
    JEL: E62 H62
    Date: 2005
  2. By: Gil S. Epstein; Shmuel Nitzan
    Abstract: The compromise enhancing effect of lobbying on public policy has been established in two typical settings. In the first, lobbies are assumed to act as 'principals' and the setters of the policy (the candidates in a Downsian electoral competition or the elected policy maker in a citizen- candidate model of electoral competition) are conceived as 'agents'. In the second setting, the proposed policies are solely determined by the lobbies who are assumed to take the dual role of 'principals' in one stage of the public-policy game and 'agents' in its second stage. The objective of this paper is to demonstrate that in the latter setting, the compromising effect of lobbying need not exist. Our reduced-form, two-stage public-policy contest, where two interest groups compete on the approval or rejection of the policy set by a politician, is sufficient to show that the proposed and possibly implemented policy can be more extreme and less efficient than the preferred policies of the interest groups. In such situations then more than the calf (interest groups) wish to suck the cow (politician) desires to suckle thereby threatening the public well being more than the lobbying interest groups. The main result specifies the conditions that give rise to such a situation under both the perfectly and imperfectly discriminating contests.
    Keywords: public-policy contests, interest groups, policy makers, lobbying, compromise
    JEL: D60 D72
    Date: 2005
  3. By: Giorgio Brunello; Lorenzo Rocco
    Abstract: We show that, when school quality is measured by the educational standard and attaining the standard requires costly effort, secondary education needs not be a hierarchy with private schools offering better quality than public schools, as in Epple and Romano, 1998. An alternative configuration, with public schools offering a higher educational standard than private schools, is also possible, in spite of the fact that tuition levied by private schools is strictly positive. In our model, private schools can offer a lower educational standard at a positive price because they attract students with a relatively high cost of effort, who would find the high standards of the public school excessively demanding. With the key parameters calibrated on the available micro-econometric evidence from the US, our model predicts that majority voting in the US supports a system with high quality private schools and low quality public schools, as assumed by Epple and Romano, 1998. This system, however, is not the one that would be selected by the social planner, who prefers high quality public schools combined with low quality private schools.
    Keywords: private schools, public schools, majority voting
    JEL: H42 J24
    Date: 2005
  4. By: Ingrid Ott; Stephen Turnovsky
    Abstract: Many public goods are characterized by rivalry and/or excludability. This paper introduces both non-excludable and excludable public inputs into a simple endogenous growth model. We derive the equilibrium growth rate and design the optimal tax and user-cost structure. Our results emphasize the role of congestion in determining this optimal financing structure and the consequences this has in turn for the government’s budget. The latter consists of fee and tax revenues that are used to finance the entire public production input and that may or may not suffice to finance the entire public input, depending upon the degree of congestion. We extend the model to allow for monopoly pricing of the user fee by the government. Most of the analysis is conducted for general production functions consistent with endogenous growth, although the case of CES technology is also considered.
    Keywords: excludable and non-excludable public goods, congestion, growth
    JEL: H21 H40 O40
    Date: 2005
  5. By: Konstantinos Angelopoulos; Apostolis Philippopoulos
    Abstract: It is known that anti-social redistributive activities (rent seeking, tax evasion, corruption, violation of property rights, delay of socially beneficial reforms, etc) hurt the macroeconomy. But it is less known what is the role of government size as a determinant of such activities. We use data from 64 counties (both developed and developing) in 5-year periods over 1980-2000. As a measure of anti-social activities, we use the ICRG index; as a measure of government size, we use the government share in GDP; and as a measure of government efficiency, we construct an index by following the methodology of Afonso, Schuknecht and Tanzi (2003). Our regressions show that what really matters to social incentives is the relation between size and efficiency. Specifically, while a larger size of government is bad for incentives when one ignores efficiency, the results change drastically when government efficiency is also taken into account. Only when our measure of size exceeds our measure of efficiency, larger public sectors are bad for incentives. By contrast, when efficiency exceeds size, larger public sectors are not bad; actually, in the case where efficiency is measured by government performance in the policy areas of administration, stabilization and infrastructure, larger public sectors significantly improve incentives.
    Keywords: government and behaviour of agents, collective decision-making
    JEL: D70 H11 H30
    Date: 2005
  6. By: Sören Blomquist; Luca Micheletto
    Abstract: Paternalism, merit goods and specific egalitarianism are concepts we sometimes meet in the literature. The thing in common is that the policy maker does not fully respect the consumer sovereignty principle and designs policies according to some other criterion than individuals’ preferences. Using the self-selection approach to tax problems developed by Stiglitz (1982) and Stern (1982), the paper provides a characterization of the properties of an optimal redistributive mixed tax scheme in the general case when the government evaluates individuals’ well-being using a different utility function than the one maximized by private agents.
    Keywords: optimal taxation, behavioral economics, paternalism, merit goods, non-welfarism
    JEL: H21 H23
    Date: 2005
  7. By: Martin Kolmar; Volker Meier
    Abstract: In an environment with asymmetric information the implementation of a first-best efficient Clarke-Groves-Vickrey (D’Aspremont-Gérard-Varet) mechanism may not be feasible if it has to be self-financing. By using intergenerational transfers, the arising budget deficit can generally be covered in every generation if the growth rate of the economy is positive. This result yields an alternative explanation for the existence of pay-as-you-go financed transfer mechanisms.
    Keywords: pay-as-you-go, externalities, mechanism design, adverse selection
    JEL: D82 H23 H55
    Date: 2005
  8. By: Tomer Blumkin; Efraim Sadka
    Abstract: We illustrate a novel informational feature of education, which the government may utilize. Discretionary decisions of individuals to acquire education may serve as an additional signal (to earned labor income) on the underlying unobserved innate earning ability, thereby mitigating the informational constraint faced by the government. We establish a case for taxing education, as a supplement to the labor income tax.
    Keywords: optimal taxation, re-distribution, education, inequality
    JEL: D60 H20
    Date: 2005
  9. By: Henning Bohn
    Abstract: The paper examines the sustainability of U.S. fiscal policy, finding substantial evidence in favor. I summarize the U.S. fiscal record from 1792-2003, critically review sustainability conditions and their testable implications, and apply them to U.S. data. I particularly emphasize the ramifications of economic growth. A “growth dividend” has historically covered the entire interest bill on the U.S. debt. Unit root tests on real series, unscaled by GDP, are distorted by the series’ severe heteroskedasticity. The most credible evidence in favor of sustainability is the robust positive response of primary surpluses to fluctuations in the debt-GDP ratio.
    Keywords: public debt, sustainability, primary surplus, unit root
    JEL: E60 H00 H60
    Date: 2005

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