nep-pbe New Economics Papers
on Public Economics
Issue of 2005‒06‒27
twenty-one papers chosen by
Kerim Arin
Massey University

  1. India: Fiscal Condition of the States, International Experience,and Options for Reform: Volume 1 By Roy Bahl; Eunice Heredia-Ortiz; Jorge Martinez-Vazquez; Mark Rider
  2. Sobre los Efectos Macroeconómicos de la Composición de la Deuda Pública en Colombia By Franz Hamann; Julián Pérez; Paulina Restrepo
  3. A Note on Budget Balance under Interim Participation Constraints: The Case of Independent Types By Tilman Borgers; Peter Norman
  4. Externalities of social capital : the role of values, norms and networks By Butter, Frank A.G. den; Mosch, Robert H.J.
  5. Cartel Stability under an Optimal Sharing Rule By Hans-Peter Weikard
  6. Using Data Envelopment Analysis to Assess the Relative Efficiency of Different Climate Policy Portfolios By Valentina Bosetti; Barbara Buchner
  7. Social Capital, R&D and Industrial Districts By Massimiliano Mazzanti; Giulio Cainelli; Susanna Mancinelli
  8. Political economy and pensions in ageing societies – a note on how an ”impossible” reform was implemented in Sweden. By Kruse, Agneta
  9. The Effects of 'Gesell' (Currency) Taxes in Promoting Japan's Economic Recovery By Mitsuhiro Fukao
  10. Japan's Fiscal Policy and Fiscal Reconstruction By Toshihiro Ihori; Atsushi Nakamoto
  11. How should we measure the return on public investment in a VAR By Álvaro Manuel Pina; Miguel St. Aubyn
  12. Cross-country Efficiency of Secondary Education Provision: a Semi-parametric Analysis with Nondiscretionary Inputs By António Afonso; Miguel St. Aubyn
  13. Do Report Cards Tell Consumers Anything They Don't Already Know? The Case of Medicare HMOs By Leemore Dafny; David Dranove
  14. Opportunities for Improving the Drug Development Process: Results from a Survey of Industry and the FDA By Ernst R. Berndt; Adrian H. B. Gottschalk; Matthew W. Strobeck
  15. THE AUTOMATED PAYMENT TRANSACTION (APT) TAX: A proposal to the President's Advisory Panel on Federal Tax Reform By Edgar L. Feige
  16. On the equivalence of the Arrow impossibility theorem and the Brouwer fixed point theorem (forthcoming in ``Applied Mathematics and Computation''(Elsevier)) By Yasuhito Tanaka
  17. A topological approach to the Arrow impossibility theorem when individual preferences are weak orders (forcoming in ``Applied Mathematics and Compuation''(Elsevier)) By Yasuhito Tanaka
  18. Efectos de la Política de Estado Hondureña sobre la Seguridad Alimentaria By Paul Lewin; Baptiste Gerbier
  19. Local Life and Municipal Services in Spain at the Beginning of the 20 th Century. By Gregorio Núñez
  20. Population Aging and Legal Retirement Age. By Juan Antonio Lacomba; Francisco Miguel Lagos
  21. Rational Addiction with an Optimal Inventory: Theory and Evidence from Japanese Daily and Monthly Purchases By Junmin Wan

  1. By: Roy Bahl (Andrew Young School of Policy Studies); Eunice Heredia-Ortiz (Andrew Young School of Policy Studies); Jorge Martinez-Vazquez (Andrew Young School of Policy Studies); Mark Rider (Andrew Young School of Policy Studies)
    Abstract: India is a Union of 28 States, two Union Territories with legislatures, and five Union Territories without legislatures. The 7th Schedule of India’s Constitution provides for a separate State List, which enumerates exclusive legislative and executive authority that lies with state governments. The State List entrusts major responsibilities in the areas of human and physical development to the states. These responsibilities require major expenditures by the states, but the tax revenue sources assigned to the states, although they have not been fully used, are not sufficient to meet these expenditure responsibilities. The resulting fiscal imbalances of the states is addressed through a complex system of intergovernmental transfers in various forms and through several other channels, including borrowings. Over the years, in practice, the States of India have sought to finance their increasing needs for expenditures through different forms of transfers from the Union Government and loans, rather than by raising additional tax revenues and/or charging for services delivered. This has resulted in the states running large revenue and fiscal deficits and accumulating potentially unsustainable debt burdens. In this process, most states have compromised budgetary discipline, resorted to off-budget forms of borrowings, and accumulated large contingent liabilities, with the attendant risks of default. The lack of fiscal discipline among the states is symptomatic of a flawed intergovernmental fiscal system. In addition to the lack of aggregate fiscal discipline, the level and quality of services delivered by the states are well below where they ought to be with the money actually spent. There is much evidence of inefficient service delivery. For example, many states have high rates of illiteracy, particularly among women, and high infant and maternal mortality rates. In addition, the quality of economic services provided by the states, particularly electricity and transportation, is poor.
    Keywords: india,intergovernmetnal, fiscal transfers, government expenditures
    Date: 2005–06–01
  2. By: Franz Hamann; Julián Pérez; Paulina Restrepo
    Abstract: Este artículo presenta un análisis cuantitativo del impacto macroeconómico de la forma como se financia el déficit fiscal en una economía pequeña y abierta. En particular, nos enfocamos en evaluar el impacto macroeconómico de una situación en la que, dado un nivel de déficit fiscal, el gobierno decide entre financiarlo con deuda doméstica o externa. Para este propósito empleamos un modelo de equilibrio general dinámico y estocástico para una economía pequeña y abierta. Al calibrar el modelo a la economía colombiana, encontramos que los efectos de una sustitución de deuda pública externa por interna dependen de qué tan permanente sea dicha sustitución. Una sustitución transitoria tiene efectos macroeconómicos despreciables, con excepción de su impacto sobre los flujos de capital privados ("efecto portafolio"). Es decir, un aumento de la deuda pública doméstica vis a vis una reducción en la externa, es balanceado por una reducción de los activos externos netos privados. Por el contrario, una sustitución permanente de un 10% de deuda externa por doméstica tiene efectos macroeconómicos transitorios pero considerables sobre la actividad real y los flujos de capital. Dicha recomposición genera un aumento en los activos externos netos de un 5% acompañada de una depreciación nominal cercana al 1 %. Aunque nuestros resultados son generales en ambientes con flexibilidad de precios, especulamos que pueden variar en presencia de incertidumbre acerca de la sostenibilidad de las finanzas públicas y/o rigideces nominales y reales.
    Keywords: Política Fiscal; Composición de deuda Pública; Flujos de Capital; Colombia
    JEL: F41 H60
  3. By: Tilman Borgers; Peter Norman
    Date: 2005–06–24
  4. By: Butter, Frank A.G. den (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Mosch, Robert H.J.
    Abstract: The economic perspective on values and norms shows that they may bring about externalities for the society as a whole. This possibility of market failure provides a good reason for the government to follow closely the developments in values and norms, and the resulting behaviour in communities and networks. It justifies the initiative of Prime Minister Balkenende to organise the debate on these matters in the Netherlands (and, under the Dutch EU-presidency, in Europe). Networks can be associated both with positive (Putnam type) and with negative (Olson type) externalities. This paper discusses the various influences of values, norms and networks on socio-economic welfare and provides empirical evidence on these relationships. The focus of our own empirical analysis is on the Netherlands. Trust as part of social capital, and the role that values, norms and networks play as co-ordination mechanism, form important aspects both in the theoretical and in the empirical analysis. It appears that there has been no obvious decrease in these aspects of social capital in the Netherlands. It contrasts the findings of Putnam for the US.
    Keywords: social capital; values and norms; trust; networks; market failure
    JEL: D62 D70 H19
    Date: 2004
  5. By: Hans-Peter Weikard (Wageningen University)
    Abstract: Previous work on the formation and stability of cartels has focused on the case of identical players. This assumption is very restrictive in many economic environments. This paper analyses stability of cartels in games with heterogeneous players and spillovers to non-members. I introduce a sharing rule for coalition payoffs, called "optimal sharing" which stabilises all cartels that are possibly stable under any rule. Under optimal sharing the grand coalition is the unique stable cartel if spillovers are negative. I introduce a new property, called "non-essentiality" and determine the set of stable cartels under optimal sharing if spillovers are positive and if the non-essentiality property applies. Finally I analyse cartel stability under optimal sharing in simple public goods game with heterogeneous players. My results show – in contrast to earlier findings for identical players – that large coalitions may well be stable.
    Keywords: Cartel stability, Coalition formation games with spillovers, Partition function approach, Optimal sharing rule
    JEL: C72 D72 H41
    Date: 2005–05
  6. By: Valentina Bosetti (Fondazione Eni Enrico Mattei); Barbara Buchner (Fondazione Eni Enrico Mattei)
    Abstract: Within the political, scientific and economic debate on climate change, the process of evaluating climate policies ex-ante, during and/or ex-post their lifetime, is receiving increasing attention from international institutions and organisations. The task becomes particularly challenging when the aim is to evaluate strategies or policies from a sustainability perspective. The three pillars of sustainability should then be jointly considered in the evaluation process, thus enabling a comparison of the social, the environmental and the economic dimensions of the policy’s impact. This is commonly done in a qualitative manner and is often based on subjective procedures. The present paper discusses a data-based, quantitative methodology to assess the relative performances of different climate policies, when long term economic, social and environmental impacts of the policy are considered. The methodology computes competitive advantages as well as relative efficiencies of climate policies and is here presented through an application to a sample of eleven global climate policies, considered as plausible for the near future. The proposed procedure is based on Data Envelopment Analysis (DEA), a technique commonly employed in evaluating the relative efficiency of a set of decision making units. We consider here two possible applications of DEA. In the first, DEA is applied coupled with Cost-Benefit Analysis (CBA) in order to evaluate the comparative advantages of policies when accounting for social and environmental impacts, as well as net economic benefits. In the second, DEA is applied to compute a relative efficiency score, which accounts for environmental and social benefits and costs interpreted as outputs and inputs. Although the choice of the model used to simulate future economic and environmental implications of each policy (in the present paper we use the FEEM RICE model), as well as the choice of indicators for costs and benefits, represent both arbitrary decisions, the methodology presented is shown to represent a practical tool to be flexibly adopted by decision makers in the phase of policy design.
    Keywords: Climate, Policy, Valuation, Data envelopment analysis, Sustainability
    JEL: H41 Q51 Q54 C61
    Date: 2005–06
  7. By: Massimiliano Mazzanti (University of Ferrara); Giulio Cainelli (University of Bari and CERIS-CNR); Susanna Mancinelli (University of Ferrara)
    Abstract: The main idea behind this paper is that social capital is not, as generally suggested by the socio-economic literature, an individual attitude towards something which does not imply privately appropriable economic benefits. Actually, SC might and should be interpreted as a public component of an investment which implies private and public benefits entangled with each other. In order to put forward this idea, a dynamic theoretical model that assumes social capital as the public component of the impure public good R&D is developed. It shows that the ‘civic culture’ of the district area in which the firm works is not sufficient as an incentive to increase its investment in social capital, because this investment strictly depends on the economic convenience of investing in the impure public good. Social capital /networking dynamics might positively and complementarily evolve only if the opportunity cost of investing in innovation is sufficiently low. We consequently focus our attention on a specialized industrial district located in the Emilia Romagna region – the biomedical district of Mirandola (Modena) – characterised by a strong pattern of innovative activity. Using a proxy for innovative activity as dependant variable, we observe that R&D and networking/social capital arise as complementary driving forces for innovation outputs. When empirical evidence confirms that this complementarity plays a key role, and consequently strong links exist between market and non-market dynamics relating to firms, the role for policy actions targeted to social capital is larger. The policy effort should be targeted toward both market and non-market characteristics taken together, rather than solely to the production of (local) public goods (social capital) or innovation inputs as independent elements of firm processes. The input of SC alone is not sufficient to ensure innovation and growth: economic incentives matter. On the other hand, whenever SC dynamics are crucial for R&D private investments, the effect of economic incentives depends on the presence and degree of their complementarity.
    Keywords: Social capital, R&D, Technological innovation, Industrial districts
    JEL: O32 D92 H49
    Date: 2005–06
  8. By: Kruse, Agneta (Department of Economics, Lund University)
    Abstract: Ageing puts a strain on most countries’ pension systems; forecasts show them to be more or less unsustainable. Evidence from social choice research, theoretical as well as empirical, does not seem to offer a way out of the dilemma, as the median voter will resist a reform. Despite this, Sweden has implemented a major reform, supposedly making the system sustainable. The question in this paper is thus: how was it possible to launch such a reform in Sweden? The analysis is based on majority voting models. Important explanatory factors are age structure as well as the age of the median voter; both of these go against the probability of a reform. A focus on age structure in combination with transitional rules and specific features of the reform may provide an explanation.
    Keywords: political economy; pension reform; median voter; age structure
    JEL: D72 H55 J26
    Date: 2005–06–07
  9. By: Mitsuhiro Fukao
    Abstract: The traditional interest rate policy has lost its potency due to the zero-lower bound of nominal interest rates and the gradual accelerating deflation in Japan. Without stopping deflation, the Japanese government may face a rapid erosion of credit worthiness due to an uncontrolled budget deficit. In order to cope with this unusual situation, a non-traditional monetary policy measure is proposed. A negative nominal interest rate is needed to clear Japanese markets and can be achieved by levying a tax on all the government-guaranteed yen financial assets. This is a modified version of Gesell's stamp duty on currency for actual implementation in the contemporary context. The benefits and side effects of this tax for Japan are analyzed here.
    Date: 2005–06
  10. By: Toshihiro Ihori; Atsushi Nakamoto
    Abstract: This paper investigates the macroeconomic effects of fiscal policy and the fiscal reconstruction movement in Japan. We first summarize Japan's fiscal policy in recent years and discuss advantages and disadvantages of government deficits. Next, we investigate the macroeconomic effects of Japanese fiscal policy and evaluate the plausibility of non-Keynesian effects. We also analyze the possibility of the crowding-in effect of fiscal policy and investigate the spillover effects of deregulation. Finally, we discuss political constraints in the fiscal reconstruction attempts and propose some measures for successful fiscal reforms in the near future.
    Date: 2005–06
  11. By: Álvaro Manuel Pina; Miguel St. Aubyn
    Keywords: Public investment;rate of return;VAR.
    JEL: C32 H43 H57 O47
  12. By: António Afonso; Miguel St. Aubyn
    Abstract: We address the efficiency of expenditure in education provision by comparing the output (PISA results) from the educational system of 25, mostly OECD, countries with resources employed (teachers per student, time spent at school). We estimate a semi-parametric model of the education production process using a two-stage procedure. By regressing data envelopment analysis output scores on nondiscretionary variables, both using Tobit and a single and double bootstrap procedure, we show that inefficiency is strongly related to GDP per head and adult educational attainment.
    Keywords: education; technical efficiency; DEA; bootstrap; semi-parametric
    JEL: C14 C61 H52 I21
  13. By: Leemore Dafny; David Dranove
    Abstract: The use of government-mandated report cards to diminish uncertainty about the quality of various products and services is widespread. However, report cards will have little effect if they simply confirm consumers' prior beliefs. Moreover, documented "responses" to report cards may reflect learning about quality that would have occurred in their absence. Using panel data on Medicare HMO market shares between 1994 and 2002, we examine the relationship between enrollment and quality both before and after report cards were mailed to 40 million Medicare beneficiaries in 1999 and 2000. We find evidence for both market-based and report-card-induced learning. We estimate the report-card effect on enrollment in the 2 years following their release to be approximately equal to that of cumulative market learning between 1994 and 2002. The report-card effect is entirely due to beneficiaries' responses to consumer satisfaction scores; other reported quality measures such as the mammography rate did not affect enrollment.
    JEL: D8 H4 I1
    Date: 2005–06
  14. By: Ernst R. Berndt; Adrian H. B. Gottschalk; Matthew W. Strobeck
    Abstract: In the United States, the Food and Drug Administration (FDA) agency is responsible for regulating the safety and efficacy of biopharmaceutical drug products. Furthermore, the FDA is tasked with speeding new medical innovations to market. These two missions create an inherent tension within the agency and between the agency and key stakeholders. Oftentimes, communications and interactions between regulated companies and the FDA suffer. The focus of this research is on the interactions between the FDA and the biopharmaceutical companies that perform drug R&D. To assess the current issues and state of communication and interaction between the FDA and industry, we carried out a survey of industry leadership in R&D and regulatory positions as well as senior leadership at the FDA who have responsibility for drug evaluation and oversight. Based on forty-nine industry and eight FDA interviews we conducted, we found that industry seeks additional structured and informal interactions with the FDA, especially during Phase II of development. Overall, industry placed greater value on additional communication than did the FDA. Furthermore, industry interviewees indicated that they were willing to pay PDUFA-like fees during clinical development to ensure that the FDA could hire additional, well-qualified staff to assist with protocol reviews and decision-making. Based on our survey and discussions, we uncovered several thematic opportunities to improve interactions between the FDA and industry and to reduce clinical development times: 1) develop metrics and goals at the FDA for clinical development times in exchange for PDUFA like fees; 2) establish an oversight board consisting of industry, agency officials, and premier external scientists (possibly at NIH or CDC) to evaluate and audit retrospectively completed and terminated drug projects; and 3) construct a knowledge database that can simultaneously protect proprietary data while allowing sponsor companies to understand safety issues and problems of previously developed/failed drug programs. While profound scientific and medical challenges face the FDA and industry, the first step to reducing development times and associated costs and facilitating innovation is to provide an efficient regulatory process that reduces unnecessary uncertainty and delays due to lack of communication and interaction.
    JEL: I1 H11 K23
    Date: 2005–06
  15. By: Edgar L. Feige (University of Wisconsin-Madison)
    Abstract: I propose the replacement of our current system of individual and corporate income, sales, excise, capital gains, import and export duties, gift and estate taxes with a single comprehensive “revenue neutral” Automated Payment Transaction (APT) tax. The APT tax consists of a flat rate tax levied on all voluntary transactions. The total volume of transactions represents the broadest conceivable tax base and therefore requires the lowest conceivable marginal tax rate. Since the efficiency (misallocation) costs of a tax system tend to rise geometrically with the marginal tax rate, a massive reduction in tax rates can save an estimated $300 billion of misallocation costs associated with the current tax system. The APT tax is automatically assessed and collected when transactions are routinely settled through the electronic technology of the bank/payments clearing system with no deductions, exemptions, or exclusions. The APT tax also imposes an automatically collected tax on cash as it enters and leaves the banking system. All income and information tax returns are eliminated as taxes are digitally assessed and collected by the financial equivalent of the E-Z pass that is now used to speed traffic through a toll booth system on highways. The annual savings in compliance and administrative costs are estimated to be $200 billion per year. Unlike the “Fair Tax” or “National Sales Tax” proposals which are highly regressive, the flat rate APT tax introduces progressivity through the tax base since the total volume of transactions includes all asset transactions involving exchanges of titles to property. The wealthy carry out a disproportionate share of these asset exchanges and therefore bear a disproportionate burden of the tax despite its flat rate structure. The perceived fairness, even handedness and simplicity of the APT tax will greatly reduce tax evasion, which the IRS estimates to total $325 billion per year. Like all taxes, the APT tax creates new distortions which must be weighed against the benefits obtained by scrapping the current tax system. Scrapping the present tax system tax promises potential benefits estimated at $825 billion annually. The proposed APT tax is simple, comprehensible, fair and efficient, with minimal administrative and compliance costs. The burden of proof therefore rests with APT tax opponents who must demonstrate that its costs exceed the $825 billion of potential annual benefits.
    Keywords: Tax reform; administration and compliance costs;equity; efficiency; flat tax;
    JEL: H20 H21 H23 H24 H25 H26
    Date: 2005–06–15
  16. By: Yasuhito Tanaka (Doshisha University)
    Abstract: We will show that in the case where there are two individuals and three alternatives (or under the assumption of free-triple property) the Arrow impossibility theorem for social welfare functions that there exists no social welfare function which satisfies transitivity, Pareto principle, independence of irrelevant alternatives, and has no dictator is equivalent to the Brouwer fixed point theorem on a 2-dimensional ball (circle).
    JEL: D6 D7 H
    Date: 2005–06–16
  17. By: Yasuhito Tanaka (Doshisha University)
    Abstract: We will present a topological approach to the Arrow impossibility theorem of social choice theory that there exists no binary social choice rule (which we will call a social welfare function) which satisfies the conditions of transitivity, independence of irrelevant alternatives (IIA), Pareto principle and non-existence of dictator.
    JEL: D6 D7 H
    Date: 2005–06–16
  18. By: Paul Lewin; Baptiste Gerbier
    Keywords: Honduras, Seguridad Aliemntaria, Política Pública, Agricultura
    JEL: D6 D7 H
    Date: 2005–06–16
  19. By: Gregorio Núñez (Department of Economic Theory and Economic History (University of Granada) and “Grupo de Estudios Históricos sobre la Empresa”)
    Abstract: The interpretation that still prevails of the political and economic history of Spain at the beginning of the century, emphasizes the basically rural and backward character of a society that grew and was modernized very slowly. Even as late as 1932-1936, during the Second Republic in Spain, political backwardness, industrial underdevelopment and engrained agrarian conflict are common factors stressed by many authors and, in contrast, there was a lack of a solid alternative politically and economically rooted in their as yet minority urban middle classes.3 And «perhaps the sole outstanding fact in 1898 was the extent and unanimity of the malaise in the middle class» [PAN-MONTOJO, 1998, p.262]. Recently these ideas are being revised in search of «more subtle interpretations of the political reality which is more prosaic, but not for that reason less complex». Political historians such as Forner and García argued that political fraud, corruption and backwardness cannot explain completely and convincingly early 20 th century Spain. On the contrary, they suggest that the implicit critical factor in the so-called «vieja política» (old politics) was a more general lack of civic maturity, that might have filled the established rules of the political game with democratic content [FORNER & GARCÍA, 1992, pp. 41 y ss.]; but in fact Spanish society only gradually began to fill this gap. They also add that, in such a process of growing maturity, cities played, as should be expected, a fundamental role.
    Keywords: City and Town Life - Spain - History, Cities and Towns - Economic History – Spain – 1878-1944, Urban Life – Spain – 1878-1944, Urban policy, Urbanization - Spain.
    Date: 2005–06–16
  20. By: Juan Antonio Lacomba (Department of Economic Theory and Economic History, University of Granada); Francisco Miguel Lagos (Department of Economic Theory and Economic History, University of Granada)
    Abstract: This paper analyzes the effects of population aging on the preferred legal retirement age. What is revealed is the crucial role that the indirect ’macro’ effects resulting from a change in the legal retirement age play in the optimal decision. Two Social Security systems are studied. Under a defined contribution scheme aging lowers the preferred legal retirement age. However, under a defined pension scheme the retirement age is delayed. This result shows the relevance of correctly choosing the parameter affected by the dependency ratio in the design of the Social Security programme.
    Keywords: Social security, aging, legal retirement age
    JEL: H55 J26
    Date: 2005–06–16
  21. By: Junmin Wan (Graduate School of Economics, Institute of Social and Economic Research, Osaka University)
    Abstract: A rational addiction model with an optimal inventory is developed and can be used as a new way to distinguish consumption from purchases when there is perfect foresight concerning price. The theoretical framework is tested using daily and monthly cigarette purchases in Japan. In Japan, the central government controls the price of cigarettes; this can be considered a natural experiment. The rational addiction model is not supported when inventory is not considered, as the inventory becomes an omitted variable and correlates with price and tax, while it is supported if the optimal inventory is included in the estimating equation. The timing of hoarding is clarified theoretically and empirically.Since the tax elasticity of hoarding exceeds 400 percent, the hoarding effect is very large just before a tax or price increase; a tax increase, therefore, is considered a good tool for temporary economic stimulation.
    Keywords: addiction, hoarding, tax increase, omitted variable
    JEL: C12 D11 D12 H31
    Date: 2004–01

This nep-pbe issue is ©2005 by Kerim Arin. 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.