nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒03‒18
thirty-one papers chosen by
Peren Arin
Massey University

  1. Optimal Taxation and Social Insurance in a Lifetime Perspective By A. Lans Bovenberg; Peter Birch Sørensen
  2. A Simulation Method to Measure the Tax Burden on Highly Skilled Manpower By Christina Elschner; Robert Schwager
  3. Monopoly, Inequality and Redistribution via the Public Provision of Private Goods By Thomas Moutos; Margarita Katsimi
  4. Tax smoothing with redistribution By Iván Werning
  5. Company tax coordination cum tax rate competition in the European Union By Eggert, Wolfgang; Haufler, Andreas
  6. Can Tax Competition Lead to a Race to the Bottom in Europe? A Skeptical View By Thierry Warin; André Fourçans
  7. Incomplete Fiscal Rules with Imperfect Enforcement By Florin Bilbiie; David Stasavage
  8. What Triggers Early Retirement. Results from Swiss Pension Funds By Monika Bütler; Olivia Huguenin; Federica Teppa
  9. Heterogeneous Social Preferences and the Dynamics of Free Riding in Public Goods By Urs Fischbacher; Simon Gächter
  10. Environmental policy competition and differential tax treatment; a case for tighter coordination? By Richard Nahuis; Paul Tang
  11. Actuarial Neutrality when Longevity Increases: An Application to the Italian Pension System By Michele Belloni; Carlo Maccheroni
  12. Evaluating state tax revenue variability: a portfolio approach By Thomas A. Garrett
  13. Assessing the Impact of Tax/Transfer Policy Changes on Poverty: Methodological Issues and Some European Evidence By Callan T; Walsh J
  14. Anonymous Price Taking Equilibrium in Tiebout Economies with Unbounded Club Sizes By Nizar Allouch; John P. Conley; Myrna Wooders
  15. How Effective are Emission Taxes in an Open Economy? By Jota Ishikawa; Tomohiro Kuroda
  16. Why should governments intervene in education, and how effective is education policy By Marc van der Steeg
  17. A comparison of catching-up premium rate models By Jan Bonenkamp
  18. Fiscal Contracts for a Monetary Union By Florin Bilbiie
  19. Impact of Risk and Uncertainty in the Provision of Local and Global Environmental Goods: An Experimental Analysis By Lata Gangadharan; Veronika Nemes
  20. Production Targets and Free Disposal in the Private Provision of Public Goods By David P. Myatt; Chris Wallace
  21. The Evolution of Collective Action By David P. Myatt; Chris Wallace
  22. Decentralization, Corruption And Government Accountability: An Overview By Dilip Mookherjee; Pranab Bardhan
  23. Public sector wage gaps in Spanish regions. By J. Ignacio García-Pérez; Juan F. Jimeno
  24. A comment on the cost of capital for investments with non-homogeneous components By Jorge Navas and Jesús Marín-Solano
  25. Corruption Clubs: The Allocation of Public Expenditure and Economic Growth By P R Agénor; K C Neanidis
  26. War in Iraq versus Containment By Steven J. Davis; Kevin M. Murphy; Robert H. Topel
  27. Military Draft and Economic Growth in OECD Countries By Katarina Keller; Panu Poutvaara; Andreas Wagener
  28. Ratification quotas in international agreements By Kohnz, Simon
  29. Scandal, Protection, and Recovery in Political Cabinets By David P. Myatt; Torun Dewan
  30. The Gatekeeping Role of General Practitioners. Does Patients' Information Matter? By Paula González
  31. Managing Default Risk for Commodity Dependent Countries: Price Hedging in an Optimizing Model By Samuel Malone

  1. By: A. Lans Bovenberg (Tilburg University); Peter Birch Sørensen (Department of Economics, University of Copenhagen)
    Abstract: Advances in information technology have improved the administrative feasibility of redistribution based on lifetime earnings recorded at the time of retirement. We study optimal lifetime income taxation and social insurance in an economy in which redistributive taxation and social insurance serve to insure (ex ante) against skill heterogeneity as well as disability risk. Optimal disability benefits rise with previous earnings so that public transfers depend not only on current earnings but also on earnings in the past. Hence, lifetime taxation rather than annual taxation is optimal. The optimal tax-transfer system does not provide full disability insurance. By offering imperfect insurance and structuring disability benefits so as to enable workers to insure against disability by working harder, social insurance is designed to offset the distortionary impact of the redistributive labor income tax on labor supply.
    Keywords: optimal lifetime income taxation; optimal social insurance
    JEL: H21 H55
  2. By: Christina Elschner; Robert Schwager
    Abstract: A model is presented for simulating the tax burden on highly skilled manpower. The effective average tax rate, defined as the relative wedge between employment costs and disposable income, is computed. Income and payroll taxes and social security contributions not yielding an equivalent benefit are taken into account. The compensation package consists of cash payments and old-age provision. To integrate retirement benefits and their tax treatment, an intertemporal approach is used. The results indicate a wide dispersion of tax rates across Europe and the US. Slovakia, Switzerland and the US tax highly skilled manpower low. Scandinavian countries, Belgium and Slovenia turn out to be high tax countries.
    Keywords: income tax, highly skilled labour, effective tax burden, pensions
    JEL: H24 H21 H55
    Date: 2006–03–07
  3. By: Thomas Moutos (AUEB and CESifo); Margarita Katsimi (AUEB and CESifo)
    Abstract: The relationship between inequality and redistribution is usually studied under the assumption that the government collects different amounts of taxes from each citizen (voter) but gives back the same amount (in cash or in kind) to everyone. In this paper we consider what happens if the government can redistribute through both sides of its budget (revenue and expenditure). We study the effects of inequality on the size (and structure) of redistributive programs in both perfectly competitive and monopolistic settings. We find that the presence of monopoly results in a higher tax rate than in the competitive case and that in the latter case an increase in inequality can be associated with a fall in the tax rate. We find also that although the median voter may not vote for a positive tax rate in the presence of public sector inefficiency under perfect competition, she may prefer – ceteris paribus – a positive tax rate in the presence of monopoly.
    Keywords: Monopoly, Redistribution, Inequality, Public Goods, Median Voter
    JEL: H23 H42 P16
    Date: 2006
  4. By: Iván Werning
    Abstract: We study optimal labor and capital taxation in a dynamic economy subject to government expenditure and aggregate productivity shocks. We relax two assumptions from Ramsey models: that a representative agent exists and that taxation is proportional with no lump-sum tax. In contrast, we capture a redistributive motive for distortive taxation by allowing privately observed differences in relative skills across workers. We consider two scenarios for tax instruments: (i) taxation is linear with arbitrary intercept and slope; and (ii) taxation is non-linear and unrestricted as in Mirrleesian models. Our main result provides conditions for perfect tax smoothing: marginal taxes on labor income should remain constant over time and invariant to shocks. In addition, capital should not be taxed. We also discuss implications for optimal debt management. Finally, an extension highlights movements in the distribution of relative skills as a potential source for variations in optimal marginal tax rates.
    Date: 2005
  5. By: Eggert, Wolfgang; Haufler, Andreas
    Abstract: This paper reviews the recent theoretical literature that analyses the European Union's policy to eliminate preferential corporate tax regimes and the proposal to introduce a consolidated EU tax base with formula apportionment for the taxation of multinational firms. Since neither proposal includes a harmonisation of corporate tax rates, a core issue is how tax competition between member states will be affected by these partial coordination measures. The conclusions from our review are supportive of the EU's ban on preferential tax regimes, but the economic incentive effects of a switch to formula apportionment are found to be ambiguous.
    JEL: H87 F23 H25
    Date: 2006–03
  6. By: Thierry Warin; André Fourçans
    Abstract: This paper addresses the question of the likelihood of a race to the bottom in a monetary union, like the Euro-zone, that could result from tax competition between countries. This fear of a race to the bottom is used both in the economic literature and the political arena to promote tax harmonization. Using a game theoretical approach with the costs of changing tax policies to analyze the conditions of a race to the bottom, this paper shows that countries may not choose such an extreme strategy. In other words, the extreme case scenario of a race to the bottom is unlikely, and proponents of tax harmonization should base their reasoning upon other assumptions.
    Keywords: Monetary union, Economic integration, Tax competition, Tax harmonization, Fiscal competition
    JEL: H20 H26 H77 H87
    Date: 2006–04
  7. By: Florin Bilbiie (Nuffield College, Oxford and CEP, London School of Economics and EUI, Florence); David Stasavage (London School of Economics)
    Abstract: This paper analyses the effect of limits on fiscal deficits when fiscal policy outcomes depend on automatic stabilizers and when fiscal rules lack perfect credibility. The model developed, which includes interactions between monetary and fiscal policy, provides theoretical support for existing arguments that fiscal rules contracted on a structural deficit will be welfare-enhancing relative to rules written on the actual deficit. The latter rules would result in a procyclical bias in fiscal policy, as well as a contractionary bias in monetary policy. Contrary to existing arguments, the model also suggests that rules written on the structural deficit may ultimately be more credible than those written on the actual deficit. The reason for this is that rules written on the actual fiscal deficit risk running into a credibility trap; higher marginal penalties will be necessary when initial credibility of enforcement is imperfect, but announcing a higher penalty for violating a fiscal rule can actually reduce credibility if the penalty is disproportionately large relative to the violation.
    Date: 2006–03–10
  8. By: Monika Bütler (deep–HEC, Université de Lausanne, CEPR, CESIfo); Olivia Huguenin (deep–HEC, Université de Lausanne); Federica Teppa (Center for Research on Pensions and Welfare Policies)
    Abstract: Early retirement is predominantly considered as the result of incentives set by social security and the tax system. But people seem to retire early even in the absence of such distortions as the Swiss example demonstrates. We look for determinants of early retirement, in particular the role of lifetime income and family status, using individual data from a selection of Swiss pension funds. Our ?ndings suggest that affordability is a key determinant in retirement decisions: More affuent men, and — to a much smaller extent — women, tend to leave the work force earlier. The fact that early retirement has become much more prevalent in the last 15 years is another indicator for the importance of affordability as Switzerland’s funded pension system has matured over that period leading to higher effective replacement rates. We also ?nd sizeable differences in retirement behavior across marital status. These may be explained by a constrained rational choice based on differential mortality and the desire of couples to coordinate their entry into retirement.
    Keywords: Occupational Pension, Retirement decision, Duration models
    JEL: D91 H55
    Date: 2004–04
  9. By: Urs Fischbacher (University of Zurich); Simon Gächter (University of Nottingham, CESifo and IZA Bonn)
    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: 2006–03
  10. By: Richard Nahuis; Paul Tang
    Abstract: The Kyoto Protocol binds the level of greenhouse gas emissions in participating countries. It does not, however, dictate how the countries are to achieve this level. The economic costs of reaching emission targets are generally evaluated to be low. For example, evaluations with applied general-equilibrium models estimate the costs to be in the range of 0.2% to 0.5% of GDP, when international trade in emissions rights among governments is allowed for. We argue that important costs are overlooked since governments have an incentive to choose highly distorting tax schemes. <P> This paper shows that governments generally choose different energy tax rates for households and for internationally operating firms as the result of tax competition or pollution competition: in the first case, governments try to undercut other governments to attract firms to their country, whereas in the second, they try to push dirty industries across the border. In both cases, the incentive for firms and households to use or save energy is different at the margin. Both cases call for coordination of climate change policies that goes beyond a binding ceiling on greenhouse gas emissions and international trade in permit rights among governments alone.
    Keywords: energy taxes; tax competition; climate change policies
    JEL: H23 Q48 Q58
    Date: 2005–10
  11. By: Michele Belloni (Center for Research on Pensions and Welfare Policies); Carlo Maccheroni (University of Turin and University "L.Bocconi", Milan)
    Abstract: As a possible solution to the severe crises of the PAYGO pension systems induced by population aging and by low economic growth, many countries are recently switching from a defined benefit (DB) to a notional defined contribution (NDC) scheme. Particularly important for the NDC systems are the rules which establish how to incorporate life expectancies and their changes into the pension formulae. This work investigates these issues focusing on the Italian NDC system, introduced by the 1995 reform and gradually taking the place of the previous DB one. The methodology used follows a representative agents approach, in which each agent describes a cohort, either involved in the transition to the new rules or of steady-state. Cohort-and-gender mortality projections, developed ad hoc for this work, are exploited to establish a benchmark against which actuarial fairness and neutrality can be assessed. The NDC Italian pension system is almost actuarially fair and neutral. However, some noticeable distortions from our benchmark exist. A remarkable one comes from the use in the pension formulae of mortality tables which do not incorporate longitudinal trends in mortality rates.
    Keywords: social security, notional defined contribution, actuarial neutrality,actuarial fairness, money's worth measures, demographic trends, cohort-specific mortality projections
    JEL: J11 J14 H55 J16 C23 D31
    Date: 2006–03
  12. By: Thomas A. Garrett
    Abstract: State revenue variability is evaluated using a volatility model rooted in portfolio theory. The model evaluates how closely a state's revenue portfolio is constructed to minimize variability in total state tax revenue. The model complements parametric methods of revenue variability.
    Keywords: Taxation ; Revenue
    Date: 2006
  13. By: Callan T; Walsh J
    Abstract: A method of systematically assessing the 'first-round' impact of tax and transfer policy changes on the income distribution and the incidence of relative income poverty is proposed. It involves the construction of a 'distributionally neutral' policy, which can be approximated by a policy which indexes tax allowances, credits and bands and welfare payment rates in line with a broad measure of income growth. The impact of actual policy changes in five EU countries over the 1998 to 2001 period is then measured against this benchmark, using the EUROMOD tax-benefit model.
    Keywords: Distributive impact, relative income poverty, microsimulation
    JEL: H23 H53 I32
    Date: 2449–03
  14. By: Nizar Allouch (Queen Mary, University of London); John P. Conley (University of Vanderbilt); Myrna Wooders (University of Warwick)
    Abstract: We introduce a model of a local public goods economy with a continuum of agents and jurisdictions with finite, but unbounded populations. Under boundedness of per capita payoffs we demonstrate nonemptiness of the core of the economy. We then demonstrate that the equal treatment core coincides with the set of price-taking equilibrium outcomes with anonymous prices - that is, prices for public goods depend only on observable characteristics of agents. Existence of equilibrium follows from nonemptiness of the core and equivalence of the core to the set of equilibrium outcomes. Our approach provides a new technique for showing existence of equilibrium in economies with a continuum of agents.
    Keywords: Tiebout, Clubs, Jurisdictions, F-core, Core-equilibrium equivalence, Edgeworth equivalence, Continuum economies with clubs, Crowding types, Core, Equal treatment core
    JEL: C62 D71 H41
    Date: 2006–03
  15. By: Jota Ishikawa; Tomohiro Kuroda
    Abstract: This paper compares emission taxes with other taxes from the viewpoint of emission reduction in an open economy. Using a simple monopoly model, we show that emission taxes may not be very effective to protect environment because of the spillover effects between markets stemming from non-constant marginal costs and transboundary externalities. Other taxes such as production taxes and tariffs are more effective under certain conditions. Thus, an easy application of emission taxes should be discreet in the open economy framework.
    Date: 2006–03
  16. By: Marc van der Steeg
    Abstract: This paper reviews arguments for government interference in the education sector and discusses the effectiveness of commonly used policy instruments. There are both efficiency and equity reasons for government intervention. Particular attention is paid to education spillovers (an efficiency motive). The empirical literature shows that there is little reason to argue for additional policy efforts to correct for externalities. There is some promising evidence, however, for non-pecuniary spillovers in the form of crime reduction and health improvements. With regard to the effectiveness of policy instruments, the paper discusses studies with a (quasi-)experimental design so that the causal impact of the policy can be identified. Early childhood interventions appear to be more effective than interventions in later stages of the education cycle.
    Keywords: private and social returns to education; education and equity; education policy; controlled and social policy experiments
    JEL: I20 I28 H23 H52
    Date: 2005–07
  17. By: Jan Bonenkamp
    Abstract: This paper discusses and compares two models for the catching-up premium rate, a partial adjustment (PA) model and a linear quadratic regulator (LQR) model. The models are different in that the PA model is a solution to a static optimisation problem, while the optimisation problem in the LQR model is dynamic. With respect to the economic principle of premium smoothing, it turns out that the LQR model is the preferable model. In addition, the simulation outcomes of this model are more consistent with the institutions of the Dutch pension system.
    Keywords: linear quadratic regulator model; partial adjustment model; premium smoothing
    JEL: C61 H55
    Date: 2005–10
  18. By: Florin Bilbiie (Nuffield College, Oxford and CEP, London School of Economics and EUI, Florence)
    Abstract: This paper suggests that in a monetary union: (i) fiscal policies should be delegated with optimal contracts, perhaps written over the deficit; (ii) policymakers would have no incentives to deviate by forming coalitions from the resulting equilibrium when exchange of information is allowed for. In a model of a monetary union with decentralized fiscal authorities and both fiscal-fiscal and fiscal-monetary spillovers, individual policymaking is inefficient whereas binding agreements are unfeasible. A centralised equilibrium is optimal and time consistent if the policymaker shares the social preferences and uses non-distortionary fiscal instruments. When policy is decentralized with heterogenous preferences of authorities and fiscal policy is distortionary, the resulting equilibrium is always inefficient and stable to incentives to collude. The optimal policy mix can however be implemented in the decentralized game, via delegating all policies (by the same principal) where the resulting equilibrium is efficient and coalition-proof.
    Date: 2006–03–10
  19. By: Lata Gangadharan; Veronika Nemes
    Abstract: Uncertainties and risks in the decision making process are abundant in the area of environmental economics, irrespective of whether the problems being discussed are local or global. This paper uses laboratory evidence from public goods games to examine how in payoff equivalent situations, decision makers contribute towards local or global environmental goods, in the presence of risk and uncertainties in the provision of these goods. We use a within subject design that allows for comparisons across seven different treatments in which subjects are exposed to internal (strategic) and external (environmental) risk and uncertainty. Our results show that the location of the risk and uncertainty matters, with subjects moving away from the external uncertainty in favor of internal uncertainty, when that uncertainty is associated with the local environmental good. When the uncertainty relates to the global environmental good, subjects face both external and internal uncertainty on the same good leading to a significant drop in contributions. We find that in the presence of risk and uncertainty subjects use feedback from other members of their group when deciding about future contributions. The reward for research and development and innovation is captured in the experimental design by the increased probability of obtaining the desired outcome in the endogenous probability treatment. Subjects seem to understand this incentive and contribute more towards global goods in this treatment.
    Keywords: Experiments, Public Goods, Local and Global Environmental Problems, Risk, Uncertainty.
    JEL: C91 Q00 H41
    Date: 2005
  20. By: David P. Myatt; Chris Wallace
    Abstract: In a collective-action game a player`s payoff is the sum of (i) a private component that depends only on that player`s action, and (ii) a public component, common to all players and dependent upon all actions. A classic application is the private provision of a public good. Play evolves: strategy revisions are made according to a multinomial-logit choice rule. Long-run behaviour is determined by a potential function, which incorporates the private (not social) benefits of activity. Behaviour may be influenced only by reducing public-good output (an application of a free-disposal property). When welfare is the expected time average of aggregate payoffs, it is socially optimal to either leave production well alone, or damage it as much as possible. This often takes the form of a production target, where all output is discarded unless some threshold is reached, potentially generating an equilibrium-selection problem. When the evolution of play approximates a best-reply process, the optimal threshold corresponds to the output level that an individual who pays all private costs but enjoys only private benefits would be just willing to provide.
    Keywords: Public Goods, Potential Games, Evolution, Quantal Response, Equilibrium Selection, Thresholds
    JEL: C72 C73 H41
    Date: 2005
  21. By: David P. Myatt; Chris Wallace
    Abstract: A public good is produced if and only if a team of m or more volunteers contribute to it. An equilibrium-selection problem leads to the questions: will collective action succeed? If so, who will participate in the team? The paper studies the evolution of collective action: as part of a strategy-revision process, updating players choose quantal responses to existing play. With symmetric players, success depends upon the cost of contribution, the benefit from provision, and the critical team-size m; the relative variability of costs and benefits, and their correlation, are also critical. When players differ, successful teams consist of either the most efficient contributors, or those with the most idiosyncratic preferences. The addition of a single "bad apple" (for instance, an individual whose costs are particularly variable) to a population in which a successful team operates may result in destabilisation: over time, the bad apple might supplant an existing contributor, prompting a collapse.
    Keywords: Collective Action, Evolution, Teams, Equilibrium Selection, Exponential Cost, Rooted Trees.
    JEL: C72 C73 H41
    Date: 2005
  22. By: Dilip Mookherjee (Department of Economics, Boston University); Pranab Bardhan
    Abstract: In summary, the effects of decentralization on corruption and government accountability are complex and cannot be summarized by simple, unconditional statements. This applies equally to theoretical analyses, cross-country regression results and more detailed empirical studies of specific countries. In this essay we reviewed the literature dealing with two principal accountability mechanisms: external competition with other governments, and internal democratic pressures.
    Date: 2005–06
  23. By: J. Ignacio García-Pérez (Department of Economics, Universidad Pablo de Olavide); Juan F. Jimeno (Bank of Spain, Research Division)
    Abstract: This paper provides an approximation to the measurement of public sector wage gaps in Spanish regions. By using data from the European Community Household Panel, it is shown that the balance between what private firms pay in the local market and what the public sector pays, differs substantially in different areas of the country. Public sector wage differences among Spanish regions are mostly due to differences in returns, not to differences in characteristics or to selection effects, and are not constant across gender, educational levels, or occupations. Moreover, in those regions where Regional Governments have a higher weight in public employment, public wage gaps are higher and public employers pay higher returns. There also seems to be a cross-regional positive correlation between public wage gaps and unemployment, and a negative one between labour productivity and public wage gaps. Hence, a tentative conclusion is that the incentives to select into the public sector are higher in the low productivity regions, precisely those where scarcity of human capital in the private sector may be the most important factor for explaining economic backwardness.
    Keywords: public sector, wage differentials, switching regressions, Spanish regions.
    JEL: J31 H73 H83
    Date: 2006–03
  24. By: Jorge Navas and Jesús Marín-Solano (Universitat de Barcelona)
    Abstract: In this paper, the expression for the cost of capital is derived when net and replacement investments exhibit differences in their effective prices due to a different fiscal treatment. It is shown that, contrary to previous results in the literature, the cost of capital should be constructed under an opportunity cost criterion rather than a historical one. This result has some important economic consequences, since the optimizing firm will take into account not only the effective price for the new investments but also consider the opportunity cost of replacing them.
    Keywords: Cost of capital, Grants on net investments
    JEL: D92 H32 C61
    Date: 2006
  25. By: P R Agénor; K C Neanidis
    Abstract: This paper studies the optimal allocation of government spending between health, education, and infrastructure in an endogenous growth framework. In the model, infrastructure a?ects not only the production of goods but also the supply of health and education services. The production of health (education) services depends also on the stock of educated labor (health spending). Transitional dynamics associated with budget-neutral shifts in the composition of expenditure are analyzed, and growth- and welfare-maximizing allocation rules are derived and compared. The discussion highlights the key role played by the parameters that characterize the health and education technologies.
    Date: 2006
  26. By: Steven J. Davis; Kevin M. Murphy; Robert H. Topel
    Abstract: We consider three questions related to the choice between war in Iraq and a continuation of the pre-war containment policy. First, in terms of military resources, casualties and expenditures for humanitarian assistance and reconstruction, is war more or less costly for the United States than containment? Second, compared to war and forcible regime change, would a continuation of the containment policy have saved Iraqi lives? Third, is war likely to bring about an improvement or deterioration in the economic well-being of Iraqis? We address these questions from an ex ante perspective as of early 2003. According to our analysis, pre-invasion views about the likely course of the Iraq intervention imply present value costs for the United States in the range of $100 to $870 billion. Our estimated present value cost for the containment policy is nearly $300 billion and ranges upward to $700 billion when we account for several risks stressed by national security analysts. Our analysis also indicates that war and forcible regime change will yield large improvements in the economic well-being of most Iraqis relative to their prospects under the containment policy, and that the Iraqi death toll would likely be greater under containment.
    JEL: H56
    Date: 2006–03
  27. By: Katarina Keller (Susquehanna University); Panu Poutvaara (University of Helsinki and IZA Bonn); Andreas Wagener (University of Vienna)
    Abstract: Economic theory predicts that military conscription is associated with static inefficiencies as well as with dynamic distortions of the accumulation of human and physical capital. Relative to an economy with an all-volunteer force, output levels and growth rates should be lower in countries that rely on a military draft to recruit their army personnel. For OECD countries, we show that military conscription indeed has a statistically significantly negative impact on economic performance.
    Keywords: growth, military draft, augmented Solow model
    JEL: H20 H57 J22 C68
    Date: 2006–03
  28. By: Kohnz, Simon
    Abstract: This paper analyses the role of ratification quotas in multilateral agreements over emission reduction. The higher is the quota, the lower is the level of emissions in case the agreement comes into force, but the higher is also the risk of failure. In a setting with incomplete information, two country types and a binary contribution to the provision, I examine the differences between simultaneous and sequential ratification. When the benefits from emission of both types are smaller than the social costs, the outcome in the simultaneous case is essentially identical to the sequential case. The optimal quota is 100% and achieves the first best. With the high type's benefits exceeding the social costs, I find that the optimal quota is as small as possible, if ratification is simultaneous. In the sequential ratification case, I cannot determine the optimal quota. However, I find that the aggregate expected surplus decreases with respect to the simultaneous case.
    JEL: H41 D71
    Date: 2005–09
  29. By: David P. Myatt; Torun Dewan
    Abstract: Empirical evidence suggests that a Prime Minister can benefit from firing ministers who are involved in political scandals. We explore a model in which a minister`s exposure to scandals is positvely related to his policy activism, so that a Prime Minister may wish to protect him from resignation calls. We find that protection can sometimes work against the objective of encouraging activism: it makes a minister`s position more valuable to him and hence can encourage him to "sit tight" by moderating his activities. On the other hand, an exogenous increase in exposure to scandals may lead a minister to "live for today" by pursuing controversial policy innovations. The Prime Minister`s ability to protect ministers from resignation calls is limited by her short-term incentive to fire. She may, however, enhance her credibility by building a collective reputation with the wider membership of her cabinet; we show that heterogeneity of cabinet membership can play an important role.
    Keywords: Ministerial Resignations, Reputation, Relational Contracts, Multi-Market Contract, Protection, Incentives
    JEL: C70 D20 H10
    Date: 2005
  30. By: Paula González (Department of Economics, Universidad Pablo de Olavide)
    Abstract: We develop a principal-agent model in which the health authority acts as a principal for both a patient and a general practitioner (GP). The goal of the paper is to investigate the relative merits of gatekeeping and non-gatekeeping systems and to analyze the role of the quality of patient information and referral pressure in determining which model dominates. We find that, whenever GPs incentives matter, non-gatekeeping is better only if there is a sufficiently high pressure for referral. At the same time, for a non-gatekeeping system to dominate, the quality of the patient information should not be extreme: neither too bad (patient’ s self-referral would be very inefficient) nor too good (the GP’s agency problem would be very costly).
    Keywords: General Practice, Moral hazard, Incentives, Patients’ beliefs, Patients’ pressure, Referrals.
    JEL: D82 H51 I18 L51
    Date: 2006–03
  31. By: Samuel Malone
    Abstract: Macroeconomic volatility, in particular from exposure to volatile terms of trade in the form of volatile commodity prices, is an important source of risk for emerging market countries. As a consequence of this exposure, it has been argued, their probability of facing solvency problems on payments of their foreign currency debt is high, as are the country risk premia they must pay in order to borrow from international capital markets. While the availability of derivative contracts on many major commodity prices makes it possible to hedge commodity price exposure, many emerging market sovereigns either do not hedge a significant amount of their fiscal exposure to their major exports and import commodities or do not clearly report their hedging activities. In light of this phenomenon, and with the goal of crisis prevention in mind, we illustrate how a country exposed to shocks can execute its own insurance strategy against fluctuations in the prices of its major export commodities using futures and options markets. In the context of a model of sovereign default with endogeous sovereign spread and debt choice (Catao and Kapure (2004)), we demonstrate the resulting benefits of this insurance in terms of increased welfare for the country, a reduced soverign spread, and a higher debt ceiling. Additionally, we highlight some political economy problems leaders might face that hinder them from hedging in practice, and describe a hedging strategy to overcome these problems.
    Keywords: Sovereign Default, Hedging, Macroeconomic Volatility
    JEL: E44 F34 H63
    Date: 2005

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