nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒04‒01
25 papers chosen by
Peren Arin
Massey University

  1. International Transmission of Fiscal Shocks: An Empirical Investigation By Faik Koray; K. Peren Arin
  2. School Choice and the Flight to Private Schools: To What Extent Are Public and Private Schools Substitutes? By David M. Brasington
  3. Persistence of Power, Elites and Institutions By Daron Acemoglu; James A. Robinson
  4. Redistribution, taxes, and the median voter By Marco Bassetto; Jess Benhabib
  5. Monetary and fiscal theories of the price level: the irreconcilable differences By Bennett T. McCallum; Edward Nelson
  6. Is there a social security tax wedge? By Alessandro Cigno
  7. On Policy Relevance of Ramsey Tax Rules By Selim, Sheikh Tareq
  8. Tax Evasion, Public Investment, and Welfare Effects of a Tariff Reform By Manoj Atolia
  9. A Dynamic Theory of Public Spending, Taxation and Debt By Marco Battaglini; Stephen Coate
  10. Dynamic Scoring: Alternative Financing Schemes By Eric M. Leeper; Shu-Chun Susan Yang
  11. Simulating labor supply behaviour when workers have preferences over job opportunities and face non-linear budget constraints By John K. Dagsvik; Marilena Locatelli; Steinar Strøm
  12. The Effects of Joint Taxation of Married Couples on Labor Supply and Non-wage Income By Sara LaLumia
  13. Optimal wealth taxes with risky human capital By Borys Grochulski; Tomasz Piskorski
  14. Fiscal Decentralisation and Economic Growth in the OECD By Phil Bodman; Kathryn Ford
  15. On Optimal Monetary and Fiscal Policy Interactions in Open Economies By Chiara Forlati
  16. The Interaction Between Public and Private Governments: An Empirical Analysis By Ron Cheung
  17. Taxes and Growth in a Financially Underdeveloped Country: Evidence from the Chilean Investment Boom By Chang-Tai Hsieh; Jonathan A. Parker
  18. Corporate Debt Restructuring and Public Financial Institutions in Japan -Do Government-Affiliated Financial Institutions Soften Budget Constraints?- By Kenya Fujiwara
  19. Public Policy and the Transition to Private Pension Provision in the United States and Europe By Onorato Castellino; Elsa Fornero
  20. Comparing Tax Rates Using OECD and GTAP 6 Data By Gurgel, Angelo; Metcalf, G.; Reilly, John
  21. Cost-Effectiveness Analysis and its Application for Policy Evaluation for Medicine or Public Health By Yasushi Ohkusa; Tamie Sugawara
  22. Public Debt Maturity and Currency Crises By Paul Levine; Alexandros Mandilaras; Jun Wang
  23. Ricardian Equivalence for Sub-national States By Jo Anna Gray; Joe Stone
  24. The Changes of Accounting Standards and Structural Reform in Japanese companies By Yasuhiro Asami
  25. Migration and Hedonic Valuation: The Case of Air Quality By Patrick Bayer; Nathaniel Keohane; Christopher Timmins

  1. By: Faik Koray; K. Peren Arin
    Abstract: This paper investigates how innovations in income taxes and government purchases originating in the U.S. affect the U.S. economy, and how these effects are transmitted to the Canadian economy. Using a semi-structural VAR model and data for both countries for the 1961:1-2004:3 period, we find that fiscal policy innovations originating in the U.S. are transmitted to the Canadian economy by international trade and capital flows through interest rate and exchange rate channels. Unanticipated shocks to U.S. government purchases have beggar thy neighbor effects on Canada. U.S. output increases and Canadian output decreases in response to a positive shock to U.S. government purchases. In response to an unanticipated increase in U.S. income taxes, U.S. output declines while U.S. and Canadian real interest rates rise. The response of Canadian output, however, is not significantly different from zero.
  2. By: David M. Brasington
    Abstract: Opponents of school choice sometimes charge that vouchers, charter schools, and tuition tax credits would strip funding and talented students from the public schools. Proponents say this is exactly what is needed to provide extra competition for public schools. Flight to private schools may happen if parents think private schools are good substitutes for public schools. For goods with explicit market prices, economists estimate substitutability by specifying a demand curve and finding a cross price elasticity, but the non-market nature of schooling has prevented this. The current study finds a way to estimate the demand for public schooling and calculate a cross price elasticity by exploiting Rosen’s (1974) two-stage hedonic technique. It estimates the cross price elasticity between public schooling and the price of private schooling to be 0.32: Americans view private schools as fairly weak substitutes for public schools. The use of spatial statistics accounts for potential spillovers and omitted variable bias in the house price hedonics and the demand curve estimation. In fact, the -1.72 price elasticity of demand is much larger than the -0.20 to -0.40 estimates generally found by non-spatial studies.
  3. By: Daron Acemoglu; James A. Robinson
    Abstract: We construct a model of simultaneous change and persistence in institutions. The model consists of landowning elites and workers, and the key economic decision concerns the form of economic institutions regulating the transaction of labor (e.g., competitive markets versus labor repression). The main idea is that equilibrium economic institutions are a result of the exercise of de jure and de facto political power. A change in political institutions, for example a move from nondemocracy to democracy, alters the distribution of de jure political power, but the elite can intensify their investments in de facto political power, such as lobbying or the use of paramilitary forces, to partially or fully offset their loss of de jure power. In the baseline model, equilibrium changes in political institutions have no effect on the (stochastic) equilibrium distribution of economic institutions, leading to a particular form of persistence in equilibrium institutions, which we refer to as invariance. When the model is enriched to allow for limits on the exercise of de facto power by the elite in democracy or for costs of changing economic institutions, the equilibrium takes the form of a Markov regime-switching process with state dependence. Finally, when we allow for the possibility that changing political institutions is more difficult than altering economic institutions, the model leads to a pattern of captured democracy, whereby a democratic regime may survive, but choose economic institutions favoring the elite. The main ideas featuring in the model are illustrated using historical examples from the U.S. South, Latin America and Liberia.
    JEL: H2 N10 N40 P16
    Date: 2006–03
  4. By: Marco Bassetto; Jess Benhabib
    Abstract: We study a simple model of production, accumulation, and redistribution, where agents are heterogeneous in their initial wealth, and a sequence of redistributive tax rates is voted upon. Though the policy is infinite-dimensional, we prove that a median voter theorem holds if households have identical, Gorman aggregable preferences; furthermore, the tax policy preferred by the median voter has the “bang- bang” property.
    Keywords: Taxation ; Wealth
    Date: 2006
  5. By: Bennett T. McCallum; Edward Nelson
    Abstract: The fiscal theory of the price level (FTPL) has attracted much attention but disagreement remains concerning its defining characteristics. Some writers have emphasized implications regarding interest-rate pegging and determinacy of RE solutions, whereas others have stressed its capacity to generate equilibria in which price level trajectories mimic those of bonds and differ drastically from those of money supplies. We argue that the FTPL attained prominence precisely because it appeared to provide a theory whose implications differ greatly from conventional monetary analysis; accordingly we review monetarist writings to identify the primary distinctions. In addition, we review recent findings concerning learnability - and therefore plausibility - of competing RE equilibria. These indicate that when FTPL and monetarist equilibria differ, the latter are more plausible in the vast majority of cases. Under Ricardian assumptions, necessary for clear distinctions, theoretical analysis indicates that fiscal and monetary coordination is not necessary for macroeconomic stability.
    Keywords: Monetary policy ; Fiscal policy
    Date: 2006
  6. By: Alessandro Cigno
    Abstract: A Beveridgean pension scheme invariably introduces a wedge between the wage rate and the marginal take-home pay. A Bis- marckian 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 o¤set 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 Bismar- ckian, than if it is Beveridgean.
    Keywords: tax wedge, Bismarck, Beveridge, public pensions, implicit pension tax, labour
    JEL: H31 H55 J38
    Date: 2006–01
  7. By: Selim, Sheikh Tareq (Cardiff Business School)
    Abstract: Over the last three decades, the literature has experienced a marked enthusiasm amongst the critics of optimal taxation theory who attempted to establish the limits of optimal tax formulas and prescriptions in designing tax policy. This paper, in pursuit of investigating the importance and policy relevance of Ramsey tax rules, establishes that most of the common grounds of such criticisms, be it realistic, such as administrative and compliance costs, or be it rather abstract, such as fairness, are either unimportant or irrelevant for Ramsey taxation. The more important inadequacy of the traditional Ramsey tax models is their limited applicability for designing tax policy in developing countries.
    Keywords: Optimal taxation; Ramsey tax rules; Policy relevance
    JEL: E61 E62 H21 H30
    Date: 2006–03
  8. By: Manoj Atolia (Department of Economics, Florida State University)
    Abstract: For developing countries the usual gain from a tariff reform must be balanced against the losses that arise due to their limited ability to raise domestic taxes and prevent tax evasion. If the revenue loss from the tariff reform is not fully offset, the government budget shrinks. As public investment is much more productive on the margin than the private investment in developing countries, the resulting loss from the fall in public investment must be offset against the gain from the tariff reform. In addition, to the extent a coordinated domestic tax reform is implemented, there is a distortionary loss due to tax evasion that must also be balanced against such gain. While in the second-best world, it is always possible to lose from a tariff reform, such an outcome becomes quite likely when very plausible such constraints are imposed on the government policy in developing countries. The paper, therefore, further strengthens the criticism of the IMF and World Bank's recommendation to developing countries to reduce border taxes. This criticism can also be reinterpreted as an argument about the proper sequencing of economic reforms.
    Keywords: Trade Reform, Welfare Analysis, Public Investment, Tax Evasion
    JEL: D61 D63 F13 H26
    Date: 2003–10
  9. By: Marco Battaglini; Stephen Coate
    Abstract: This paper presents a dynamic political economy theory of public spending, taxation and debt. Policy choices are made by a legislature consisting of representatives elected by geographically-defined districts. The legislature can raise revenues via a distortionary income tax and by borrowing. These revenues can be used to finance a national public good and district-specific transfers (interpreted as pork-barrel spending). The value of the public good is stochastic, reflecting shocks such as wars or natural disasters. In equilibrium, policy-making cycles between two distinct regimes: “business-as-usual” in which legislators bargain over the allocation of pork, and “responsible-policy-making” in which policies maximize the collective good. Transitions between the two regimes are brought about by shocks in the value of the public good. In the long run, equilibrium tax rates are too high and too volatile, public good provision is too low and debt levels are too high. In some environments, a balanced budget requirement can improve citizen welfare.
    JEL: H6
    Date: 2006–03
  10. By: Eric M. Leeper; Shu-Chun Susan Yang
    Abstract: Neoclassical growth models predict positive growth effects over the entire transition path following a reduction in capital or labor tax rates when lump-sum taxes (or transfers) are used to balance the government budget. This paper considers the consequences of bond-financed tax reductions that bring forth adjustments in expected future government consumption, capital tax rates, or labor tax rates. Through the resulting intertemporal distortions, current tax cuts can lower growth. The paper shows that the stronger the response of distorting fiscal policies to debt, the more favorable the growth effects of a tax cut.
    JEL: E1 H3 H6
    Date: 2006–03
  11. By: John K. Dagsvik; Marilena Locatelli; Steinar Strøm
    Abstract: A female labor supplied model including sectoral choice, estimated on data from Norway, 1994 has been used in simulation to yield labor supply elasticities. We find that these elasticities are declining with the wage level of the women. The overall elasticities are rather small, but these small elasticities shadow for much stronger sectoral responses. A wage increase gives the women an incentive to shift labor supply from the public to the private sector. This occurs despite the fact that education and experiences have a slightly higher return in the public than in the private sector. The reasons for our result are that in the private sector wages are more dispersed and hours are less regulated. Marginal tax rates were cut considerably in the 1992 tax reform. We find that the impact on overall labor supply is rather modest, but again these modest changes shadow for stronger sectoral changes. The tax reform stimulated the women to shift their labor from the public to the private sector and to work longer hours. A calculation of the expected value of changes in household welfare shows that the richest households benefited far more from the 1992 tax reform than the poorest household.
    Keywords: Labor supply, married females, structural model, sectoral choice, wage ealsticities, evaluation of tax reforms
    JEL: J22 C51
    Date: 2006–01
  12. By: Sara LaLumia (Department of Economics, University of Michigan; Department of Economics, College of William and Mary)
    Abstract: The United States changed its tax treatment of married couples in 1948, from a system in which each spouse paid taxes on his or her own income to a system in which a married couple is taxed as a unit. The switch from separate to joint taxation changed incentives for labor supply and asset ownership. This paper investigates the effects of the conversion to joint taxation, taking advantage of a natural experiment created by cross-state variation in property laws. Married individuals in states with community property laws had always been taxed as if each spouse had earned half of the coupleÕs income, and thus were unaffected by the 1948 legal change. Comparing the behavior of taxpayers in affected and unaffected states indicates that the tax change is associated with a decline of 0.9-1.6 percentage points in the labor force participation rate of married women, consistent with the higher first-dollar tax rates they faced after 1948. Married women were also 0.6-1.9 percentage points less likely to have non-wage income after 1948, reflecting pre-1948 allocation of family assets to wives for tax purposes. The effects of joint taxation on married menÕs labor force participation and non-wage income holding are generally not statistically significant.
    Keywords: joint taxation, labor supply, income shifting
    JEL: H24 J22
    Date: 2006–03–23
  13. By: Borys Grochulski; Tomasz Piskorski
    Abstract: We study the structure of optimal wealth and labor income taxes in a Mirrlees economy in which the productivity of labor (i.e., skill) is private, stochastic, and endogenous. Individual agents' skills are determined by their level of human capital. Human capital is not publicly observable and the returns to human capital investment are subject to idiosyncratic shocks. Preferences are not assumed to be additively separable in consumption and human capital investment and, thus, the intertemporal marginal rates of substitution of consumption are private information. We characterize the optimal allocation and a tax system that implements this allocation in equilibrium. The optimal allocation does not satisfy the "reciprocal Euler equation" of Rogerson [Econometrica, 1985], which holds in Mirrlees economies with exogenous skills. The tax system we use in our decentralization of the optimum consists of a wealth tax that is linear in wealth and a labor income tax that depends solely on labor income. The result of Kocherlakota [Econometrica, 2005], establishing the optimality of zero expected marginal wealth tax rate, holds in our model. We show that endogenous skill determination affects the volatility of marginal wealth taxes rather than their expectation. Relative to economies with exogenous skills, the optimal marginal wealth tax rate is more volatile in our endogenous skill economy. Also, we demonstrate the optimality of a wedge in the returns on the two assets present in our economy: At the optimum, the marginal return on human capital investment is strictly larger than the marginal return on physical capital investment.
    Keywords: Human capital ; Wealth
    Date: 2005
  14. By: Phil Bodman (MRG - School of Economics, The University of Queensland); Kathryn Ford
    Abstract: What impact, if any, does fiscal decentralisation have on economic growth? Further investigations of the inter-relationships between fiscal decentralisation and economic growth are timely given that government decentralisation remains at the forefront of many OECD policy agendas. The study incorporates new measures of fiscal decentralisation to better account for the impact of different levels of subnational fiscal autonomy on economic growth. The analysis also considers the impact of previously omitted public sector decentralisation variables that provide further indication of the extent to which subnational governments are ‘closer to the people’ and potentially better able to account for local preferences in fiscal decision-making. Whilst little evidence of a direct relationship between fiscal decentralisation and output growth is found, some evidence is found to support the hypothesis that a medium degree of fiscal decentralisation is positively related to growth in the capital stock and the level of human capital.
  15. By: Chiara Forlati
    Abstract: This paper studies monetary and fiscal policy interactions in a two country model, where taxes on firms’ sales are optimally chosen and the monetary policy is set cooperatively. It turns out that in a two country setting non-cooperative fiscal policy makers have an incentive to change taxes on sales depending on shocks realizations in order to reduce output production. Therefore whether the fiscal policy is set cooperatively or not matters for optimal monetary policy decisions. Indeed, as already shown in the literature, the cooperative monetary policy maker implements the flexible price allocation only when special conditions on the value of the distortions underlying the economy are met. However, if non-cooperative fiscal policy makers set the taxes on firms’ sales depending on shocks realizations, these conditions cannot be satisfied; conversely, when fiscal policy is cooperative, these conditions are fulfilled. We conclude that whether implementing the flexible price allocation is optimal or not depends on the fiscal policy regime.
    Keywords: Monetary and Fiscal Policy, Policy Coordination
    JEL: E52 E58 E62 F42
    Date: 2004–07
  16. By: Ron Cheung (Department of Economics, Florida State University)
    Abstract: Private governments, found in planned developments and condominiums, are increasingly common methods of local service delivery. This paper provides the first empirical study of their impact on local public finance. A novel dataset of homeowners' associations allows construction of a panel of private governments in California. Panel methods test whether public expenditures respond to private government membership. Estimates indicate that local governments lower spending in response to private government activity, consistent with strategic substitution. The paper then examines various mechanisms to explain this downloading and shows that substitutability between public and private providers is key to which services are downloaded.
    Keywords: private government, local expenditures, gated communities, planned developments, strategic downloading
    JEL: R00 H00 H70
    Date: 2004–11
  17. By: Chang-Tai Hsieh; Jonathan A. Parker
    Abstract: This paper argues that taxation of retained profits is particularly distortionary in an economy with good growth prospects and poorly developed financial markets because it primarily reduces the investment of financially constrained firms, investment that has marginal product greater than the after-tax market real interest rate. Contrarily, taxes on distributed profits or capital gains primarily reduce the investment of financially unconstrained firms. Chile experienced a banking crisis over the period from 1982 to 1986 and in 1984 reduced its tax rate on retained profits from 50 percent to 10 percent. We show that, consistent with our theory, there was a large increase in aggregate investment after the reform which was entirely funded by an increase in retained profits. Further, we show that investment grew by more in industries that depend more on external financing, according to the Rajan and Zingales (1998) measure. Finally, we present some weak evidence from comparisons of investment rates across firms for several different measures of their likelihood of being financially constrained.
    JEL: H32 E22 D92 O54 O16
    Date: 2006–03
  18. By: Kenya Fujiwara (Kobe University)
    Abstract: There are two different views on the effects of public financial institutions on corporate debt restructuring: the soft budget view and the hard budget view. The former view, which is held by Kornai (1979, 1983), Dewatripont and Maskin (1995), and others insists that because centralized public financial institutions have difficulty committing themselves to refrain from providing additional funds to distressed firms, corporate reorganizations often result in overinvestment. On the other hand, the latter view argues that public financial institutions should prefer corporate liquidation rather than the continuation of business because public financial institutions are secured by mortgages to a greater extent and are more reluctant to forgive the debts than private financial institutions.
    Keywords: public financial institutions, debt restructuring, soft budget view, hard budget view, Kornai, Dewatripont, Maskin, corporate reorganizations, corporate liquidation, private financial institutions, debt
    JEL: G28 G33 G34
    Date: 2006–12
  19. By: Onorato Castellino (University of Turin and Center for Research on Pensions and Welfare Policies, Turin); Elsa Fornero (University of Turin and Center for Research on Pensions and Welfare Policies, Turin)
    Abstract: PAYG and funding may and do coexist in social security systems. The proportions of this coexistence, however, are quite variable from country to country. The paper examines the US and a number of European countries, looking at both the present state and the foreseeable trends in future decades. The impact of a mixed system is analysed under the relevant viewpoints, with special reference to the adequacy and sustainability of the overall structure and to the distribution of risk.
    Date: 2006–03
  20. By: Gurgel, Angelo; Metcalf, G.; Reilly, John
    Abstract: Research Notes
    Date: 2006
  21. By: Yasushi Ohkusa (Japanese National Institution of Infectious Disease); Tamie Sugawara (University of Tsukuba)
    Abstract: In comparison to the policy for other field, the policy for medicine and public health is to consider the value of life or the value of the quality of life. Quality of life is very well known as a concept of QOL. Also, Quality Adjusted Life of Years (QALY) which integrates QOL over life of years is widely used as a measure of the value of life. Cost-effectiveness analysis for medicine and public health adopts two approaches to incorporate value of QOL or QALY. We summarize those advantage and disadvantage briefly at first. Unfortunately, cost-effectiveness analysis has not been committed and operated as an official rule for the method of policy evaluation for medicine or public health in Japan, yet. Thus we show some researches about it which examines ex post or ex ante policy evaluation using cost-effectiveness analysis. In other countries, some political decision making in medicine or public health is based on cost-effectiveness analysis. However, the pressure of the financial deficit will require more accountability about evidence. Therefore, cost-effectiveness analysis must be more important even in political decision making in medicine or public health in Japan.
    Keywords: cost-effectiveness, public health, quality of life
    JEL: H51
    Date: 2006–02
  22. By: Paul Levine (University of Surrey); Alexandros Mandilaras (University of Surrey); Jun Wang (University of Surrey)
    Abstract: This paper provides a theoretical and empirical examination of the e®ect of debt structure on the probability of a currency crisis and the slope of the yield curve. We employ an open-economy version of the Barro-Gordon model with public debt, as in Benigno and Missale (2004) and generalize the analysis to allow for the case where the monetary authority can fully commit itself to an escape clause monetary rule. Comparing the latter with the discretionary outcomes motivates the asymmetric information game where the signalling e®ect of defending the parity competes with the fundamentals of the debt burden. Two key predictions of the model are tested with positive results.
    Keywords: Currency crisis, debt management
    JEL: F31
    Date: 2006–03
  23. By: Jo Anna Gray (University of Oregon Economics Department); Joe Stone (University of Oregon Economics Department)
    Abstract: The authors test Ricardian equivalence within an endogenous growth model for U.S. states, which have high rates of migration relative to most countries. Results are consistent with both Ricardian equivalence and endogenous growth, despite the relative ease of migration. Increases in productive government expenditures increase long-run growth by the same amount, for example, whether financed by taxes or bonds. State rules limiting the use of bond financing may play a role in supporting Ricardian equivalence. The study provides the first explicit test of Ricardian equivalence for sub-national states in the context of an endogenous growth model.
    Date: 2005–12–01
  24. By: Yasuhiro Asami (Japan Science and Technology Agency)
    Abstract: In the business year beginning on April 1 1999 or later our accounting standards have been greatly changed. Concretely (1) the disclosure of consolidated financial statements as audited documents, (2) onsolidated statements of cash flows, and (3) tax consequences accounting have been introduced in the business year beginning on April 1 1999 or later. In addition (4) the standard for fair value accounting of financial instruments and (5) the accounting standard for employees’ retirement benefits (Hereafter this accounting standard will be abbreviated to retirement benefits accounting) have been introduced in the business year beginning on April 1 2000 or later. This has been often called, ‘Big Bang Reforms of Accounting Standards’ in our country. The reforms of accounting standards are still now in progress.
    Keywords: accounting standards, Japan, reform, structural reform
    JEL: D21 D23 D24 H25
    Date: 2006–12
  25. By: Patrick Bayer; Nathaniel Keohane; Christopher Timmins
    Abstract: Conventional hedonic techniques for estimating the value of local amenities rely on the assumption that households move freely among locations. We show that when moving is costly, the variation in housing prices and wages across locations may no longer reflect the value of differences in local amenities. We develop an alternative discrete-choice approach that models the household location decision directly, and we apply it to the case of air quality in U.S. metro areas in 1990 and 2000. Because air pollution is likely to be correlated with unobservable local characteristics such as economic activity, we instrument for air quality using the contribution of distant sources to local pollution – excluding emissions from local sources, which are most likely to be correlated with local conditions. Our model yields an estimated elasticity of willingness to pay with respect to air quality of 0.34 to 0.42. These estimates imply that the median household would pay $149 to $185 (in constant 1982-1984 dollars) for a one-unit reduction in average ambient concentrations of particulate matter. These estimates are three times greater than the marginal willingness to pay estimated by a conventional hedonic model using the same data. Our results are robust to a range of covariates, instrumenting strategies, and functional form assumptions. The findings also confirm the importance of instrumenting for local air pollution.
    JEL: H5 Q2 Q5 R1
    Date: 2006–03

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