nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒02‒12
twenty-one papers chosen by
Peren Arin
Massey University

  1. Twin Deficits: Squaring Theory, Evidence and Common Sense By Giancarlo Corsetti; Gernot J. Müller
  2. Is There a Social Security Tax Wedge? By Alessandro Cigno
  3. A Dynamic Theory of Public Spending, Taxation and Debt By Marco Battaglini; Steve Coate
  4. Can we afford to live longer in better health? By Ed Westerhout; Frank Pellikaan
  5. Redistributive Taxation Under Ethical Behaviour By Robin Boadway; Nicolas Marceau; Steeve Mongrain
  6. Corruption and the Shadow Economy: An Empirical Analysis By Axel Dreher; Friedrich Schneider
  7. Bureaucratic Rents and Life Satisfaction By Simon Luechinger; Stephan Meier; Alois Stutzer
  8. Public sector efficiency: evidence for new EU member states and emerging markets By António Afonso; Ludger Schuknecht; Vito Tanzi
  9. Cigarette Tax Revenues and Tobacco Control in Japan By Junmin Wan
  10. Power to the People? The Impact of Decentralization on Governance By Axel Dreher
  11. S-Based Taxation under Default Risk By Paolo Panteghini
  12. Heterogeneous social preferences and the dynamics of free riding in public goods By Urs Fischbacher; Simon Gaechter
  13. Performance related pay and labor productivity By Gielen,Anne C.; Kerkhofs,Marcel J.M.; Ours,Jan C. van
  14. Does Envy Destroy Social Fundamentals? The Impact of Relative Income Position on Social Capital By Justina A.V. Fischer; Benno Torgler
  15. Do the rich vote Conservative because they are rich? By Lind, Jo Thori
  16. What explains the variation in estimates of labour supply elasticities? By Michiel Evers; Daniël van Vuuren; Ruud de Mooij
  17. Conflict and the Social Contract By Helmut Bester; Karl Wärneryd
  18. BUDGET INFLEXIBILITY By Juan Carlos Echeverry; Leopoldo Fergusson; Pablo Querubín
  19. The effects of replacement schemes on car sales: the Spanish case By Omar Licandro; Antonio R. Sampayo
  20. Projecting OECD health and long-term care expenditures: What are the main drivers? By OECD
  21. Indirect Effects of an Aid Program: The Case of Progresa and Consumption By Manuela Angelucci; Giacomo De Giorgi

  1. By: Giancarlo Corsetti; Gernot J. Müller
    Abstract: In this paper we reconsider the twin deficit hypothesis (that fiscal shocks generating budget deficits also worsen external trade) both from a theoretical point of view and by analyzing data for Australia, Canada, the UK and the US. First, we assess the joint dynamics of budget and trade deficits along the business cycle, uncovering a strikingly recurrent S-shaped relation between the two. The correlation is actually negative, suggesting twin divergence. This observation however cannot rule out the possibility that government spending expansions and/or tax cuts may cause trade deficits, as the overall correlation is likely to be dominated by cyclical factors. Second, we reconsider the transmission of government spending in a standard two-country two-good model: we find that openness and the persistence of fiscal shocks are major determinants of the magnitude (or even sign) of the response of the trade balance to fiscal shocks. For a given persistence of the fiscal shock, the closer an economy, the larger the crowding out effect on investment, the lower the deterioration of the trade balance. Third, we take this insight to the data, investigating the transmission of fiscal shocks in a VAR framework in the four countries in our sample. Our empirical findings tend to support our view. In the US and Australia, which are relatively less open than Canada and the UK, and where government spending shocks are less persistent, we find that the external impact of fiscal policy is rather limited. Instead, private investment responds substantially. The reverse is true for Canada and the UK. These findings confirm and put into perspective earlier results, whereas fiscal expansions in the US are found to have on average a negligible effect on the country's trade balance. However, we emphasize that these results are consistent with a call for a US fiscal retrenchment to address global imbalances: the impact of budget cuts on the US external trade is muted by their positive effect on domestic investment, strengthening the US ability to generate resources against future interest and debt repayment.
    Keywords: twin deficits, budget deficit, trade deficits, home-bias, openness, crowding out, international transmission of fiscal policy, current account adjustment, business cycle dynamics.
    JEL: E62 E63 F32 F42 H30
    Date: 2005
  2. By: Alessandro Cigno (University of Florence, CESifo, CHILD and IZA Bonn)
    Abstract: A Beveridgean pension scheme invariably introduces a wedge between the wage rate and the marginal take-home pay. A Bismarckian one can do so only if it is not actuarially fair, or in the presence of credit rationing. Interestingly, if the two possible sources of distortion are present at the same time, they will tend to offset each other. The distortion may even change sign (the wedge may become a premium). In any case, the same pension contribution will discourage labour less if the scheme is Bismarckian, than if it is Beveridgean.
    Keywords: tax wedge, Bismarck, Beveridge, public pensions, implicit pension tax, labour
    JEL: H31 H55 J38
    Date: 2006–02
  3. By: Marco Battaglini; Steve Coate
    Date: 2006–01–28
  4. By: Ed Westerhout; Frank Pellikaan
    Abstract: This document analyses the effects of ageing populations upon public finances. More specifically, it focuses on the implications of ageing for acute health care, long-term care, and public pension expenditure. It does so for 15 EU countries. It pays particular attention to three novel insights: <UL> <LI>a large part of health care spending relates to time to death rather than to age <LI>life expectancy may increase much faster than current demographic projections suggest, and <LI>the average health status may continue to improve in the future. </UL> It adopts a generational accounting model that incorporates health care costs during the last years of life, decomposed into an acute health care component and a long-term care component. <P> The projections show that gains in life expectancy increase age-related expenditure; better health has the opposite effect. Combined, these trends reduce health care expenditure and increase pension expenditure. Their joint effect upon public finance is rather modest, however. Hence, the assessment of public finances in most EU15 countries does not change: even if a faster increase in life expectancy should combine with an improvement in health, current fiscal and social security institutions are unsustainable.
    Keywords: ageing populations; fiscal sustainability
    JEL: H62 I10 J11
    Date: 2005–06
  5. By: Robin Boadway; Nicolas Marceau; Steeve Mongrain
    Abstract: We consider the implications of ethical behaviour on the effect of a redistributive tax-transfer system. In choosing their labour supplies, individuals take into account whether their tax liabilities correspond to what they view as ethically acceptable. If tax liabilities are viewed as ethically acceptable, a taxpayer behaves ethically, does not distort her behaviour, and chooses to work as if she were not taxed. On the other hand, if ethical behaviour results in tax liabilities that exceed those that are ethically acceptable, she behaves egoistically (partially or fully), distorts her behaviour, and chooses her labour supply taking into account the income tax. We establish taxpayers' equilibrium behaviour and obtain that labour supply is less elastic when taxpayers may behave ethically than when they act egoistically. We characterize and compare the egoistic voting equilibrium linear tax schedules under potentially ethical and egoistic behaviour. We also compare our results to those obtained under altruism, an alternative benchmark.
    Keywords: Ethical behaviour, Kantian preferences, income taxation, redistribution
    JEL: H24 H21 Z13
    Date: 2006
  6. By: Axel Dreher (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH)); Friedrich Schneider (Department of Economics, University of Linz, Austria)
    Abstract: This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a crosssection of 120 countries and a panel of 70 countries for the period 1994-2002. Our results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. We also find that stricter regulations increase both corruption and the shadow economy.
    Keywords: Corruption, Shadow Economy, Regulation, Tax Burden
    JEL: D73 H26
    Date: 2006–01
  7. By: Simon Luechinger (University of Zurich); Stephan Meier (Federal Reserve Bank of Boston); Alois Stutzer (University of Zurich and IZA Bonn)
    Abstract: The monopoly position of the public bureaucracy in providing public services allows government employees to acquire rents. Those rents can involve higher wages, monetary and non-monetary fringe benefits (e.g. pensions and staffing), and/or bribes. We propose a direct measure to capture the total of these rents: the difference in reported subjective wellbeing between bureaucrats and people working in the private sector. In a sample of 38 countries, we find large variations in the extent of rents in the public bureaucracy. The extent of rents is determined by differences in institutional constraints and correlates with perceptions of corruption. We find judicial independence to be of major relevance for a tamed bureaucracy.
    Keywords: public sector, rents, life satisfaction, corruption, judicial independence
    JEL: D72 D73 I31 J30 J45 K42 H11 H83
    Date: 2006–02
  8. By: António Afonso (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, Postfach 16 03 19, 60066 Frankfurt am Main, Germany.); Vito Tanzi (Inter-American Development Bank, 1300 New York Avenue, NW Washington, DC 20577, USA.)
    Abstract: In this paper we analyse public sector efficiency in the new member states of the European Union compared to that in emerging markets. After a conceptual discussion of expenditure efficiency measurement issues, we compute efficiency scores and rankings by applying a range of measurement techniques. The study finds that expenditure efficiency across new EU member states is rather diverse especially as compared to the group of top performing emerging markets in Asia. Econometric analysis shows that higher income, civil service competence and education levels as well as the security of property rights seem to facilitate the prevention of inefficiencies in the public sector.
    Keywords: Interest rate pass-through; euro area countries; panel cointegration
    JEL: E43 G21
    Date: 2006–01
  9. By: Junmin Wan (Osaka School of International Public Policy, Osaka University)
    Abstract: The hypotheses of non-addiction, myopia and rational addiction are tested using annual, quarterly and monthly data. Changes in the prices of Japanese cigarettes can be viewed as exogenous from the point of view of consumer behavior, because the Japanese government controls cigarette prices. The empirical results of this paper support the addiction hypothesis. The short-run and long-run price elasticities range from -0.338 to -0.421, and from -0.679 to -0.686, respectively; thus, increases in tax revenues in the long-run are likely to be smaller than those in the short-run. As a result, tax increases would be an effective means of curbing smoking and reducing its social cost. Furthermore, the debt compensation programs for the Japan Railway and the National Forestry will not go according to plan, unless revenues are increased in the future.
    Keywords: smoking, rational addiction, tax revenues
    JEL: D12 E21 H29
    Date: 2004–06
  10. By: Axel Dreher (Swiss Institute for Business Cycle Research (KOF), Swiss Federal Institute of Technology Zurich (ETH))
    Abstract: The paper analyzes the impact of decentralization on governance employing four indicators of governance and five measures of decentralization. Depending on data availability, crosssections for a maximum of 129 countries are estimated. Results for a panel of about 70 countries over the period 1984-2001 are also presented. The results show that decentralization – measured as the share of sub-national employment, revenues or, respectively, expenditures – improves governance. This is particularly true for low income countries but – depending on the indicator employed – to some extent for high income countries also. However, the number of sub-national government tiers exerts a negative impact on some dimensions of governance.
    Keywords: Decentralization, Governance, Legal Quality, Judicial Independence, Federalism, Institutions
    JEL: H40 H71 H72 H77
    Date: 2006–01
  11. By: Paolo Panteghini
    Abstract: This article studies the characteristics of a S-based tax system under default risk. In particular we show that its neutrality properties depend on whether debt is protected or unprotected. In the former case, this system is neutral. In the latter case, where default timing is optimally chosen by shareholders, the S-based system is neutral with respect to real decisions only if the ?rm?s and the lender?s tax rate are equal. However, the shareholders? decision to default is always distorted.
  12. By: Urs Fischbacher (Institute for Empirical Research in Economics); Simon Gaechter (School of Economics, University of Nottingham)
    Abstract: We provide a direct test of the role of social preferences in voluntary cooperation. We elicit individuals’ cooperation preference in one experiment and make a point prediction about the contribution to a repeated public good. This allows for a novel test as to whether there are "types" of players who behave consistently with their elicited preferences. We find clear-cut evidence for the existence of "types". People who express free rider preferences show the most systematic deviation from the predicted contributions, because they contribute in the first half of the experiment. We also show that the interaction of heterogeneous types explains a large part of the dynamics of free riding.
    Keywords: Public goods games, experiments, voluntary contributions, conditional cooperation, free riding
    JEL: C91 C72 H41 D64
    Date: 2006–01
  13. By: Gielen,Anne C.; Kerkhofs,Marcel J.M.; Ours,Jan C. van (Tilburg University, Center for Economic Research)
    Abstract: This paper uses information from a panel of Dutch firms to investigate the labor productivity effects of performance related pay (PRP). We find that PRP increases labor productivity at the firm level with about 9%.
    Keywords: performance related pay; labour productivity
    JEL: C41 H55 J64 J65
    Date: 2006
  14. By: Justina A.V. Fischer; Benno Torgler
    Abstract: Research evidence on the impact of relative income position on individual attitudes and behaviour is sorely lacking. Therefore, this paper assesses such positional impact on social capital by applying 14 different measurements to International Social Survey Programme data from 25 countries. We find support for a positional concern effect or ‘envy’ whose magnitude in several cases is quite substantial. The results indicate that such an effect is non-linear. In addition, we find an indication that absolute income level is also relevant. Lastly, changing the reference group (regional versus national) produces no significant differences in the results.
    Keywords: Relative income position; envy; positional concerns; social capital; social norms; happiness
    JEL: Z13 H26 I31 D00 D60
    Date: 2006–01
  15. By: Lind, Jo Thori (Dept. of Economics, University of Oslo)
    Abstract: Political economy models predict that the rich oppose redistribution, and hence vote for conservative parties. Although this seems to fit the data well, I show that this is not true when we control for unobservable characteristics. Using Norwegian survey data, I study to what extent voting is caused by income. Unobserved characteristics correlated with income are handled by using fixed effects panel data discrete choice models. Although a positive association between income and conservative voting persists when controlling for unobservables, the magnitude of the effect is reduced by a factor of five. To correct for measurement error, I instrument income with average income by profession. The magnitude of the coefficients is increased, but the main conclusions remain.
    Keywords: Political economy; redistribution; voting; multinomial logit; panel data
    JEL: C23 C25 D31 D72 H11 H53
    Date: 2006–02–03
  16. By: Michiel Evers; Daniël van Vuuren; Ruud de Mooij
    Abstract: This paper performs a meta-analysis of empirical estimates of uncompensated labour supply elasticities. We find that much of the variation in elasticities can be explained by the variation in gender, participation rates, and country fixed effects. Country differences appear to be small though. There is no systematic impact of the model specification or marital status on reported elasticities. The decision to participate is more responsive than is the decision regarding hours worked. Even at the intensive margin, we find that the elasticity for women exceeds that for men. For men and women in the Netherlands, we predict an uncompensated labour supply elasticity of 0.1 (or 0.2 if an alternative specification is preferred) and 0.5, respectively. These values are robust for alternative samples and specifications of the meta regression.
    Keywords: labour supply; meta-analysis; uncompensated elastisity
    JEL: J22 H2
    Date: 2005–12
  17. By: Helmut Bester (Department of Economics, Free University of Berlin, Boltzmannstr. 20, D-14195 Berlin, Germany.; Karl Wärneryd (Department of Economics, Stockholm School of Economics, Box 6501, S-113 83 Stockholm, Sweden.
    Abstract: We consider social contracts for resolving conflicts between two agents who are uncertain about each other's fighting potential. Applications include international conflict, litigation, and elections. Even though only a peaceful agreement avoids a loss of resources, if this loss is small enough, then any contract must assign a positive probability of conflict. We show how the likelihood of conflict outbreak depends on the distribution of power between the agents and their information about each other.
    Keywords: conflict, social contracts, asymmetric information
    JEL: C78 D72 D74 D82 H21 H23
    Date: 2006–02
  18. By: Juan Carlos Echeverry; Leopoldo Fergusson; Pablo Querubín
    Abstract: The study of budgetary institutions has long been an important topic in the economic literature. Nonetheless, the degree of rigidity or inflexibility in budget preparation, a prime preoccupation for policy makers and in particular for finance ministers since a long time ago, has been relatively unexplored. In this paper we show that budget inflexibility can take several forms and argue that it is likely to be closely related to various types of political conflict present in the budget process. Moreover, we study one particular form of budget inflexibility and its connection with one specific (but perhaps the most important) political force driving the budget process. More specifically, we discuss some of the consequences of "expenditure inflexibility," defined as the existence of transfers to special interests enjoying constitutional or legal protection which impede their modification in the short run, in a simple model of legislative bargaining that captures the Tragedy of the Commons present in public budget allocation.
    Date: 2005–09–05
  19. By: Omar Licandro; Antonio R. Sampayo
    Abstract: This paper studies a model of car replacement designed to evaluate policies addressed to influence replacement decisions. An aggregate hazard function is computed from optimal replacement rules of heterogeneous consumers, which mimics the hump-shaped hazard function observed for the Spanish car market. The model is calibrated to evaluate quantitatively the Plan Prever, a replacement scheme introduced in Spain in 1997, finding that the positive effect of the subsidy is high in the short run but small in the long run for both sales and the average age of the stock.
    Keywords: scrapping, replacement schemes, heterogeneous consumers
    JEL: D12 H31
    Date: 2005
  20. By: OECD
    Abstract: This paper proposes a comprehensive framework for projecting public heath and long-term care expenditures. Notably, it considers the impact of demographic and non-demographic effects for both health and long-term care. Compared with other studies, the paper extends the demographic drivers by incorporating death-related costs and the health status of the population. Concerning non-demographic drivers of health care, the projection method accounts for income elasticity and a residual effect of technology and relative prices. For long-term care, the effects of increased labour participation, reducing informal care, and wage inflation are taken into account. Using this integrated approach, public health and long-term care expenditure are projected for all OECD countries for the years 2025 and 2050. Alternative scenarios are simulated, in particular a 'cost-pressure' and 'cost-containment' scenario, together with sensitivity analysis. Depending on the scenarios, the total health and long-term care spending is projected to increase on average across OECD countries in the range of 3.5 to 6 percentage points of GDP for the period 2005-2050. Cette étude propose un cadre assez complet pour effectuer des projections de dépenses de soins de santé et de soins de long terme. Notamment, à la fois pour les dépenses de santé et les soins de long terme, les effets des facteurs démographiques et non démographiques sont considérés dans l'analyse. En comparaison avec d'autres études, les effets démographiques ont été élargis pour incorporer les coûts liés à la mortalité et à l'état de santé de la population. Pour ce qui concerne les facteurs non démographiques des dépenses de santé, la méthode de projection incorpore un effet d'élasticité-revenu et l'effet résiduel de la technologie et des prix relatifs. Pour les soins de long terme, l'effet d'une participation accrue dans le marché du travail diminuant l'offre de soins informels, et de l'inflation des salaires ont été pris en compte. Sur la base de cette approche intégrée, les dépenses publiques de santé et des soins de long terme sont projetées pour tous les pays de l'OCDE et pour les années 2025 et 2050. Des scénarios alternatifs ont été simulés, en particulier un "scénario de pression sur les coûts" et un "scénario de contention des coûts", ainsi qu’une analyse de sensitivité. En fonction des scénarios, le total des dépenses de santé et des soins de long terme est projeté d'augmenter pour la moyenne de l’OCDE entre 3.5 et 6 points de PIB pour la période 2005-2050.
    Keywords: ageing populations, vieillissement de la population, longevity, longévité
    JEL: H51 I12 J11 J14
    Date: 2006–02
  21. By: Manuela Angelucci (University of Arizona and IZA Bonn); Giacomo De Giorgi (University College London)
    Abstract: Aid programs in developing countries are likely to affect all households living in the treated areas, both eligible and non-eligible ones. Studies that focus on the treatment effect on the treated may fail to capture important spillover effects. We exploit the unique design of an aid program's experimental trial to identify its indirect effect on consumption for non-eligible households living in treated areas. We find that this effect is positive, and that it occurs through changes in the insurance and credit markets: non-eligible households receive more transfers, and borrow more when hit by a negative idiosyncratic shock, because of the program liquidity injection, thus they can reduce their precautionary savings. We also test for general equilibrium effects in the local labor and goods markets, finding no significant changes in labor income and prices, while there is a reduction in earnings from sales of agricultural products, which are now consumed. We show that this class of aid programs has important positive externalities, thus their overall effect is larger than the effect on the treated. Our results confirm that a key identifying assumption - that the treatment has no effect on the non-treated - is likely to be violated in similar policy designs.
    Keywords: program evaluation, consumption, Progresa
    JEL: E21 H43 I38 O12 O17
    Date: 2006–01

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