nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒02‒26
27 papers chosen by
Peren Arin
Massey University

  1. The Economic Costs of the Iraq War: An Appraisal Three Years After the Beginning of the Conflict By Linda Bilmes; Joseph Stiglitz
  2. Who Adjusts and When? On the Political Economy of Reforms By Alberto Alesina; Silvia Ardagna; Francesco Trebbi
  3. How's Your Government? International Evidence Linking Good Government and Well-Being By John F. Helliwell; Haifang Huang
  4. Vying for Foreign Direct Investment: A EU-type Model of Tax Competition By Assaf Razin; Efraim Sadka
  5. Household Incomes and Redistribution in the European Union: Quantifying the Equalising Properties of Taxes and Benefits By Immervoll, Herwig; Levy, Horacio; Lietz, Christine; Mantovani, Daniela; O'Donoghue, Cathal; Sutherland, Holly; Verbist, Gerlinde
  6. Russian Attitudes Toward Paying Taxes – Before, During, and After the Transition By Benno Torgler; James Alm; Jorge Martinez-Vazquez
  7. The Evolution of Tax Morale in Modern Spain By Benno Torgler; Jorge Martinez-Vazquez
  8. Optimal Corporation Tax: An I.O. Approach By Luca Colombo; Paola Labrecciosa; Patrick Paul Walsh
  9. Special Interest Groups and the Allocation of Public Funds By Monica Singhal
  10. Perceptions of Redistribution: Report on exploratory qualitative research By Alan Hedges
  11. A Macro and Microeconomic Integrated Approach to Assessing the Effects of Public Policies By José M. Labeaga; Miguel Rodríguez; Xavier Labandeira
  13. The Value of Broadband and the Deadweight Loss of Taxing New Technology By Austan Goolsbee
  14. Attracting FDI: Further Evidence on Infrastructure, Corruption, and Taxes from Panel Data By Timothy J. Goodspeed
  15. A Model of Income Insurance and Social Norms By Lindbeck, Assar; Persson, Mats
  16. Demand (and Supply) in an Inter-District Public School Choice Program By Randall Reback
  17. Optimal Tariffs: The Evidence By Christian Broda; Nuno Limao; David Weinstein
  18. Job Security and Work Absence: Evidence from a Natural Experiment By Lindbeck, Assar; Palme, Mårten; Persson, Mats
  19. The Causes of Political Integration: An Application to School Districts By Nora Gordon; Brian Knight
  20. Subsidiarity portfolios and separation compacts to enhance the governance of state-owned banks By Rodolfo Apreda
  21. Public and Private Welfare Activity in the United Kingdom, 1979 to 1999 By Rachel Smithies
  22. Jobcentre Plus or Minus? Exploring the performance of Jobcentre Plus for non-jobseekers By Eleni Karagiannaki
  23. Assessing the Wellbeing of the Spanish Elderly By Michele Boldrin; Sergi Jiménez-Martín
  24. Regulation and Opportunism: How Much Activism Do We Need? By Aleix Calveras; Juan José Ganuza; Gerard Llobet
  25. Endogenous technology and tradable emission quotas By Golombek, Rolf; Hoel, Michael
  26. Bidding for Incomplete Contracts: An Empirical Analysis By Patrick Bajari; Stephanie Houghton; Steve Tadelis
  27. Nuclear Weapons and National Prestige By Barry O'Neill

  1. By: Linda Bilmes; Joseph Stiglitz
    Abstract: This paper attempts to provide a more complete reckoning of the costs of the Iraq War, using standard economic and accounting/ budgetary frameworks. As of December 30, 2005, total spending for combat and support operations in Iraq is $251bn, and the CBO's estimates put the projected total direct costs at around $500bn. These figures, however, greatly underestimate the War's true costs. We estimate a range of present and future costs, by including expenditures not in the $500bn CBO projection, such as lifetime healthcare and disability payments to returning veterans, replenishment of military hardware, and increased recruitment costs. We then make adjustments to reflect the social costs of the resources deployed, (e.g. reserve pay is less than the opportunity wage and disability pay is less than forgone earnings). Finally, we estimate the effects of the war on the overall performance of the economy. Even taking a conservative approach and assuming all US troops return by 2010, we believe the true costs exceed a trillion dollars. Using the CBO's projection of maintaining troops in Iraq through 2015, the true costs may exceed $2 trillion. In either case, the cost is much larger than the administration's original estimate of $50-$60bn. The costs estimated do not include those borne by other countries, either directly (military expenditures) or indirectly (the increased price of oil). Most importantly, we have not included the costs to Iraq, either in terms of destruction of infrastructure or the loss of lives. These would all clearly raise the costs significantly.
    JEL: H5
    Date: 2006–02
  2. By: Alberto Alesina; Silvia Ardagna; Francesco Trebbi
    Abstract: Why do countries delay stabilizations of large and increasing budget deficits and inflation? And what explains the timing of reforms? We use the war of attrition model as a guidance for our empirical study on a vast sample of countries. We find that stabilizations are more likely to occur when time of crisis occur, at the beginning of term of office of a new government, in countries with "strong" governments (i.e. presidential systems and unified governments with a large majority of the party in office), and when the executive faces less constraints. The role of external inducements like IMF programs has at best a weak effect, but problem of reverse causality are possible.
    JEL: G0 H0
    Date: 2006–02
  3. By: John F. Helliwell; Haifang Huang
    Abstract: In this paper we employ World Values Survey measures of life satisfaction as though they were direct measures of utility, and use them to evaluate alternative features and forms of government in large international samples. We find that life satisfaction is more closely linked to several World Bank measures of the quality of government than to real per capita incomes, in simple correlations and more fully specified models explaining international differences in life satisfaction. We test for differences in the relative importance of different aspects of good government, and find a hierarchy of preferences that depends on the level of development. The ability of governments to provide a trustworthy environment, and to deliver services honestly and efficiently, appears to be of paramount importance for countries with worse governance and lower incomes. The balance changes once acceptable levels of efficiency, trust and incomes are achieved, when more value is attached to building and maintaining the institutions of electoral democracy.
    JEL: H11 I31 P52
    Date: 2006–01
  4. By: Assaf Razin; Efraim Sadka
    Abstract: This paper brings out the special mechanism through which taxes influence bilateral FDI, when investment decisions are two-fold in the presence of fixed setup flows costs. For each pair of source-host countries, there is a set of factors determining whether aggregate FDI flows will occur at all, and a different set of factors determining the volume of FDI flows (provided they occur). We develop a two-country tax competition model which yield an asymmetric Nash-equilibrium with high corporate tax rate and high level of public good provision in the rich source country for FDI outflows and with low corporate tax rate and low level of public good provision in the poor host country for FDI outflows. This is akin to the asymmetry among the EU 15 and EU 10 in the enlarged European Union, as of 2004. We also demonstrate that the notion that the mere international tax differentials are a key factor behind the direction and magnitude of FDI flows, the traditional race to the bottom argument in tax competition are too simple.
    JEL: F0
    Date: 2006–01
  5. By: Immervoll, Herwig (University of Cambridge, OECD, European Centre for Social Welfare Policy and Research, Vienna and IZA, Bonn); Levy, Horacio (University of Essex); Lietz, Christine (Department of Economics and Finance, Institute for Advanced Studies, Vienna, Austria); Mantovani, Daniela (University of Cambridge and Prometeia, Bologna); O'Donoghue, Cathal (National University of Ireland, Galway, IZA, Bonn and CHILD); Sutherland, Holly (University of Essex and DIW Berlin); Verbist, Gerlinde (University of Antwerp)
    Abstract: The systems of direct taxes and cash benefits in the Member States of the European Union vary considerably in size and structure. We explore their direct impacts on cross-sectional income inequality (termed "redistributive effect" for the purpose of this paper) using EUROMOD, a tax-benefit microsimulation model for the European Union. This relies on harmonised household micro-data representative of each national population together with simulations of entitlements to cash benefits and liabilities for taxes and social contributions. It allows us to draw a more comprehensive – and comparable – picture of the combined effects of transfers and taxes than is usually possible. We decompose the redistributive effect of taxbenefit systems to assess and compare the effectiveness of individual policies at reducing income disparities. We derive results for the 15 "old" members of the European Union and present them for each country separately as well as for the EU-15 as a whole.
    Keywords: Income inequality, Redistribution, Microsimulation, European Union
    JEL: C81 D31 H22 H55
    Date: 2006–02
  6. By: Benno Torgler (World Bank); James Alm (Andrew Young School of Policy Studies, Georgia State University); Jorge Martinez-Vazquez (Andrew Young School of Policy Studies)
    Abstract: This paper examines citizens’ attitudes toward paying taxes – what is sometimes termed their “tax morale”, or the intrinsic motivation to pay taxes – focusing on the experience of individuals in the Russian Federation. A unique aspect of our analysis is our ability to study tax morale before (1991), during (1995), and shortly after (1999) the transition of the Russian economy from a centrally planned economy to one based on market reliance. Our empirical analysis uses data from the World Values Survey and the European Values Survey. The results show decay in tax morale in the first four years of the transition from 1991 to 1995, and a small recovery in 1999. These results are consistent with the relevance of social norms in tax compliance, where the widespread perception of tax evasion and of a corrupt and inefficient state led initially to a decline of tax morale. However, the results also suggest that the restoration of a higher level of trust in the state, after some progress in the transition to a market economy, positively influenced tax morale. Using disaggregated data for Russian regions, we also find significant regional differences in tax morale, reflecting the degree of trust different regions have toward Moscow’s institutions and policies.
    Keywords: Russia, Taxes, Transition, Tax Morale
    Date: 2005–09–05
  7. By: Benno Torgler (World Bank); Jorge Martinez-Vazquez (Andrew Young School of Policy Studies)
    Abstract: This paper studies the evolutions of tax morale in Spain in the post-Franco era. Tax morale, defined as the intrinsic motivation to pay taxes, might be a key determinant of the actual degree of tax compliance in a country. But despite its potential significance, most studies in the previous literature have treated tax morale as an exogenous residual. In contrast to the previous tax compliance literature, the current paper investigates tax morale as the dependent variable and attempts to answer what actually shapes tax morale. The empirical analysis uses survey data from two sources: the World Values Survey (WVS) and the European Values Survey (EVS). The data allow us to observe tax morale in Spain for the years 1981, 1990, 1995, and 1999/2000. The study of the evolution of tax morale in Spain over nearly a 20-year span is particularly interesting because it provides close to a natural experiment setting. Constitutional and political changes after Franco died in 1975 and the advent of a fully democratic state, deep tax reforms, a significant push for decentralization, joining the European Community, and so on, provide excellent benchmarks for institutional changes that are expected in the compliance literature to change tax morale.
    Keywords: Tax Morale, Spain, tax compliance, Spanish Tax Reform
    Date: 2005–12–01
  8. By: Luca Colombo; Paola Labrecciosa; Patrick Paul Walsh
    Abstract: Theory predicts that optimal effective corporation tax rates will benegatively related to industry specific sunk costs, and hence industryconcentration. Governments should tax industries with monopolistic powersoftly. Evidence suggests that this Schumpeterian (1942) principle ofcorporate taxation was used widely across industries in France, Italy and theUK in the 1990s.
    Keywords: Effective Corporation Tax Rate, Industry Sunk Costs,Industry Concentration.
    JEL: H25 L52
    Date: 2006–02
  9. By: Monica Singhal
    Abstract: A long-standing puzzle in the fiscal federalism literature is the empirical non-equivalence in government spending from grants and other income. I propose a fully rational model in which violations of fungibility arise from dynamic interactions between politicians and interest groups with the ability to raise funds for local government. The predictions of the model are tested by exploiting unique features of windfalls received by states under a settlement with the tobacco industry. Although windfalls are unrestricted, the median state increased spending on tobacco control programs from zero to $2.30 per capita upon receipt of funds. The marginal propensity to spend on such programs is 0.20 from settlement revenue and zero from overall income. States which were not involved in the settlement lawsuits spend less. The findings are consistent with the predictions of the model when political partisanship is introduced: Republican governors spend less and factors which should lead to political convergence increase spending for Republicans and decrease spending for Democrats. These results cannot be explained by existing models in the literature.
    JEL: H7 D7 H1
    Date: 2006–02
  10. By: Alan Hedges
    Abstract: This paper represents the results of a small-scale qualitative study, exploring public perceptions of the redistributive effects of taxation and public spending in the UK. Redistribution is not at the top of people's minds when they consider these issues and it is a complex subject on which they have thought little. People appear to apply separate principles of 'fairness' and 'mutuality' to the structures of taxation and public spending. Fairness in taxation may involve more progressivity than the current system, and those with low incomes may need more help. The support this implies for the redistributive impact of government does not appear to be primarily motivated by concerns about making incomes more equal, but rather the outcome of belief in a system in which everyone can get help when they need it, and everyone contributes according to their means.
    Keywords: Redistribution, attitudes, taxation, public spending
    JEL: I38
    Date: 2005–03
  11. By: José M. Labeaga; Miguel Rodríguez; Xavier Labandeira
    Abstract: Most public policies have not only efficiency but also distributional effects. However, there is a kind of trade-off between modeling approaches suitable for calculating each one of these impacts on the economy. For the former, most of the studies have been conducted with general equilibrium models, whereas partial equilibrium models represent the main approach for distributional analysis. This paper proposes a methodology which enables us to carry out an analysis of the distributional and efficiency consequences of public policies. In order to do so, we have integrated a microeconomic household demand model and a computable general equilibrium model for the Spanish economy. We illustrate the advantages of this approach by simulating a revenue-neutral reform in Spanish indirect taxation, with a reduction of VAT and a simultaneous increase of energy taxes. The results show that the reform brings about significant efficiency and distributional effects, in some cases counterintuitive, and demonstrate the academic and social utility of this approximation.
  12. By: Justina A.V. Fischer; Benno Torgler
    Abstract: 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: 2006–02
  13. By: Austan Goolsbee
    Abstract: With fixed costs of developing technology, taxes can generate large efficiency costs by slowing the rate of diffusion and these costs are not accounted for in conventional analyses. This paper illustrates this by analyzing the impact that taxes would have had on broadband Internet access at an early stage of its diffusion around the country, combining data on individual demand by area with data on supplier entry in those markets. Applying a tax to broadband in 1998 would have reduced the quantity and generate a large deadweight loss in the conventional model but when the analysis accounts for the fixed costs of entering new markets, taxes would have also delayed entry in several markets. In these places, the lost consumer surplus from delay is an additional deadweight loss and it more than doubles the estimated efficiency costs of taxation. The conventional model also dramatically understates the share of tax burden that would have been borne by customers.
    JEL: H2 D6
    Date: 2006–02
  14. By: Timothy J. Goodspeed (Hunter College)
    Abstract: In this study we investigate the determinants of FDI inflows in an unbalanced panel data set of 47 countries from 1995-2002. We are especially interested in the role of corruption, taxes, and particularly infrastructure. We use fixed country and year effects and examine different infrastructure measures. The evidence indicates that lower taxes, lower corruption, and better infrastructure attract FDI. The magnitude of the response of FDI to our infrastructure measures is similar to that of corruption and taxes in elasticity terms.
    Keywords: FDI, Infrastructure, Determinants of FDI, Corruption, Taxes
    JEL: H O
  15. By: Lindbeck, Assar (The Research Institute of Industrial Economics); Persson, Mats (Institute for International Economic Studies)
    Abstract: A large literature on ex ante moral hazard in income insurance emphasizes that the individual can affect the probability of an income loss by choice of lifestyle and hence, the degree of risk-taking. The much smaller literature on moral hazard ex post mainly analyzes how a “moral hazard constraint” can make the individual abstain from fraud (“mimicking”). The present paper instead presents a model of moral hazard ex post without a moral hazard constraint; the individual's ability and willing­ness to work is represented by a continuous stochastic variable in the utility function, and the extent of moral hazard depends on the generosity of the insurance system. Our model is also well suited for analyzing social norms concerning work and benefit dependency.
    Keywords: Moral Hazard; Sick Pay Insurance; Labor Supply; Asymmetric Information  
    JEL: G22 H53 I38 J21
    Date: 2006–01–25
  16. By: Randall Reback (Barnard College, Columbia University)
    Abstract: This study examines parents’ demand for sending their children to a public school located outside their residential school district. Using a unique data set that contains information concerning both inter-district transfers and rejections of transfer applications, I am able to identify which school district characteristics attract the greatest demand for incoming transfers. The analyses reveal that mean student test scores are stronger predictors of transfer demand than both students’ socio-economic characteristics and school district spending, suggesting that parents care more about outcomes than inputs. In addition, while districts are only supposed to reject transfer students due to capacity concerns, districts’ supply decisions are also correlated with differences in student performance across neighboring districts.
    Keywords: school choice, inter-district open enrollment, public school demand
    JEL: I21 I28 H40
    Date: 2004–10
  17. By: Christian Broda; Nuno Limao; David Weinstein
    Abstract: The theoretical debate over whether countries can and should set tariffs in response to export elasticities goes back over a century to the writings of Edgeworth (1894) and Bickerdike (1907). Despite the optimal tariff argument's centrality in debates over trade policy, there exists no evidence about whether countries actually apply it when setting tariffs. We estimate disaggregate export elasticities and find evidence that countries that are not members of the World Trade Organization systematically set higher tariffs on goods that are supplied inelastically. The result is robust to the inclusion of political economy variables and a variety of model specifications. Moreover, we find that countries with higher aggregate market power have on average higher tariffs. In short, we find strong evidence in favor of the optimal tariff argument.
    JEL: F13 H21 F14
    Date: 2006–02
  18. By: Lindbeck, Assar (The Research Institute of Industrial Economics); Palme, Mårten (Stockholm University); Persson, Mats (Institute for International Economic Studies)
    Abstract: We analyze the consequences for sickness absence of a selective softening of job security legislation for small firms in Sweden in 2001. According to our differences-in-difference estimates, aggregate absence in these firms fell by 0.2-0.3 days per year. This aggregate net figure hides important effects on different groups of employees. Workers remaining in the reform firms after the reform reduced their absence by about one day. People with a high absence record tended to leave reform firms, but these firms also became less reluctant to hire people with a record of high absence.
    Keywords: Seniority Rules; Sick Pay Insurance; Firing Costs; Moral Hazard
    JEL: H53 I38 J22 J50 M51
    Date: 2006–02–14
  19. By: Nora Gordon; Brian Knight
    Abstract: This paper examines the forces behind political integration through the lens of school district consolidations, which reduced the number of school districts in the United States from around 130,000 in 1930 to under 15,000 at present. Despite this large observed decline, many districts resisted consolidation before ultimately merging and others never merged, choosing to remain at enrollment levels that nearly any education cost function would deem inefficiently small. Why do some districts voluntarily integrate while others remain small, and how do those districts that do merge choose with which of their neighbors to do so? In addressing these questions, we empirically examine the role of potential economies and diseconomies of scale, heterogeneity between merger partners, and the role of state governments. We first develop a simulation-based estimator that is rooted in the economics of matching and thus accounts for three important features of typical merger protocol: two-sided decision making, multiple potential partners, and spatial interdependence. We then apply this methodology to a wave of school district mergers in the state of Iowa during the 1990s. Our results highlight the importance of economies of scale, diseconomies of scale, state financial incentives for consolidation, and a variety of heterogeneity measures.
    JEL: H4 H7 I2 C7
    Date: 2006–02
  20. By: Rodolfo Apreda
    Abstract: This paper sets forth a new approach to state-owned banks grounded on portfolio theory and the principle of subsidiarity, so as to improve the governance of such institutions. Firstly, it defines what is meant by portfolio of portfolios and the separation feature, which leads to setting up what we call a separation compact. Next, the principle of subsidiarity is introduced, highlighting the pathways to its uses and misuses when we deal with state-owned banks. Afterwards, we bring forward the notion of subsidiarity portfolio, stressing how such construct can foster to a great degree key governance variables, namely accountability, control, transparency, management, checks and balances, as well as the fulfillment of the fiduciary role. Finally, it is laid down a new viewpoint for state-owned banks, from which they come to be regarded as separation compacts.
    Keywords: state-owned banks, portfolios, governance, principle of subsidiarity, separation compact, subsidiarity portfolios
    JEL: H10 H20 H5 G11 G21
    Date: 2006–02
  21. By: Rachel Smithies
    Abstract: This paper analyses the shifting balance between public sector and private sector welfare provision in the United Kingdom over the past two decades. Five sectors - education, health, personal social services, housing, and income maintenance and social security - are examined over three time points, 1979/80, 1995/96, and 1999/2000. Burchardt's (1997) typology is used to classify welfare activities according to who funds them, who provides them, and who decides on the provider and/or amount of service. It is found that shifts in the composition of welfare activity have been relatively small and gradual: around half of all welfare activity, dropping from 52 percent to 49 percent, is entirely public; around a quarter, rising from 24 percent to 29 percent, is entirely private; and the remainder involves a mixture of both sectors. Within the latter group, there was a notable increase over time in the contracting-out of public services, which rose from 6 percent to 10 percent of all welfare activity.
    Keywords: welfare, soical spending, privatisation, contracting-out, public provision, private provision
    JEL: H50 H53 L33
    Date: 2005–03
  22. By: Eleni Karagiannaki
    Abstract: Since April 2002 Jobcentre Plus has started to operate nationwide in the UK providing fully integrated benefit claiming and work placement/job-seeking activities for people of working age. This new organisation put an explicit work-focus in the delivery of the benefit system. Along with Jobseeker's Allowance (JSA) claimants who traditionally have been the focus of relevant work-focused policies, Jobcentre Plus targets a much wider group of clients including lone parents, disabled people and carers. Although the work-focus of the new organisation could be beneficial for clients who themselves have an explicit work orientation, its effect on clients for whom work is not a feasible option are far less clear. This paper explores whether the changes in the delivery of the benefit system introduced by Jobcentre Plus have been beneficial for claimants who are not jobseekers and assesses which aspects of the new organisation work well and which could be improved in order to address more effectively the needs of non-job-oriented clients.
    Keywords: Jobcentre Plus, welfare-to-work, non-jobseekers, policy evaluation
    JEL: H11 I38
    Date: 2005–03
  23. By: Michele Boldrin; Sergi Jiménez-Martín
    Abstract: In this paper we use a variety of data sources, both micro and macro, time series, cross section, and panel data to provide an empirical evaluation of the current level of economic wellbeing of the Spanish elderly, and of its determinants. We focus, in particular on the role played by the pension system and its generosity in terms of minimum pension supplements and non-contributive pensions. In an IV context, we find that actual Social Security benefits contribute substantially to explain income and consumption poverty levels and trends of low income and consumption percentiles. Thus we offer support to previous evidence for Spain emphasizing the role of minimum benefit policies.
    Keywords: Welfare State, Social Security, Retirement, Income Inequality, Poverty
    JEL: I3 H5 J14 J26
    Date: 2006–02
  24. By: Aleix Calveras; Juan José Ganuza; Gerard Llobet
    Abstract: This paper analyzes the current trend towards firms’ self-regulation as opposed to the formal regulation of a negative externality. Firms respond to increasing activism in the market(conscious consumers that take into account the external effects of their purchase) by providing more socially responsible goods. However, because regulation is the outcome of a political process, an increase in activism might imply an inefficiently higher externality level. This may happen when a majority of non-activist consumers collectively free-ride on conscious consumers. By determining a softer than optimal regulation, they benefit from the behavior of firms, yet they have access to cheaper (although less efficient) goods.
    Keywords: Activism, Corporate Social Responsability, Voting and Regulation
    JEL: D72 H42 L51 M14 Q52
    Date: 2005–09
  25. By: Golombek, Rolf (The Ragnar Frisch Centre for Economic Research); Hoel, Michael (Dept. of Economics, University of Oslo)
    Abstract: We study an international climate agreement that assigns emission quotas to each participating country. Unlike the simplest models in the literature, we assume that abatement costs are affected by R&D activities undertaken in all firms in all countries, i.e. abatement technologies are endogenous. In line with the Kyoto agreement we assume that the international climate agreement does not include R&D policies. We show that for a secondbest agreement, marginal costs of abatement should exceed the Pigovian level. Moreover, marginal costs of abatement differ across countries in the second-best quota agreement with heterogeneous countries. In other words, the second-best outcome cannot be achieved if emission quotas are tradable.
    Keywords: Climate policy; international climate agreements; emission quotas; technology spillovers
    JEL: H23 O30 Q20 Q25 Q28
    Date: 2006–02–17
  26. By: Patrick Bajari; Stephanie Houghton; Steve Tadelis
    Abstract: Procurement contracts are often incomplete because the initial plans and specifications are changed and refined after the contract is awarded to the lowest bidder. This results in a final cost to the buyer that differs from the low bid, and may also involve significant adaptation and renegotiation costs. We propose a stylized model of bidding for incomplete contracts and apply it to data from highway paving contracts. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs, broadly defined, are an important determinant of the observed bids. We then estimate the costs of adaptation and bidder markups using a structural auction model. The estimates suggest that adaptation costs on average account for about ten percent of the winning bid. The distortions from private information and local market power, which are the focus on much of the literature on optimal procurement mechanisms, are much smaller by comparison.
    JEL: D23 D82 H57 L14 L22
    Date: 2006–02
  27. By: Barry O'Neill (University of California, Los Angeles)
    Abstract: Leaders and historians see prestige as important, but international relations theorists have neglected the concept, in part for lack of a clear definition. It is proposed that a party "holds prestige" when group members generally believe that they generally believe that the party has a certain desirable quality, and this situation gives the party perceived power in the group. The definition gains support from a survey of international affairs writings on the sources of prestige. Prestige is strategically important when a party wants support from others who would rather join the side that more of the others are joining. Some general ways of acquiring prestige are discussed. Compared to achieving social progress, building and testing nuclear weapons is better at bearing prestige because it has distinct borders separating success and failure, because it is salient and because it involves the symbolism of power. In some cases when prestige is a factor, one can better demonstrate one’s ability to perform an accomplishment by refraining from doing it. The analysis yields suggestions for reducing nuclear proliferation.
    Keywords: prestige, nuclear weapons, common knowledge, signaling, countersignaling, global games, symbolism
    JEL: C72 D82 H56
    Date: 2006–02

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