nep-pbe New Economics Papers
on Public Economics
Issue of 2005‒12‒20
forty papers chosen by
Peren Arin
Massey University

  1. The Productivity Effects of Privatization: Longitudinal Estimates from Hungary, Romania, Russia, and Ukraine By J. David Brown; John Earle; Almos Telegdy
  2. Understanding the Effects of Government Spending on Consumption By Jordi Galí; J. David López-Salido; Javier Vallés
  3. Do New Lottery Games Stimulate Retail Activity? Evidence from West Virginia Counties By Mark Skidmore; Mehmet Serkan Tosun
  5. New Evidence on Fiscal Decentralization and the Size of Government By Jon H. Fiva
  6. Income Taxes, Property Values and Migration By Amihai Glazer; Vesa Kanniainen; Panu Poutvaara
  7. Tax Effects, Search Unemployment, and the Choice of Educational Type By Annette Alstadsæter; Ann-Sofie Kolm; Birthe Larsen
  8. Tax-tariff reform with costs of tax administration By Knud Jørgen Munk
  9. Should you Take a Lump-Sum or Annuitize? Results from Swiss Pension Funds By Monika Bütler; Federica Teppa
  10. Nordic Dual Income Taxation of Entrepreneurs By Vesa Kanniainen; Seppo Kari; Jouko Ylä-Liedenpohja
  11. Taxation and the Financial Structure of German Outbound FDI By Jack Mintz; Alfons Weichenrieder
  12. Tax Competition when Firms Choose their Organizational Form: Should Tax Loopholes for Multinationals be Closed? By Sam Bucovetsky; Andreas Haufler
  13. Do Institutions of Direct Democracy Tame the Leviathan? Swiss Evidence on the Structure of Expenditure for Public Education By Justina A.V. Fischer
  14. Fiscal Devolution and Dependency By Foreman-Peck, James; Lungu, Laurian
  15. Capital Subsidies and Underground Production By Francesco Busato, Bruno Chiarini, Pasquale de Angelis, Elisabetta Marzano
  16. Savers, Spenders and Fiscal Policy in a Small Open Economy By Egil Matsen; Tommy Sveen; Ragnar Torvik
  17. Cross-Border Shopping and the Sales Tax: A Reexamination of Food Purchases in West Virginia By Mark Skidmore; Mehmet Serkan Tosun
  18. On the Determinants of Optimal Border Taxes for a Small Open Economy By Knud Jørgen Munk; Bo Sandemann Rasmussen
  19. Assessing and Explaining the Relative Efficiency of Local Government: Evidence for Portuguese Municipalities By António Afonso; Sónia Fernandes
  20. A constitutional theory of the family By Alessandro Cigno
  21. The Three Parties in the Race to the Bottom: Host Governments, Home Governments and Multinational Companies By Rosanne Altshuler; Harry Grubert
  22. Severance Pay and the Shadow of the Law: Evidence for West Germany By Laszlo Goerke; Markus Pannenberg
  23. Globalization, Multinationals and Tax Base Allocation: Advance Pricing Agreements as Shifts in International Taxation? By Brem Markus
  24. Who%u2019s Going Broke? Comparing Growth in Healthcare Costs in Ten OECD Countries By Laurence Kotlikoff; Christian Hagist
  25. Econometric Accounting of the Australian Corporate Tax Rates: a Firm Panel Example By Feeny, Simon; Gillman, Max; Harris, Mark N.
  26. To go or not to go: Emigration from Germany By Silke Uebelmesser
  27. Simulating the Dynamic Macroeconomic and Microeconomic Effects of the FairTax By Laurence J. Kotlikoff; Sabine Jokisch
  28. Perfect Competition, Spatial Competition, and Tax Incidence in the Retail Gasoline Market By James Alm; Edward Sennoga; Mark Skidmore
  29. Pension Contributions as a Commitment device: evidence of sophistication among time-inconsistent households By Patricia Sourdin
  30. Policy-induced Internal Migration: An Empirical Investigation of the Canadian Case By Kathleen M. Day; Stanley L. Winer
  31. Provincial Interests and Political Integration: Voting in the French Maastricht Referendum By Andrew Austin
  32. Labour market regulation and retirement age By M. Magnani
  33. Concerns for Equity and the Optimal Co-Payments for Publicly Provided Health Care By Michael Hoel
  34. Protecting Cultural Monuments Against Terrorism By Bruno S. Frey; Dominic Rohner
  35. Mind the Gap – International Comparison of Cyclical Adjustment of the Budget By Gabor Vadas; Gabor P.Kiss
  36. Whither Political Economy? Theories, Facts and Issues By Antonio Merlo
  37. Search Profiling with Partial Knowledge of Deterrence By Charles F. Manski
  38. War with Outsiders Makes Peace Inside By Johannes Münster; Klaas Staal
  39. Reconsidering the Environmental Kuznets Curve hypothesis: the trade off between environment and welfare By Nicola Cantore
  40. The Impact of Generic Reference Pricing Interventions in the Statin Market By Jaume Puig

  1. By: J. David Brown; John Earle; Almos Telegdy
    Abstract: This paper estimates the effect of privatization on multifactor productivity (MFP) using long panel data for nearly the universe of initially state-owned manufacturing firms in four economies. We exploit the key longitudinal feature of our data to measure and control for pre-privatization selection bias and to estimate long-run impacts. We find that the magnitudes of our estimates are robust to alternative functional forms, but sensitive to how we control for selection. Our preferred random growth models imply that majority privatization raises MFP about 15% in Romania, 8% in Hungary, and 2% in Ukraine, while in Russia it lowers it 3%. Privatization to foreign rather than domestic investors has a larger impact, 18-35%, in all countries. Positive domestic effects appear within a year in Hungary, Romania, and Ukraine and continue growing thereafter, but take 5 years after privatization to emerge in Russia.
    Keywords: privatization, productivity, foreign ownership, random growth model, transition, Hungary, Romania, Russia, Ukraine
    JEL: D24 G34 L33 P31
    Date: 2005
  2. By: Jordi Galí; J. David López-Salido; Javier Vallés
    Abstract: Recent evidence suggests that consumption rises in response to an increase in government spending. That finding cannot be easily reconciled with existing optimizing business cycle models. We extend the standard new Keynesian model to allow for the presence of rule-of-thumb consumers. We show how the interaction of the latter with sticky prices and deficit financing can account for the existing evidence on the effects of government spending.
    Keywords: Rule-of-thumb consumers, non-Ricardian households, fiscal multiplier, government spending, Taylor rules
    JEL: E32 E62
    Date: 2002–09
  3. By: Mark Skidmore (Department of Economics, University of Wisconsin - Whitewater); Mehmet Serkan Tosun (Bureau of Business and Economic Research, College of Business and Economics, West Virginia University)
    Abstract: In this paper we examine the impact of the lottery sales and the introduction of new lottery games on the retail activity using panel data on lottery sales, the adoption of new lottery games in West Virginia and in neighboring states, and retail income (a proxy for retail sales) for all 55 counties in West Virginia over the 1987-2001 period. Importantly, we are able to utilize changes in neighboring state lottery status to examine the potentially endogenous relationship between lottery sales and retail activity. Our findings generally show that lottery sales are positively associated with retail income, but perhaps surprisingly this positive effect is generated from interior counties and not border counties. We also find that the introduction of video lottery in several West Virginia counties has resulted in a significant increase in retail income.
    Keywords: Lottery, Regional Development
    JEL: R11 H70
    Date: 2005–05
  4. By: Yifan Hu; Timothy Kam
    Abstract: We construct a monetary model where government bonds also provide liquidity service. Liquid government bonds affect equilibrium allocations, inflation and create an endogenous interest-rate spread. How this new feature alters optimal fiscal-monetary policy in a stochastic sticky-price environment is considered. The trade-off confronting a planner, shown in recent literature, between using inflation surprise and labor-income tax is eradicated by the existence of the liquid bond. We find that the more sticky prices become, the more the planner stabilizes prices, but the planner also creates less distortionary and less volatile income taxes by resorting to taxing the liquidity service of bonds.
    JEL: E42 E52 E63
    Date: 2005–12
  5. By: Jon H. Fiva
    Abstract: This paper adds to the literature by utilizing improved data on tax revenue decentralization to re-examine the relationship between fiscal decentralization and the size of government. An econometric analysis using panel data from 18 OECD countries shows that fiscal decentralization matters for both the size and composition of government spending. Tax revenue decentralization is associated with a smaller public sector, while expenditure decentralization is associated with a larger public sector. The former effect seems to be driven by a reduction in social security transfers, while the latter effect seems to be driven by increased government consumption.
    Keywords: fiscal federalism, sub-central fiscal autonomy, government expenditures, size of government
    JEL: H11 H53 H77
    Date: 2005
  6. By: Amihai Glazer (University of California, Irvine); Vesa Kanniainen (University of Helsinki); Panu Poutvaara (University of Helsinki and IZA Bonn)
    Abstract: We consider taxation by a utilitarian government in the presence of heterogeneous locations within a country. We show that a utilitarian government never equalizes after-tax incomes, even when it can impose group-specific lump-sum taxes. If migration is impossible, a utilitarian government may even transfer income from the poor to the rich, reducing the rents earned by absentee landlords. The redistributive tax on the rich may be higher or lower when the rich can migrate than when they cannot.
    Keywords: taxes, land rents, property values, migration, redistribution
    JEL: H21 H7 R21 R23
    Date: 2005–12
  7. By: Annette Alstadsæter; Ann-Sofie Kolm; Birthe Larsen
    Abstract: This paper examines the effect of taxes on the individuals’ choices of educational direction, and thus on the economy’s skill composition. A proportional labour income tax induces too many workers with high innate ability to choose an educational type with high consumption value and low effort costs. This increases the skill mismatch and aggregate unemployment in the economy. The government can correct for this distortion by use of differentiated tuition fees or tax rates.
    Keywords: unemployment, matching, education, optimal taxation, tuition fees
    JEL: H21 H24 J64 J68
    Date: 2005
  8. By: Knud Jørgen Munk (Department of Economics, University of Aarhus, Denmark)
    Abstract: As is broadly recognized, the straightforward application of the Diamond-Mirrlees (1971) production efficiency theorem implies that when lump-sum taxation is not available, then it is optimal for the government in a small open economy to rely on taxes on the net demand of households rather than on border taxes to finance its resource requirements. However, the theorem does not hold when taxation is associated with administrative costs. The present paper explores the implications for optimal taxation and for desirable directions of tax-tariff reform in countries at different levels of economic development taking into account the costs of tax administration. The paper lends support to and clarifies the reasons for the criticism by Emran and Stiglitz (2003, 2005) of the IMF and the World Bank's recommendation to developing countries to adopt VAT to replace border taxes.
    Keywords: Optimal taxation, optimal trade policy, VAT, tax-tariff reform, costs of tax administration, informal sector, developing countries
    JEL: F11 F13 H21
    Date: 2005–12–15
  9. By: Monika Bütler; Federica Teppa
    Abstract: We use a unique dataset on individual retirement decisions in Swiss pension funds to analyze the choice between an annuity and a lump sum at retirement. Our analysis suggests the existence of an “acquiescence bias”, meaning that a majority of retirees chooses the standard option offered by the pensions fund or suggested by common practice. Small levels of accumulated pension capital are much more likely to be withdrawn as a lump sum, suggesting a potential moral hazard behavior or a magnitude effect. We hardly find evidence for adverse selection effects in the data. Single men, for example, whose money’s worth of an annuity is considerably below the corresponding value of married men, are not more likely to choose the capital option.
    Keywords: occupational pension, lump sum, annuity, choice anomalies
    JEL: D91 H55 J26
    Date: 2005
  10. By: Vesa Kanniainen; Seppo Kari; Jouko Ylä-Liedenpohja
    Abstract: The paper shows how entrepreneurial taxes interact with the career choice of individuals, the quality of entrepreneurs, and their effort and investments. It is particularly relevant to differentiate the early effects on start-up enterprises with substantial uncertainty from the tax effects on mature firms where the uncertainty is resolved. That is why the neutrality results of dividend taxation from mature company theory do not carry over to start-up enterprises. The Nordic dual model encourages (discourages) the establishment of new enterprises by entrepreneurs who anticipate high (low) profitability.
    Keywords: dual income taxation, enterprise taxes
    JEL: H25
    Date: 2005
  11. By: Jack Mintz; Alfons Weichenrieder
    Abstract: The paper analyzes the financial structure of outbound FDI during the period 1996-2002 by drawing on up to 54,022 firm-year observations of 13,758 German-owned subsidiaries. We find that the tax rate in the host country has a sizeable and significantly positive effect on leverage for wholly-owned foreign unlike partially-owned foreign companies. Most of the effect comes from increased intra-company borrowing, while third-party debt is not significantly affected by tax differences. While wholly-owned subsidiaries react more sensitively to tax rate differentials, they are less sensitive to macroeconomic influences like interest rates.
    Keywords: foreign direct investment, financial structure, capital structure, taxation
    JEL: F23 H25
    Date: 2005
  12. By: Sam Bucovetsky; Andreas Haufler
    Abstract: We analyze a sequential game between two symmetric countries when firms can invest in a multinational structure that confers tax savings. Governments are able to commit to long-run tax discrimination policies before firms' decisions are made and before statutory capital tax rates are chosen non-cooperatively. Whether a coordinated reduction in the tax preferences granted to mobile firms is beneficial or harmful for the competing countries depends critically on the elasticity with which the firms' organizational structure responds to tax discrimination incentives. The model can be applied to policy initiatives that aim at a ban on preferential tax regimes and at reducing the profit shifting opportunities for multinational firms.
    Keywords: tax competition, multinational firms, preferential treatment
    JEL: F23 H73
    Date: 2005
  13. By: Justina A.V. Fischer
    Abstract: The deleterious impact of institutions of direct legislation on student performance found in studies for both the U.S. and Switzerland has raised the question of what its transmission channels are. For the U.S., an increase in the ratio of administrative to instructional spending and larger class sizes were observed, supporting the hypothesis of a Leviathan-like school administration. For Switzerland, using a cross-sectional time-series panel of sub-federal school expenditure and size of classes, no such effect is detected. This finding is in line with previous analyses in which efficiency gains in the provision of public goods for Switzerland have been found.
    Keywords: direct democracy, median voter, bureaucracy, public education
    JEL: H41 H72 I22
    Date: 2005
  14. By: Foreman-Peck, James (Cardiff Business School); Lungu, Laurian (Cardiff Business School)
    Abstract: Public spending devolution in practice is widely seen as more appropriate for addressing varied political aspirations within state boundaries than is tax devolution. A drawback is that devolved public spending may be subject to irresistible upward pressure, as illustrated by 'formula drift' of the United Kingdom devolved administrations. By crowding out the private sector such public spending can exacerbate the problem it was originally intended to alleviate. When taxpayers do not value increases in government output at least as highly as the private goods and services they must forgo to finance them, then the public sector is too large. This paper estimates a three sector Hecksher-Ohlin model of the economy with the greatest relative rise of the public spending ratio in the United Kingdom, Wales. Simulation of the model shows a net gain in emp loyment from a one percent cut in income tax matched by a corresponding reduction in government spending. This result is consistent with the current level of intergovernmental transfers being excessive.
    Keywords: Fiscal Devolution; Small Open Economy Modelling; Crowding Out
    JEL: R15 R58
    Date: 2005–12
  15. By: Francesco Busato, Bruno Chiarini, Pasquale de Angelis, Elisabetta Marzano (Dept. of Economics, School of Economics and Management, University of Aarhus, Denmark; Università di Napoli Parthenope)
    Abstract: In this paper we investigate the effects of different fiscal policies on the firm choice to produce underground. We consider a tax evading firm operating simultaneously both in the regular and in the underground economy. We suggest that such a kind of firm, referred to as moonlighting firm, is able to offset the specific costs usually stressed by literature on underground production, such as those suggested by Loayza (1994) and Anderberg et alii (2003). Investigating the effects of different fiscal policy interventions, we find that taxation is a critical parameter to define the size of capital allocation in the underground production. In fact, a strong and inverse relationship is found, and tax reduction is the best policy to reduce the convenience to produce underground. We also confirm the depressing effect on investment of taxation (see, for instance, Summers, 1981), so that tax reduction has no cost in terms of investment. By contrast, the model states that while enforcement is an effective tool to reduce capital allocation in the underground production, it also reduce the total capital stock. Moreover, we also suggest that the allowance of incentives to capital accumulation may generate, in this specific typology of firm, some unexpected effects, causing, together with a positive investment process, also an increase in the share of irregularity. This finding could explain, in a microeconomic framework, the evidence of Italian southern regions, where high incentives are combined with high irregularity ratios
    Keywords: tax evasion, moonlighting, capital subsidies, underground production
    JEL: E22 H25 H26
    Date: 2005–10
  16. By: Egil Matsen; Tommy Sveen; Ragnar Torvik
    Abstract: This paper analyzes the effects of fiscal policy in an open economy. We extend the savers-spenders theory of Mankiw (2000) to a small open economy with endogenous labor supply. We first show how the Dornbusch (1983) consumption-based real interest rate for open economies is modified when labor supply is endogenous. We then turn to the effects of fiscal policy when there are both savers and spenders. With this heterogeneity taken into account, tax cuts have a short-run contractionary effect on domestic production, and increased public spending has a short-run expansionary effect. Although consistent with recent empirical work, this result contrasts with those of most other theoretical models. Transitory changes in demand have permanent real effects in our model, and we discuss the implications for real exchange-rate dynamics. We also show how “rational” savers may magnify or dampen the responses of “irrational” spenders, and show how this is related to features of the utility functions.
    Keywords: rule-of-thumb consumers, fiscal policy, open economy
    JEL: E21 E62 F41
    Date: 2005
  17. By: Mark Skidmore (Department of Economics, University of Wisconsin - Whitewater); Mehmet Serkan Tosun (Bureau of Business and Economic Research, College of Business and Economics, West Virginia University)
    Abstract: In this paper we present new evidence of cross-border shopping in response to sales taxation. While several instructive studies provide estimates of the cross-border shopping effect, we utilize a unique opportunity to evaluate the effect of a large discrete change in sales tax policy. Using county level data on food income and sales tax data for West Virginia over the 1982-2000 period we estimate that for every one-percentage point increase in the county relative price ratio due to sales tax change, the per capita food income decreases by about 0.7 percent. Our estimates indicate that food sales fell in West Virginia border counties by about 4 percent as a result of the imposition of the 6 percent sales tax on food in 1989.
    Date: 2005–09
  18. By: Knud Jørgen Munk; Bo Sandemann Rasmussen (Department of Economics, University of Aarhus, Denmark)
    Abstract: For a small open economy where the government is restricted to raise revenue using border taxes only, the optimal structure of border taxes is considered. As a matter of normalization exports and the supply to the market of the primary factor may be assumed to be untaxed, but that the household use of the primary factor and domestic consumption of the export good cannot be taxed is nevertheless a constraint; this insight provides the key to understanding what determines the optimal tariff structure. The optimal border tax structure is derived for both exogenous and endogenous labour supply, and the results are interpreted in the spirit of the Corlett-Hague results for the optimal tax structure in a closed economy and compared with results from CGE models.
    Keywords: Border taxes, small open economy, labour supply, Corlett-Hague.
    JEL: H21 F13
    Date: 2005–12–15
  19. By: António Afonso; Sónia Fernandes
    Abstract: In this paper we measure the relative efficiency of Portuguese local municipalities in a non-parametric framework approach using Data Envelopment Analysis. As an output measure we compute a composite local government output indicator of municipal performance. This allows assessing the extent of municipal spending that seems to be “wasted” relative to the “best-practice” frontier. Our results suggest that most municipalities could achieve, on average, the same level of output using fewer resources, improving performance without necessarily increasing municipal spending. Inefficiency scores are afterwards explained by means of a Tobit analysis with a set of relevant explanatory variables playing the role of non-discretionary inputs..
    Keywords: local government; expenditure efficiency; technical efficiency; DEA; Tobit models.
    JEL: C14 C34 H72 R50
  20. By: Alessandro Cigno
    Abstract: The paper re-examines the idea that a family can be viewed as a community governed by a self-enforcing constitution, and extends existing results in two directions. First, it identi?es circumstances in which a constitution is renegotiation-proof. Second, it introduces parental altruism. The behavioural and policy implications are illustrated by showing the effects of public pensions and credit rationing. These implications are not much affected by whether altruism is assumed or not, but contrast sharply with the predictions of more conventional models.
    Keywords: families, self-enforcing constitutions, renegotiation-proofness, altruism, fertility, saving, transfers, attention, pensions, credit rationing
    JEL: C72 D13 D71 D74 D91 H55 J13 J14
    Date: 2005–05
  21. By: Rosanne Altshuler; Harry Grubert
    Abstract: Most studies of tax competition and the race to the bottom focus on potential host countries competing for mobile capital, neglecting the role of corporate tax planning and of home governments that facilitate this planning. This neglect in part reflects the narrow view frequently taken of the policy instruments that countries have available in tax competition. But high-tax host governments can, for example, permit income to be shifted out to tax havens as a way of attracting mobile companies. Home countries will cooperate in this shift if their companies’ gain is greater than any reduction in the domestic tax base. We use various types of U.S. data, including firm level tax files, to identify the role of the three parties (host governments, home governments and MNCs) in the evolution of tax burdens on U.S. companies abroad from 1992 to 2002. This period is of particular interest because the United States introduced regulations in 1997 that greatly simplified the use of more aggressive tax planning techniques. The evidence indicates that from 1992 to 1998 the decline in effective tax rates on U.S. companies was driven largely by host governments defending their market share. But after 1998, tax avoidance behavior seems much more important. One indication is that effective tax rates on U.S. companies had a much weaker link with local statutory tax rates. After 1997, the new regulations motivated a very large growth in intercompany payments and a parallel growth of holding company income abroad. We attempt to estimate how many of these payments were deductible in the host country, and conclude that by 2002 the companies were saving about $7.0 billion per year by using the more aggressive planning strategies. This amounts to about 4 percent of companies’ foreign direct investment income and about 15 percent of their foreign tax burden.
    JEL: H25 H73
    Date: 2005
  22. By: Laszlo Goerke; Markus Pannenberg
    Abstract: Due to the complexity of employment protection legislation (EPL) in Germany, there is notable uncertainty about the outcomes of dismissal conflicts. In this study we focus on severance pay and inquire whether its incidence and level varies in a systematic manner with the legal rules as defined by labour as well as tax law. We start with a theoretical model that generates the main observable outcomes of dismissal conflicts as potential equilibrium situations. Using German panel data (GSOEP), we put our theoretical model to an empirical test. Our main result is that the shadow of the law matters. Criteria regarding the validity of dismissals either found in respective legislation or defined by labour courts significantly affect the incidence and magnitude of severance pay. Moreover, restrictive changes in the taxation of severance pay have a negative causal impact on its incidence.
    Keywords: severance pay, labour law, taxation, sample selection, survey data
    JEL: C23 C24 H24 J65 K31
    Date: 2005
  23. By: Brem Markus
    Abstract: This paper elaborates on the emergence of so-called Advance Pricing Agreements (APA) in international taxation and corresponding APA programs in individual countries. It refers to how globalizing business processes trigger governance change on the nation state level regarding the identification and allocation of the tax base of multinational companies. The introduction of APA programs and the generation of APAs are considered to be an example of such governance change. On the basis of a governance choice model, the paper seeks to identify factors which might explain variation in the evolution of national APA programs and the implementation of individual APAs between the taxpayer and the tax authorities. Differences in institutions, economic conditions, and the actors involved are important in explaining variation across countries.
    Keywords: Advance pricing agreement, multinational companies, transfer pricing, international taxation, cooperation, non-bureaucratic, governance choice.
    JEL: F02
    Date: 2005–12–05
  24. By: Laurence Kotlikoff; Christian Hagist
    Abstract: Government healthcare expenditures have been growing much more rapidly than GDP in OECD countries. For example, between 1970 and 2002 these expenditures grew 2.3 times faster than GDP in the U.S., 2.0 times faster than GDP in Germany, and 1.4 times faster than GDP in Japan. How much of government healthcare expenditure growth is due to demographic change and how much is due to increases in benefit levels; i.e., in healthcare expenditures per beneficiary at a given age? This paper answers this question for ten OECD countries -- Australia, Austria, Canada, Germany, Japan, Norway, Spain, Sweden, the UK, and the U.S. Specifically, the paper decomposes the 1970  2002 growth in each countrys healthcare expenditures into growth in benefit levels and changes in demographics. Growth in real benefit levels has been remarkably high and explains the lions share  89 percent  of overall healthcare spending growth in the ten countries. Norway, Spain, and the U.S. recorded the highest annual benefit growth rates. Norways rate averaged 5.04 percent per year. Spain and the U.S. were close behind with rates of 4.63 percent and 4.61 percent, respectively. Allowing benefit levels to continue to grow at historic rates is fraught with danger given the impending retirement of the baby boom generation. In Japan, for example, maintaining its 1970-2002 benefit growth rate of 3.57 percent for the next 40 years and letting benefits grow thereafter only with labor productivity entails present value healthcare expenditures close to 12 percent of the present value of GDP. By comparison, Japans government is now spending only 6.7 percent of Japans current output on healthcare. In the U.S., government healthcare spending now totals 6.6 percent of GDP. But if the U.S. lets benefits grow for the next four decades at past rates, it will end up spending almost 18 percent of its future GDP on healthcare. The difference between the Japanese 12 percent and U.S. 18 percent figures is remarkable given that Japan is already much older than the U.S. and will age more rapidly in the coming decades. Although healthcare spending is growing at unsustainable rates in most, if not all, OECD countries, the U.S. appears least able to control its benefit growth due to the nature of its fee-for-service healthcare payment system. Consequently, the U.S. may well be in the worst long-term fiscal shape of any OECD country even though it is now and will remain very young compared to the majority of its fellow OECD members.
    JEL: H51 I11
    Date: 2005–12
  25. By: Feeny, Simon; Gillman, Max (Cardiff Business School); Harris, Mark N.
    Abstract: The paper presents an econometric accounting of the effective corporate tax rate in Australia for the years 1993 to 1996. The estimation is a panel of Australian firms that uses a specially gathered financial data base. Using fixed and random effects, the model specifies that the statutory tax rate is estimated as the constant term of the model. An ability to find an estimated statutory tax rate that is close to the actual rate suggests a certain confidence in the estimated effects of the others factors affecting the effective tax rate. The results show importance for interest expenses, depreciation allowances, debt/asset structures, and the foreign ownership of firms. There is support for an Australian role as a preferential tax location.
    Keywords: Effective tax rate; accounting model; panel data; random and fixed effects
    JEL: H25 E62
    Date: 2005–12
  26. By: Silke Uebelmesser
    Abstract: This study analyzes the qualitative aspects of emigration from Germany taking account of economic and non-economic reasons. The reported willingness to emigrate from Germany in the German Socio-Economic Panel (GSOEP) is explained for men and women by three groups of variables: individual characteristics, household characteristics, and regional characteristics. It turns out that the educational background and West German residency positively affect the willingness to emigrate, whereas German nationality, age, and the family situation are mostly negatively correlated with it.
    Keywords: emigration, intention variable, probit estimation, German Socio Economic Panel (GSOEP)
    JEL: C20 F22 H55
    Date: 2005
  27. By: Laurence J. Kotlikoff; Sabine Jokisch
    Abstract: America's aging coupled with high and growing old age health and pension benefits augers for much higher payroll taxes, with potentially damaging effects on the U.S. economy. This prognosis is supported by our analysis of a detailed dynamic life-cycle general equilibrium model, which closely captures projected changes in U.S. demographics. The FairTax offers a potential alternative to this dismal economic future. The FairTax proposes to replace the federal payroll tax, personal income tax, corporate income tax, and estate tax (not modeled here) with a progressive consumption tax delivered in the form of a federal retail sales tax plus a rebate. According to our simulation model, these policy changes would almost double the U.S. capital stock by the end of the century and raise long-run real wages by 19 percent compared to the base case alternative. They would also preclude a doubling of the highly regressive payroll tax. Indeed, the poorest members of each cohort experience remarkably large welfare gains from the FairTax. To be specific, today's elderly poor are predicted to experience a 13 to 14 percent welfare gain. In contrast, their middle class counterparts enjoy a 1 to 2 percent gain, and their richest counterparts experience a .5 to 1 percent welfare loss. Poor baby boomers experience 8 percent gains, while middle- and upper-income boomers experience either very small welfare losses or small gains. Once one moves to generations postdating the baby boomers there are positive welfare gains for all income groups in each cohorts. For example, the poorest members of the generation born in 1990 enjoy a 16 percent welfare gain. Their middle-class and rich contemporaries experience 5 and 2 percent welfare gains, respectively. The welfare gains are largest for future generations. Take the cohort born in 2030. The poorest members of this cohort enjoy a huge 27 percent improvement in their well being. For middle class members of this birth group, there's an 11 percent welfare gain. And for the richest members of the group, the gain is 5 percent. The remarkable point here is the size of the gains from the reform relative to the losses. Yes, some initial high- and middle-income households are made worse off, but their welfare losses are minor compared with the gains available to future generations, particularly the poorest members of future generations. While our model is highly stylized, it suggests that the FairTax offers a real opportunity to improve the U.S. economy's performance and the wellbeing of the vast majority of Americans. The winners from this reform, primarily those who are least well off, experience very major gains, and the losers experience only minor losses.
    JEL: H2
    Date: 2005–12
  28. By: James Alm (Andrew Young School of Policy Studies, Georgia State University); Edward Sennoga (Andrew Young School of Policy Studies, Georgia State University); Mark Skidmore (Department of Economics, University of Wisconsin - Whitewater)
    Abstract: In this paper we use monthly gasoline price data for all fifty U.S. states over the period 1984 to 1999 to examine the incidence of state gasoline excise taxes. Standard economic theory predicts full shifting of the excise tax to consumers when the supply of gasoline is perfectly elastic, and our empirical results are largely consistent with this prediction. In general, we find full shifting of gasoline taxes to the final consumer, with changes in gasoline taxes fully reflected in the tax-inclusive gasoline price almost instantly, a result consistent with a retail gasoline market in which firms are perfectly competitive and produce at constant cost. In addition, although we find that gasoline retail prices demonstrate asymmetric responses to changes in gasoline wholesale prices, we find only limited evidence of such behavior for retail prices with respect to gasoline excise taxes. Importantly, we also present a novel application of a spatial price discrimination model to examine tax incidence in markets that are not perfectly competitive. In this alternative framework, the incidence of excise taxes depends upon the competitiveness of retail gasoline markets, which depends in turn on spatial aspects of the market. Consistent with this alternative theoretical framework, our empirical estimates demonstrate that gasoline markets in urban states exhibit full shifting, but those in rural states demonstrate somewhat less than full shifting.
    Keywords: incidence, spatial competition, asymmetric response
    JEL: H22
    Date: 2005–10
  29. By: Patricia Sourdin (The University of Adelaide)
    Abstract: Sophisticated agents with self-control problems value commitment devices that constrain future choices. Using Australian household data, I test whether these households value commitment devices in the form of illiquid pension contributions. Applying various probabilistic choice models, the results confirm the conjecture that households with problems of self-control are more likely to invest in illiquid pensions while less likely to hold very liquid forms of assets.
    Keywords: commitment device; pensions; intertemporal choice
    JEL: D91 H31 E21
    Date: 2005–12–12
  30. By: Kathleen M. Day; Stanley L. Winer
    Abstract: We investigate the influence of public policy on interprovincial migration in Canada using new aggregated migration data for 1974-1996, the longest period studied so far. We consider the consequences of regional variation in a variety of policies, and also investigate the effects of certain extraordinary events in Quebec and in the Atlantic provinces. The results indicate that while the changing bias in the unemployment insurance system may have induced some people to move to the relatively high unemployment Atlantic region, the resulting flows are likely too small to have altered regional unemployment rates. In contrast, political events in Quebec in the 1970's and the closing of the cod fishery in 1992 appear to be associated with large changes in migration patterns.
    Keywords: migration, regional disparity, public policy, unemployment insurance, conditional logit, taxation data
    JEL: H00 H70 J41 J65 R23 R58
    Date: 2005
  31. By: Andrew Austin
    Abstract: In September 1992 French voters in a national referendum approved the Maastrict Treaty, which instituted several provisions for closer European integration including creation of the Eurozone. This paper analyzes political and economic forces that affected French voters, and the links between the progress of European integration and changes in redistributive spending. Conventional wisdom ascribes the persistence of the Common Agricultural Program subsidies to the political power of farmers, although direct evidence of this has been sparse. The statistical analysis here finds that support for European integration is weaker, other things equal, in areas where farmers were most affected by the MacSharry reforms, which reduced some support prices and began the process of `decoupling' agricultural subsidies from production. Results also show previous support for European integration and pro-European politicians are correlated with stronger support for ratification, as are higher incomes and higher proportions of non-natives. The results are consistent with the view that European integration provides voters and taxpayers with a way to limit the influence of interest groups by shifting decisionmaking from a national to a supranational arena.
    Keywords: Referendum, agricultural subsidies, European integration, voting.
    JEL: H23 D72
    Date: 2005–11
  32. By: M. Magnani
    Abstract: Pension system and labor market reforms are widely debated issues in all industrialized countries and especially in Europe; any change over these two aspects of the Social Security System indeed, can affect heavily the functioning of the whole economy.A preminent role in this sense is played by employment protection regulation and by the mandatory retirement age; in this paper I focus on the political economy of such social policies jointly and consider the interaction between the choice over the protection of the employees in the labour market and that over retirement age. In particular, I look at the effects of the turnover generated either by temporary, selective exits due to the dynamic of the labour market or by permanent, non-selective exits due to retirements. The degree of employment protection and the mandatory retirement age emerge as a result of the political bargaining between three social groups: young, high and low prductivity old. Workforce composition in this setting defines the efficiency of the economy and determine the rise of a social consensus towards different assets of the Social Security System
    Keywords: social security, turnover on the labor market, political equilibria, employment protection, retirement age
    JEL: D72 H55 J63
    Date: 2005
  33. By: Michael Hoel
    Abstract: In countries where health care is publicly provided and where equity considerations play an important role in policy decisions, it is often argued that an increase in co-payments is unacceptable as it will be particularly harmful to the less well-off in society. The present paper derives socially optimal co-payments in a simple model of health care where people differ in income and in severity of illness. The social optimum depends on the welfare weights given to persons with different levels of expected utility. Increased concern for equity may increase optimal co-payments for illnesses with homogeneous severity across the population. For illnesses where the severity varies strongly across the population, optimal co-payments go down as a response to increased concern for equity, provided income differences in the society are sufficiently small.
    Keywords: public health, co-payments, equity concerns
    JEL: D63 H42 H51 I18
    Date: 2005
  34. By: Bruno S. Frey; Dominic Rohner
    Abstract: Famous cultural monuments are often regarded as unique icons, making them an attractive target for terrorists. Despite huge military and police outlays, terrorist attacks on important monuments can hardly be avoided. We argue that an effective strategy for discouraging terrorist attacks on iconic monuments is for the government to show a firm commitment to swift reconstruction. Using a simple game-theoretic model, we demonstrate how a credible claim to rebuild any cultural monuments destroyed discourages terrorist attacks by altering the terrorists’ expectations and by increasing the government’s reputation costs if they fail to rebuild.
    Keywords: Terrorism; Culture; Monuments; Counter-terrorism; Deterrence.
    JEL: D74 H56 Z10
    Date: 2005–11
  35. By: Gabor Vadas (Magyar Nemzeti Bank); Gabor P.Kiss (Magyar Nemzeti Bank)
    Abstract: Cyclically adjusted budget balance (CAB) is a widely cited and widely used concept in the evaluationof fiscal situations. The key idea behind it involves the identification of potential levels of economic variables.There are two recently used methods: the aggregate approach and the unconstrained disaggregateapproach. In this paper we apply them on USA, Japan and 25 EU member countries to demonstratethat both approaches could be the source of considerable bias. While the aggregate approachcannot cope with different shocks, the unconstrained disaggregate method involves systematic biasand do not contain theoretical consideration. In order to avoid these distortions we present an alternativeframework, which is able to incorporate the advantages of both approaches. Combining arbitraryoutput gap and constrained multivariate HP filter induces theoretically motivated disaggregation wherewe also exploit the implication of production function parameterisation. We found that the price effectresulting from the composition effect of different deflators could play an important role in evaluation ofthe fiscal position. To display the importance of composition effect we analyse the cyclical componentsof Finnish, Hungarian and Italian budget balances more in detail.
    Keywords: cyclically adjusted budget deficit, price gap, business cycles, constrained multivariate HP filter
    JEL: H62
    Date: 2005–12–15
  36. By: Antonio Merlo (Department of Economics, University of Pennsylvania)
    Abstract: In this paper, I discuss recent developments in political economy. By focusing on the microeconomic side of the discipline, I present an overview of current research on four of the fundamental institutions of a political economy: voters, politicians, parties and governments. For each of these topics, I identify and discuss some of the salient questions that have been posed and addressed in the literature, present some stylized models and examples, and summarize the main theoretical findings. Furthermore, I describe the available data, review the relevant empirical evidence, and discuss some of the challenges for empirical research in political economy.
    Keywords: microeconomics of political economy, voters, politicians, parties, governments
    JEL: D72 D78 H11
    Date: 2005–08–01
  37. By: Charles F. Manski
    Abstract: Economists studying public policy have generally assumed that the relevant social planner knows how policy affects population behavior. Planners typically do not possess all of this knowledge, so there is reason to consider policy formation with partial knowledge of policy impacts. Here I consider the choice of a profiling policy where decisions to search for evidence of crime may vary with observable covariates of the persons at risk of being searched. To begin I pose a planning problem whose objective is to minimize the utilitarian social cost of crime and search. The consequences of candidate search rules depends on the extent to which search deters crime. Deterrence is expressed through the offense function, which describes how the offense rate of persons with given covariates varies with the search rate applied to these persons. I study the planning problem when the planner has partial knowledge of the offense function. To demonstrate general ideas, I suppose that the planner observes the offense rates of a study population whose search rule has previously been chosen. He knows that the offense rate weakly decreases as the search rate increases, but he does not know the magnitude of the deterrent effect of search. In this setting, I first show how the planner can eliminate dominated search rules and then how he can use the minimax or minimax-regret criterion to choose an undominated search rule.
    JEL: H8 K4 D8
    Date: 2005–12
  38. By: Johannes Münster (Free University of Berlin andWZB. WZB, Reichpietschufer 50, 10785 Berlin, Germany.; Klaas Staal (University of Bonn and ZEI. ZEI(b), Walter-Flex-Straße 3, 53113 Bonn, Germany.
    Abstract: In many situations there is a potential for conflict both within and between groups. Examples include wars and civil wars and distributional conflict in multitiered organizations like federal states or big companies. This paper models such situations with a logistic technology of conflict. If individuals decide simultaneously and independently about the amount of internal conflict, external conflict and production, there is typically either only internal conflict, or only external conflict - but not both. If each group decides collectively how much each member has to put into the external conflict before the members individually decide on the amounts put into the internal conflict and production, groups choose sufficiently high external conflict in order to avoid internal conflict. This is a model of the "diversionary use of force". We also study the optimal number of groups.
    Keywords: conflict, war, rent-seeking, hierarchy, federalism, diversion
    JEL: D72 D74 H11 H74
    Date: 2005–12
  39. By: Nicola Cantore (University of York and Università Cattolica del Sacro Cuore, Milan)
    Abstract: Past climate change literature paid great attention to the welfare analysis of international agreements that stabilize emissions over time on the basis of the New Welfare Economics approach claiming “objective” measures of well-being and excluding interpersonal comparisons. In this paper, by using non New Welfare Economics approaches we show that the involvement of developing countries is not a desirable policy option. The implementation of a “Kyoto for ever” scenario including only developed regions could be recommended because improves both environment and welfare also if it does not generate a turning point in the relationship between income and pollution (PIR). The Environmental Kuznets Curve hypothesis (EKC) implies that a bell shaped PIR would induce policy-makers to pursue economic growth in order to overcome the air pollution issue. This normative prescription crucially focuses on the role played by the existence of a turning point in a context where only two sustainability dimensions are important: the economic and the environmental one. Our analysis shows that when we introduce a welfare analysis, policy implications based only on the turning point existence and consequently on the Environmental Kuznets Curve hypothesis could be misleading. In our study a “win-win” policy as the Kyoto Protocol is recommended because the existence of a turning point could be heavily paid in terms of welfare. However results are sensitive to the choice of the welfare measure.
    Keywords: Environmental Kuznets Curve, climate change, welfare, income distribution.
    JEL: H0 H3 I3
    Date: 2005–12
  40. By: Jaume Puig
    Abstract: The objective of this study was to evaluate the intended and unintended impact on pharmaceutical use and sales of three public financing reforms applied to the prescription of statins: a Spanish generic reference pricing (RP) system for lovastatin and simvastatin, and two competing policies introduced by the Andalusian Public Health Service (APHS) for all statins, first a maximum consumer price (MCP) and then a so called quality prescribing incentive for general practitioners (MCP plus PI). This study is designed as an observational, retrospective, interrupted time series analysis with comparison series (APHS and the rest of Spain) of 46 monthly drug use and sales ratios from January 2001 to October 2004 for each active ingredient in the group of statins. RP has been effective at reducing the volume of sales growth of the off-patent statins, yet its overall impact on sales of all statins has been relatively modest. The quantity and volume of sales impact heavily depends on regulatory RP details such as when the system is introduced, how often it is updated, and how the reference price is calculated.
    Keywords: Pharmaceutical sales, generic medicines, pharmaceutical reference pricing, statins
    JEL: I18 H5
    Date: 2005–12

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