nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒04‒08
48 papers chosen by
Peren Arin
Massey University

  1. Persistence of Power, Elites and Institutions By Acemoglu, Daron; Robinson, James A
  2. Optimal Taxation and Social Insurance in a Lifetime Perspective By Lans Bovenberg; Peter Birch Sørensen
  3. Bureaucratic Corruption and Profit Tax Evasion By Laszlo Goerke
  4. Efficient Revenue Sharing and Upper Level Governments: Theory and Application to Germany By Thiess Büttner; Sebastian Hauptmeier; Robert Schwager
  5. The Marginal Cost of Public Funds: Hours of Work versus Labor Force Participation By Kleven, Henrik; Kreiner, Claus Thustrup
  6. Globalisation and the Mix of Wage and Profit Taxes By Andreas Haufler; Alexander Klemm; Guttorm Schjelderup
  7. What are their Words Worth? Political Plans and Economic Pains of Fiscal Consolidations in New EU Member States By Jan Zápal; Ondrej Schneider
  8. Excise Taxation in New Zealand By John Creedy; Catherine Sleeman
  9. Corruption and the Shadow Economy: An Empirical Analysis By Axel Dreher; Friedrich Schneider
  10. Fiscal Policy, Monopolistic Competition, and Finite Lives By Ben J. Heijdra; Jenny Ligthart
  11. Balanced Budget Rules and Aggregate Instability: The Role of Consumption Taxes By Giannitsarou, Chryssi
  12. Financing Government Expenditures Optimally By Pinar Ayse Yesin
  13. Indirect Taxation and Progressivity: Revenue and Welfare Changes By John Creedy; Catherine Sleeman
  14. Cross-Border Acquisitions and Corporate Taxes: Efficiency and Tax Revenues By Norbäck, Pehr-Johan; Persson, Lars; Vlachos, Jonas
  15. Taxing Tourism in Spain: Results and Recommendations By Alberto Gago; Xavier Labandeira; Fidel Picos; Miguel Rodríguez
  16. The Causes of Fiscal Transparency: Evidence from the American States By James E. Alt; David Dreyer Lassen; Shanna Rose
  17. Sustainability of Swiss Fiscal Policy By Gebhard Kirchgässner; Silika Prohl
  18. Pensions with Heterogenous Individuals and Endogenous Fertility By Cremer, Helmuth; Gahvari, Firouz; Pestieau, Pierre
  19. Excludable and Non-excludable Public Inputs: Consequences for Economic Growth By Ingrid Ott; Stephen J. Turnovsky
  20. On the Costs of Policies to Reduce Greenhouse Gases from Passenger Vehicles By Parry, Ian W.H.
  21. Social Security and Retirement Decision: A Positive and Normative Approach By Cremer, Helmuth; Lozachmeur, Jean-Marie; Pestieau, Pierre
  22. Social Desirability of Earning Tests By Cremer, Helmuth; Lozachmeur, Jean-Marie; Pestieau, Pierre
  23. Job Security and Work Absence: Evidence from a Natural Experiment By Assar Lindbeck; Marten Palme; Mats Persson
  24. Incentives for separation and incentives for public good provision By Klaas Staal
  25. The Unemployment Benefit System: a Redistributive or an Insurance Institution? By Daniel Cardona; Fernando Sánchez-Losada
  26. A Model of Income Insurance and Social Norms By Assar Lindbeck; Mats Persson
  27. Discrete Hours Labour Supply Modelling: Specification, Estimation and Simulation By John Creedy; Guyonne Kalb
  28. Evaluating the German "Mini-Job" Reform Using a True Natural Experiment By Marco Caliendo; Katharina Wrohlich
  29. Public-Private Partnership and Schooling Outcomes across Countries By Ludger Woessmann
  30. Governmental activity and private capital adjustment By Ingrid Ott; Susanne Soretz
  32. Optimal Fiscal Policy Rules in a Monetary Union By Kirsanova, Tatiana; Satchi, Mathan; Vines, David; Wren-Lewis, Simon
  33. The Role of Fiscal Policy in a Monetary Union: Are National Automatic Stabilizers Effective? By Andrea Colciago; Anton Muscatelli; Tiziano Ropele; Patrizio Tirelli
  34. Optimal Tariffs: The Evidence By Broda, Christian; Limão, Nuno; Weinstein, David E
  35. Partisan Impacts on the Economy: Evidence from Prediction Markets and Close Elections By Snowberg, Erik; Wolfers, Justin; Zitzewitz, Eric
  36. Labour Market Institutions and the Effectiveness of Tax and Benefit Policies in Enchancing Employment: A General Equilibrium Analysis By Kari O. E. Alho
  37. Fiscal Policy and Macroeconomic Stability Within a Currency Union By Kirsanova, Tatiana; Vines, David; Wren-Lewis, Simon
  38. The Unexplained Part of Public Debt By Camila F. S. Campos; Dany Jaimovich; Ugo Panizza
  39. Disability Testing and Retirement By Cremer, Helmuth; Lozachmeur, Jean-Marie; Pestieau, Pierre
  40. Optimal Policy Towards Families with Different Amounts of Social Capital, in the Presence of Asymmetric Information and Stochastic Fertility By Alessandro Cigno; Annalisa Luporini
  41. Reciprocity and Emotions when Reciprocators Know each other By Ernesto Reuben; Frans van Winden
  42. Swedish Family Policy, Fertility and Female Wages By Tomas Kögel
  43. Probabilistic Aging By Dominik Grafenhofer; Christian Jaag; Christian Keuschnigg; Mirela Keuschnigg
  44. Debt, Deficits and Destabilizing Monetary Policy in Open Economies By Schabert, Andreas; van Wijnbergen, Sweder
  45. The Bologna Process: How Student Mobility Affects Multi-Cultural Skills and Educational Quality By Lydia Mechtenberg; Roland Strausz
  46. Can New Orleans Play Its Way Past Katrina? The Role of Professional Sports in the Redevelopment of New Orleans By Victor Matheson; Robert Baade
  47. Efficient Abatement in Separated Carbon Markets: A Theoretical and Quantitative Analysis of the EU Emissions Trading Scheme By Sonja Peterson
  48. Education, Economic Growth and Measured Income Inequality By Günther Rehme

  1. By: Acemoglu, Daron; Robinson, James A
    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 labour (e.g., competitive markets versus labour 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 non-democracy 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 favouring the elite. The main ideas featuring in the model are illustrated using historical examples from the US South, Latin America and Liberia.
    Keywords: de facto power; de jure power; democracy; dictatorship; elites; institutions; labour repression; persistence; political economy
    JEL: H2 N10 N40 P16
    Date: 2006–03
  2. By: Lans Bovenberg; Peter Birch Sørensen
    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
    Date: 2006
  3. By: Laszlo Goerke
    Abstract: Firms may evade taxes on profits and can also avoid fulfilling legal restrictions on production activities by bribing bureaucrats. It is shown that the existence of tax evasion does not affect corruption activities at the firm level, while the budgetary repercussions of tax evasion induce less corruption. Policy measures which alter the gains or losses from corruption have a non-systematic impact on tax evasion behaviour.
    Keywords: corruption, firms, tax evasion
    JEL: D73 H25 H26
    Date: 2006
  4. By: Thiess Büttner; Sebastian Hauptmeier; Robert Schwager
    Abstract: Recent literature has emphasized that redistributive grant systems may tend to internalize fiscal externalities arising from tax competition. This paper further explores the conditions under which local grant systems enforced by the state government will enhance efficiency. A system of redistributive grants among governments is introduced into a standard model of tax competition. This basic model is then extended in order to allow for variations in the government objectives at the state level. A subsequent empirical analysis of local tax policy exploits the experience with local fiscal revenue sharing in Germany. The results suggest that attempts of state level governments to extract fiscal resources from the local revenue sharing system exert an upward pressure on tax rates.
    Keywords: fiscal equalization, tax competition, fiscal federalism, Germany
    JEL: H71 H77
    Date: 2006
  5. By: Kleven, Henrik; Kreiner, Claus Thustrup
    Abstract: This paper extends the theory and measurement of the marginal cost of public funds (MCF) to account for labour force participation responses. Our work is motivated by the emerging consensus in the empirical literature that extensive (participation) responses are more important than intensive (hours-of-work) responses. In the modelling of extensive responses, we argue that it is crucial to account for the presence of non-convexities created by fixed costs of work. In a non-convex framework, tax and transfer reforms give rise to discrete participation responses generating first-order effects on government revenue and the marginal cost of funds. Based on analytical expressions accounting for both margins of labour supply response, and allowing for heterogeneity in productivities and preferences, we calculate MCF for 15 European countries using micro data on taxes and benefits for each country. The MCF estimates depend crucially on the country under consideration and on the properties of the tax reform. In general, we find that extensive responses have very important effects on MCF, especially in the Scandinavian and the Central/Northern Continental European countries where participation tax rates are very high at the bottom of the distribution resulting from generous out-of-work benefits along with high tax rates on workers. For these countries, the estimated MCFs centre around 2 in the case of proportional tax changes.
    Keywords: fixed work costs; income transfers; intensive and extensive responses; labour supply; marginal welfare costs; taxation
    JEL: H21 H41 J20
    Date: 2006–03
  6. By: Andreas Haufler; Alexander Klemm; Guttorm Schjelderup
    Abstract: This paper analyses the development of the ratio of corporate taxes to wage taxes using a simple political economy model with internationally mobile and immobile firms. Among other results, our model predicts that countries reduce their corporate tax rate, relative to the wage tax, either when preferences for public goods increase or when a rising share of capital is employed in multinational firms. The predicted relationships are tested using panel data for 23 OECD countries for the period 1980 through 2001. The results of the empirical analysis support our central hypotheses.
    Keywords: capital and labour taxes, economic integration, multinational firms
    JEL: F15 F23 H20 H73
    Date: 2006
  7. By: Jan Zápal; Ondrej Schneider
    Abstract: In this paper, we track fiscal authority behaviour in the ten new EU member states (NSM) in the period which immediately preceded their EU accession. We first present basic stylized facts about public budgets of those countries. The paper then analyses reasons which led to periods of fiscal consolidation in the NMS. Secondly, we also present evidence from Pre-Accession Economic and Convergence programmes of NMSs concerning planned steps of the fiscal authorities and try to contrast them with reality. Throughout the paper, we identify two different groups of countries which significantly differ in their fiscal behaviour. On the one side is the group of Baltic countries, displaying strong reform effort and responsible fiscal policy usually supported by strong economic growth. On the second extreme, we identify fiscally irresponsible central European countries and two Mediterranean islands displaying lax fiscal policies and little political will to implement costly reforms. Somewhere between stand Slovenia and Slovakia, first without a strong reform performance yet with budget deficits in compliance with the Stability and Growth Pact and later with recent reform efforts. Our key finding concerning the behaviour of the fiscally irresponsible group of countries is that their current problems with high budget deficits originate in their lax approach and inability to implement politically costly expenditure cuts which is apparent from their revision of budget plans and endeavour to shift envisioned deficit reductions into the future. Yet, this strategy has led those countries to an uncomfortable position vis-à-vis European fiscal rules.
    Keywords: fiscal policy, new member states, consolidations, Stability and Growth Pact, excessive deficit procedure, convergence programmes
    JEL: E60 E62 H60 H87
    Date: 2006
  8. By: John Creedy; Catherine Sleeman
    Abstract: In New Zealand, excise taxes are levied on three commodity groups: alcohol, tobacco and petrol. The 2001 Tax Review, published by the New Zealand Treasury, argued that excises are inequitable and inefficient, and advised that these taxes should be removed and the revenue replaced by raising the standard rate of GST. This paper provides an empirical examination of these issues. First, the efficiency of New Zealand’s current system of indirect taxes is examined. The welfare and redistributive effects resulting from the revenue-neutral removal of excise taxes are then examined. Welfare and redistributive measures are computed for a range of demographic groups and total weekly expenditure levels. While the largest efficiency gains and reductions in inequality are observed for households with at least one smoker, the overall distributional implications of the proposed reforms are found to be small.
    Keywords: Indirect taxation; equivalent variations; excess burdens; inequality;tax reform
    JEL: H21 H23 H31
    Date: 2005
  9. By: Axel Dreher; Friedrich Schneider
    Abstract: This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a cross-section of 120 countries and a panel of 70 countries for the period 1994-2002. Our results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. We also find that stricter regulations increase both corruption and the shadow economy.
    Keywords: corruption, shadow economy, regulation, tax burden
    JEL: D73 H26 O17 O50
    Date: 2006
  10. By: Ben J. Heijdra; Jenny Ligthart
    Abstract: The paper studies the short-run, transitional, and long-run output effects of permanent and temporary shocks in public consumption under various financing methods. To this end, a dynamic macroeconomic model for a closed economy is developed, which features a perfectly competitive final goods sector and a monopolistically competitive intermediate goods sector. Finitely lived households consume final goods, supply labor, and save part of their income. Amongst the findings for a permanent rise in public consumption are: (i) monopolistic competition increases the absolute value of the balanced-budget output multiplier, (ii) positive long-run output multipliers are obtained only if the generational turnover effect is dominated by the intertemporal labor supply effect, (iii) short-run out- put multipliers under lump-sum tax financing are smaller than long-run output multipliers if labor supply is elastic, and (iv) bond financing reduces the size of long-run output multipliers as compared to lump-sum tax financing and may give rise to non-monotonic adjustment paths if labor supply is sufficiently elastic and the speed of adjustment of lump-sum taxes is not too high. Temporary bond-financed fiscal shocks are shown to yield: (i) permanent effects on output, and (ii) negative long-run output multipliers.
    Keywords: fiscal policy, output multipliers, Yaari-Blanchard model, overlapping generations, monopolistic competition, love of variety, temporary fiscal shocks
    JEL: E12 E63 L16
    Date: 2006
  11. By: Giannitsarou, Chryssi
    Abstract: It is known that, in the context of a real business cycle model with constant returns to scale and a balanced budget fiscal policy rule, steady state indeterminacy may arise as a result of endogenous labor income tax rates. In this paper, it is shown that when the government finances its expenditures via an endogenous consumption tax instead, there exists a unique steady state which is always saddle-path stable. As a result, combining income taxes with consumption taxes makes the ranges of indeterminacy shrink, thus reducing the possibility of aggregate instability. From a policy perspective, the results provide an additional argument in favor of (less distortionary) consumption taxes in place of capital taxes.
    Keywords: balanced budget rules; consumption tax; fiscal policy; indeterminacy
    JEL: C62 E62
    Date: 2006–03
  12. By: Pinar Ayse Yesin (Study Center Gerzensee)
    Abstract: In a simple cash-credit model, I study the effects of the combination of costly tax collection and tax evasion on fiscal and monetary policy for optimal resource allocation. Allowing the informal sector to use cash more intensively than the formal sector, I compute the optimal interest and tax rates for eleven OECD countries to finance their exogeneously given government spending. A comparison of the actual and optimal interest rates reveals that tax collection costs and tax evasion together can partly explain the cross-country differences in monetary policy, also rationalizing deviations from the Friedman Rule in the long-run.
    Date: 2006–01
  13. By: John Creedy; Catherine Sleeman
    Abstract: This paper compares the disproportional effects of indirect taxation using two alternative measures, tax-progressivity and welfare-progressivity. In the context of an indirect tax imposed on a single good, tax-progressivity requires the taxed good to be luxury. In contrast, welfare-progressivity requires the equivalent variation as fraction of total expenditure to rise with total expenditure. Sufficient conditions for welfare-progressivity are derived for both the Linear Expenditure System (LES) and the Almost Ideal Demand System (AIDS). When the parameters of the direct utility functions are held constant, imposing homogeneous preferences, the condition required for welfare-progressivity is the same as that required for tax-progressivity, namely that the taxed good is a luxury. Parameter constancy also implies a particular pattern for the variation in budget shares with total expenditure, which is unique for each demand system. When parameters are allowed to vary with total expenditure, according to a general budget share relationship, which enables preference heterogeneity amongst households, welfare-progressivity is independent of tax-progressivity for both models, giving rise to possible conflicts in tax and welfare disproportionality. The empirical application of these conditions to New Zealand data shows that many such cases of conflict can arise. Furthermore, conflicting results are also obtained when examining the effects of the overall indirect tax structure. The majority of conflicts arise where tax-regressivity exists at the same time as welfareprogressivity.
    Keywords: Tax progressivity; equivalent variations; budget shares
    JEL: H23 H22 H31
    Date: 2005
  14. By: Norbäck, Pehr-Johan (The Research Institute of Industrial Economics); Persson, Lars (The Research Institute of Industrial Economics); Vlachos, Jonas (Stockholm Institute of Transistion Economics)
    Abstract: We find that reduced foreign corporate taxes may lead to inefficient foreign acquisitions if complementarities between foreign and domestic assets are low, and to efficient foreign acquisitions if such complementarities are high. Moreover, with large complementarities, foreign acquisitions can increase domestic tax revenues. The reason is that in the bidding competition between the foreign firms, all benefits from the acquisition, including tax advantages and evaded taxes, are competed away and captured by the domestic seller which, in turn, pays capital gains tax on the proceeds. Technical issues in the tax code, such as the treatment of goodwill deductibility, is also shown to crucially affect the pattern of foreign acquisitions.
    Keywords: Tax Competition; Ownership; Tax Revenues; FDI; M&As
    JEL: F23
    Date: 2006–03–09
  15. By: Alberto Gago; Xavier Labandeira; Fidel Picos; Miguel Rodríguez
    Abstract: This paper analyses the foundations, possible applications and the effects of tourism taxation in Spain. The article begins with an analysis of the economic and environmental reasons for taxing tourism, which would seem to call for taxes based on the principle of benefit, for either revenue or corrective purposes. Subsequently, we describe the praxis of tourism taxation in Spain, with special mention being given to the now repealed Balearic ecotasa. Finally, the effects of two fiscal modifications with revenue or corrective objectives are studied through the use of an applied general equilibrium model developed for the Spanish economy. We thus see that a 10% tax on lodging brings in significant public receipts, increases social welfare and has no effect on the environment. On the other hand, an increase of VAT rates on tourism-related sectors could have the same effects on tourist expenditure but at the costs of greater impact for Spain’s economy.
    Keywords: Tourism demand, frequency of travel, habit persistence, household data.
    JEL: C25 D12
    Date: 2006–03
  16. By: James E. Alt (Department of Government, Harvard University); David Dreyer Lassen (Department of Economics, University of Copenhagen); Shanna Rose (Department of Political Science, State University of New York (SUNY) - Stony Brook)
    Abstract: We use unique panel data on the evolution of transparent budget procedures in the American states over the past three decades to explore the political and economic determinants of fiscal transparency. Our case studies and quantitative analysis suggest that both politics and fiscal policy outcomes influence the level of transparency. More equal political competition and power sharing are associated with both greater levels of fiscal transparency and increases in fiscal transparency during the sample period. Political polarization and past fiscal conditions, in particular state government debt and budget imbalance, also appear to affect the level of transparency.
    JEL: D72 D78 H70
  17. By: Gebhard Kirchgässner; Silika Prohl
    Abstract: We examine whether Swiss federal fiscal policy was sustainable over the period from 1900 to 2002. We perform unit root and cointegration tests for federal revenues and expenditures, taking into account a structural shift in the budgetary process related to World War II. We find sustainability over the entire period. However, splitting the sample into two sub-samples before and after World War II, the results do much less support sustainability. Finally, applying the tax smoothing model of BARRO (1979), we show that cyclical fluctuations of the output and changes in expected inflation rate are major determinants of the federal budget deficit over the time period considered.
    Keywords: sustainability, budget deficit, cointegration, structural breaks
    JEL: H62 H63
    Date: 2006
  18. By: Cremer, Helmuth; Gahvari, Firouz; Pestieau, Pierre
    Abstract: This paper studies the design of pension schemes in a society where fertility is endogenous and parents differ in their ability to raise children. In a world with perfect information, a pay-as-you-go social security system is characterized by equal pensions for all but different contributions which may or may not increase with the number of children. Additionally, fertility must be subsidized at the margin to correct for the externality that accompanies fertility. In a world of asymmetric information, incentive-related distortions supplement the Pigouvian subsidy. These may either require an additional subsidy or an offsetting tax on fertility depending on whether the redistribution is towards people with more or less children. In the former case, pensions are decreasing in the number of children: in the latter case, they are increasing.
    Keywords: adverse selection; fertility; pensions
    JEL: H55 J13 J26
    Date: 2006–03
  19. By: Ingrid Ott (Institute of Economics, University of Lüneburg); Stephen J. Turnovsky (Department of Economics, University of Washington)
    Abstract: Many public goods are characterized by rivalry and/or excludability. This paper introduces both non-excludable and excludable public inputs into a simple endogenous growth model. We derive the equilibrium growth rate and design the optimal tax and user-cost structure. Our results emphasize the role of congestion in determining this optimal financing structure and the consequences this has in turn for the government’s budget. The latter consists of fee and tax revenues that are used to finance the entire public production input and that may or may not suffice to finance the entire public input, depending upon the degree of congestion. We extend the model to allow for monopoly pricing of the user fee by the government. Most of the analysis is conducted for general production functions consistent with endogenous growth, although the case of CES technology is also considered.
    Keywords: Excludable and Non-excludable Public Goods, Congestion, Growth
    JEL: H21 H40 O40
    Date: 2005–06
  20. By: Parry, Ian W.H. (Resources for the Future)
    Abstract: Energy models suggest that the cost of reducing carbon emissions from the transportation sector is high relative to other sectors, such as electricity generation. However, this paper shows that taxes to reduce passenger vehicle emissions produce large net benefits, rather than costs, when account is taken of: (a) their impact on reducing non-carbon externalities from passenger vehicle use, and (b) interactions with the broader fiscal system. Both of these considerations also strengthen the case for using a tax-based approach to reduce emissions over fuel economy regulation, while fiscal considerations strengthen the case for taxes over (non-auctioned) emissions permits.
    Keywords: carbon policies, passenger vehicles, externalities, welfare costs
    JEL: Q54 R48 H23
    Date: 2006–03–24
  21. By: Cremer, Helmuth; Lozachmeur, Jean-Marie; Pestieau, Pierre
    Abstract: Social insurance for the elderly is judged responsible for the widely observed trend towards early retirement. In a world of laissez-faire or in a first-best setting, there would be no such trend. However, when first-best instruments are not available, because health and productivity are not observable, the optimal social insurance policy may imply a distortion on the retirement decision. The main point we make is that while there is no doubt that retirement systems induce an excessive bias towards early in many countries, a complete elimination of this bias (i.e., a switch to an actuarially fair system) is not the right answer. This is so and for two reasons. First, some distortions are second-best optimal. This is the normative argument. Second, and on the positive side, the elimination of the bias might be problematic from a political perspective. Depending on the political process, it may either not be feasible or alternatively it may tend to undermine the political support for the pension system itself.
    Keywords: early retirement; majority voting; optimal income taxation; social security
    JEL: H21 H55 J26
    Date: 2006–03
  22. By: Cremer, Helmuth; Lozachmeur, Jean-Marie; Pestieau, Pierre
    Abstract: In many countries pension systems involve some form of earnings test; i.e., an individual’s benefits are reduced if he has labour income. This paper examines whether or not such earning tests emerge when pension system and income tax are optimally designed. We use a simple model with individuals differing both in productivity and their health status. The working life of an individual has two 'endings': an official retirement age at which he starts drawing pension benefits (while possibly supplementing them with some labour income) and an effective age of retirement at which professional activity is completely given up. Weekly work time is endogenous, but constant in the period before official retirement and again constant (but possibly at a different level), after official retirement. Earnings tests mean that earnings are subject to a higher tax after official retirement than before. We show under which conditions earnings tests emerge both under a linear and under a nonlinear tax scheme. In particular, we show that earning tests will occur if heterogeneities in health or productivity are more significant after official retirement than before.
    Keywords: earnings test; social security
    JEL: H21 H55 J26
    Date: 2006–03
  23. By: Assar Lindbeck; Marten Palme; Mats Persson
    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
  24. By: Klaas Staal (Zentrum für Europäische Integrationsforschung ZEI(b), Walter-Flex-Straße 3, 53113 Bonn, Germany and Econometric Institute, Erasmus University Rotterdam, the Netherlands.
    Abstract: In this paper I examine the incentives of regions to unite, to separate and to provide public goods. Separation allows for greater influence over the nature of political decision making while unification allows regions to exploit economies of scale in the provision of public goods. When public good provision is relatively inexpensive, separation occurs since individuals want to assert greater influence, while for intermediate costs of public good provision, separation can be explained by the desires for greater influence as well as for more public goods. Compared with the social optimum, there are excessive incentives for public good provision as well as excessive incentives for separation.
    Keywords: unification, separation, public good provision, voting
    JEL: D7 H2 H7
    Date: 2006–03
  25. By: Daniel Cardona; Fernando Sánchez-Losada
    Abstract: We analyze the effects of the unemployment benefit system on the economy. In particular, we focus on both the tax structure and the unemployment benefits composition. We show that if the unemployment benefit system is only paid by firms, then employment and production are maximized. Moreover, the way the government contemplates the unemployment benefit system, either as a redistributive or as an insurance institution, is crucial for the dynamics and the equilibria of the economy.
    Keywords: unemployment benefit system, payroll tax, wage tax.
    JEL: E24 E62 H53 J50 J65
    Date: 2004–12
  26. By: Assar Lindbeck; Mats Persson
    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
  27. By: John Creedy; Guyonne Kalb
    Abstract: The assumption behind discrete hours labour supply modelling is that utility-maximising individuals choose from a relatively small number of hours levels, rather than being able to vary hours worked continuously. Such models are becoming widely used in view of their substantial advantages, compared with a continuous hours approach, when estimating and their role in tax policy microsimulation. This paper provides an introduction to the basic analytics of discrete hours labour supply modelling. Special attention is given to model specification, maximum likelihood estimation and microsimulation of tax reforms. The analysis is at each stage illustrated by the use of numerical examples. At the end, an empirical example of a hypothetical policy change to the social security system is given to illustrate the role of discrete hours microsimulation in the analysis of tax and transfer policy changes.
    Keywords: discrete hours labour supply; taxation; microsimulation;maximum likelihood estimation.
    Date: 2005
  28. By: Marco Caliendo (DIW Berlin, IAB Nuremberg and IZA Bonn); Katharina Wrohlich (DIW Berlin and IZA Bonn)
    Abstract: Increasing work incentives for people with low incomes is a common topic in the policy debate across European countries. The "Mini-Job" reform in Germany - introduced on April 1, 2003 - can be seen in line with these policies, exempting labour income below a certain threshold from taxes and employees’ social security contributions. We carry out an ex-post evaluation to identify the short-run effects of this reform. Our identification strategy uses an exogenous variation in the interview months in the German Socio-Economic Panel, that allows us to distinguish groups that are (or are not) affected by the reform. To account for seasonal effects we additionally use a difference-in-differences strategy. The results show that the short-run effects of the reform are limited. We find no significant short-run effects for marginal employment. However, there is evidence that single men who are already employed react immediately and increase secondary job holding.
    Keywords: evaluation, natural experiment, difference-in-differences, marginal employment
    JEL: C25 H31 J68
    Date: 2006–03
  29. By: Ludger Woessmann
    Abstract: The paper provides a comparative analysis of the association between student achievement and public-private partnerships (PPPs) in schooling across countries. Student-level data from the PISA international achievement test provides information on the public-private character of both operation and funding of each tested school. Across countries, public operation is associated with lower student outcomes, but public funding with better student outcomes. Thus, systems of PPPs that combine private operation with public funding do best among all possible operation-funding combinations, while PPPs that combine public operation with private funding do worst. The advantage of private operation is particularly strong in countries with large shares of public funding.
    JEL: H42 H52 I20 L33
    Date: 2006
  30. By: Ingrid Ott (Institute of Economics, University of Lüneburg); Susanne Soretz (Department Growth and Distribution, University of Hanover)
    Abstract: We analyze within a dynamic model how rms decide on capital investment if the accompanying adjustment costs are a function of governmental activity. The government provides a public input and decides on the degree of rivalry. The productive public input enhances private capital productivity and reduces adjustment costs. We derive the equilibrium in which capital and investment ratio are both constant, carry out comparative dynamic analysis and discuss the model's policy implications. Increasing the amount of the public input unequivocally spurs capital investment whereas the result becomes ambiguous with respect to the impact of rivalry. Since a reduction in congestion increases the individually available amount of the public input, crowding out effects may lead to a reduction in the equilibrium capital stock. Most of the analysis is conducted for general production functions, although the case of CES technology is also considered.
    Keywords: Governmental activity, congested public inputs, adjustment costs
    JEL: D21 H40 H54 O16
    Date: 2006–03–13
  31. By: John Creedy
    Abstract: This paper uses an optimal tax framework to examine the effect on a measure of social welfare of an in-work payment, involving a discontinuity at an hours threshold. Social welfare is defined in terms of individuals’ utilities, which depend on leisure and net income. The in-work payment augments a modified minimum income guarantee having two tax rates. Numerical simulations, which ensure that a fixed amount of net revenue per person is collected by the government, show that social welfare falls systematically as the extent of the discontinuity increases, and as the hours threshold, at which the jump in net income occurs, increases. Eliminating the discontinuity resulting from the in-work payment therefore improves social welfare.
    Keywords: social welfare; in-work payment; hours threshold; labour supply
    JEL: H21 H31 H53
    Date: 2005
  32. By: Kirsanova, Tatiana; Satchi, Mathan; Vines, David; Wren-Lewis, Simon
    Abstract: This paper investigates the importance of fiscal policy in providing macroeconomic stabilisation in a monetary union. We use a microfounded New Keynesian model of a monetary union which incorporates persistence in inflation and non-Ricardian consumers, and derive optimal simple rules for fiscal authorities. We find that fiscal policy can play an important role in reacting to inflation and output, but that not much is lost if national fiscal policy is restricted to react only to national differences in inflation and output.
    Keywords: monetary union; optimal monetary policy and fiscal policies; simple rules
    JEL: E52 E61 E63 F41
    Date: 2006–03
  33. By: Andrea Colciago; Anton Muscatelli; Tiziano Ropele; Patrizio Tirelli
    Abstract: We assess the role of national fiscal policies, as automatic stabilizers, within a monetary union. We use a two-country New Keynesian DGE model which incorporates non-Ricardian consumers (as in Galì et al. 2004) and a home bias in the composition of national consumption bundles. We find that fiscal policies stabilize the aggregate economy but, in some cases, generate conflicting views among national policymakers. Finally, model determinacy requires that national fiscal feedbacks on debt accumulation be designed with reference to the debt dynamics of the entire monetary union. This is in sharp contrast with the "Brussels consensus" based on the view that the ECB alone should stabilize the union-wide economy and national fiscal policies should react to idiosyncratic shocks and to national debt levels.
    JEL: E58 E62 E63
    Date: 2006
  34. By: Broda, Christian; Limão, Nuno; Weinstein, David E
    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 favour of the optimal tariff argument.
    Keywords: GATT; international trade; optimal tariffs; trade policy; WTO
    JEL: F13 F14 H21
    Date: 2006–03
  35. By: Snowberg, Erik; Wolfers, Justin; Zitzewitz, Eric
    Abstract: Political economists interested in discerning the effects of election outcomes on the economy have been hampered by the problem that economic outcomes also influence elections. We sidestep these problems by analyzing movements in economic indicators caused by clearly exogenous changes in expectations about the likely winner during election day. Analyzing high frequency financial fluctuations on November 2 and 3 in 2004, we find that markets anticipated higher equity prices, interest rates and oil prices and a stronger dollar under a Bush presidency than under Kerry. A similar Republican-Democrat differential was also observed for the 2000 Bush-Gore contest. Prediction market based analyses of all Presidential elections since 1880 also reveal a similar pattern of partisan impacts, suggesting that electing a Republican President raises equity valuations by 2-3 percent, and that since Reagan, Republican Presidents have tended to raise bond yields.
    Keywords: elections; event study; partisan effects; political economy
    JEL: D72 E3 E6 G13 G14 H6
    Date: 2006–04
  36. By: Kari O. E. Alho
    Abstract: The paper aims to shed light on the relationships between labour market institutions with respect to wage formation and the effectiveness of economic and labour market policies in enhancing employment and overall economic performance. We evaluate tax and benefit policies under four alternative specifications of wage formation : fixed, market determined, and bargained wages. In the latter, we also distinguish between the short- and long-run effects, and between uncoordinated and coordinated (nation-wide) bargaining. To this end, we build a computable general equilibrium model which is calibrated using data on the Finnish economy and labour market, distinguishing workers of three skill categories by the level of their education. Evaluating policies under various possible labour market institutions, the paper also seeks relevance in a wider EU perspective. Overall, the model simulations show that labour market institutions with respect to wage formation influence to a large extent the effectiveness of many policies aiming at enhancing employment. When wages are allowed to react, policies expanding the demand for labour, which work well under fixed wages, turn out to be quite inefficient in the short run. The reverse emerges with supply side policies such as reducing benefits so that wage reactions reinforce the positive effects of these policies. The reduction of marginal taxes interacts with labour market institutions in quite a sensitive way. Under wage bargaining, tax reductions should be channelled to low-income earners, while the reverse holds under flexible wage formation. Policies directed at raising labour demand for a targeted group, typically the low skilled, are able, on the other hand, to lower unemployment amongst this group of workers also under coordinated wage bargaining. However, if the group concerned enters in a new wage bargaining round unilaterally, the effect of this policy can even be quite negative in terms of its impact on employment due to the rise of compensatory wage claims through the wage-wage links. We also consider a hypothetical, fully flexible labour market and find the extent of the widening of the wage distribution, but also the magnitude of clear economic gains, related to a low rate of unemployment reached through the assumed wage adjustment process. The most effective policy in terms of employment, labour supply and unemployment is the curtailment of social security benefits while out of work. Also a neutral policy of compensating the cut in unemployment benefits by a tax reduction leads, under bargaining, to an expansion in the economy. The results call for coordination in tax and benefit policy measures, so that incentives to work and to stay out of work are not created simultaneously
    Keywords: employment, tax and benefit policies, wage formation, CGE model
    JEL: J31 J32 H20
    Date: 2006–03–31
  37. By: Kirsanova, Tatiana; Vines, David; Wren-Lewis, Simon
    Abstract: We analyse the stability of countries within a monetary union in the face of asymmetric shocks, using a simple but widely applicable model. We show that members of the union may be subject to severe, and possibly unstable, cycles following asymmetric shocks if there is a significant backward looking element in inflation behaviour, and if real interest rates influence the level of aggregate demand. This cyclical instability can be mitigated if fiscal policy in each member country reacts to inflation differences, but it can be aggravated if fiscal feedback on debt is too strong.
    Keywords: macroeconomic stability; monetary and fiscal policies; monetary union
    JEL: E52 E61 E63 F41
    Date: 2006–03
  38. By: Camila F. S. Campos (Yale University); Dany Jaimovich (InterAmerican Development Bank); Ugo Panizza (InterAmerican Development Bank)
    Abstract: This paper shows that budget deficits account for a relatively small fraction of debt growth and that stock-flow reconciliation, which is often considered a residual entity, is one of the key determinants of debt dynamics. After having explained the importance of the stock-flow reconciliation, the paper shows that this residual entity can be partly explained by contingent liabilities and balance-sheet effects.
    Keywords: Public Debt; Deficit; Balance-Sheet Effects
    JEL: H63 F34 C82
    Date: 2006–03
  39. By: Cremer, Helmuth; Lozachmeur, Jean-Marie; Pestieau, Pierre
    Abstract: This paper studies the design of retirement and disability policies. It illustrates the often observed exit from the labour force of healthy workers through disability insurance schemes. Two types of individuals, disabled and leisure-prone ones, have the same disutility for labour and cannot be distinguished. However, they are not counted in the same way in social welfare. Benefits depend on retirement age and on the (reported) health status. We determine first- and second-best optimal benefit levels and retirement ages and focus on the distortions which may be induced in the individuals’ retirement decision. Then we introduce the possibility of testing which sorts out disabled workers from healthy but retirement-prone workers. We show that such testing can increase both social welfare and the rate of participation of elderly workers; in addition disabled workers are better taken care of. It is not optimal to test all applicants. Surprisingly, the (second-best) solution may imply later retirement for the disabled than for the leisure prone. In that case, the disabled are compensated by higher benefits.
    Keywords: disability; retirement; social security
    JEL: H55 I12 J26
    Date: 2006–03
  40. By: Alessandro Cigno; Annalisa Luporini
    Abstract: We examine the effects of differences in social capital on first and second best transfers to families with children, in an asymmetric information context where the number of births, and the future earning capacity of each child that is born, are random variables. The probability that a couple has children is conditional on the level of reproductive activity undertaken. The probability that a child will have high earning ability is positively conditioned not only by the level of educational investment undertaken by the child’s parents, but also by the social capital of the latter. The optimal policy includes two transfers, one conditional on number of births, the other on the children’s earning ability.
    Keywords: education, stochastic fertility, child benefits, pensions, scholarships, social capital, asymmetric information, multi-agency
    JEL: D13 D78 D82 H31 J13
    Date: 2006
  41. By: Ernesto Reuben; Frans van Winden
    Abstract: This is an experimental study of a three-player power-to-take game where a take authority is matched with two responders. The game consists of two stages. In the first stage, the take authority decides how much of the endowment of each responder that is left after the second stage will be transferred to the take authority (the so-called take rate). In the second stage, each responder can react by destroying any part of his or her own endowment. Two treatments are considered: one in which all players are ‘strangers’ to each other (random matching), and one in which the responders know each other from outside the lab and are more or less close ‘friends’ (whereas the take-authority is again randomly selected). We focus on how the intensity of ties between responders impacts the decisions, beliefs, and emotions of both the responders and the take-authority. Some of our findings are: (1) although take rates are about the same, friends destroy more than strangers when faced with high take rates; (2) coordination on the same destruction level is stronger among friends; (3) the high level of coordination among friends can be explained by their emotional reaction towards one another; (4) the difference between the actual and expected take rate is a much better predictor of experienced emotions and destruction than the difference between the actual and (what is considered as) the fair take rate.
    Keywords: reciprocity, social ties, emotions, expectations, experiment, friends, principal-agent relationship, appropriation, fairness
    JEL: A10 C72 C91 C92 H20 Z13
    Date: 2006
  42. By: Tomas Kögel (Dept of Economics, Loughborough University)
    Abstract: Recent demographic literature shows in Swedish micro-level data a positive effect of female wage income or female education on fertility. The literature explains this finding with Swedish family policies of high subsidies for bought-in child care and generous parental leave benefits that are calculated on the basis of a woman's prior wage income. Both policies would cause the substitution effect from an increase in female wages on fertility to be dominated by its income effect. This paper shows within an economic model that there are offsetting effects from Swedish family policy that cause the reduction in the magnitude of the substitution effect of female wages to be most likely rather small.
    Keywords: Fertility; family policy; gender equality.
    JEL: H31 H53 J13 J18
    Date: 2006–03
  43. By: Dominik Grafenhofer; Christian Jaag; Christian Keuschnigg; Mirela Keuschnigg
    Abstract: The paper develops an overlapping generations model with probabilistic aging of households. We define age as a set of personal attributes such as earnings potential, health and tastes that are characteristic of a person's position in the life-cycle. In assuming a limited number of different states of age, we separate the concepts of age and time since birth. Agents may retain their age characteristics for several periods before they move with a given probability to another state of age. Different generations that share the same age characteristics are aggregated analytically to a low number of age groups. The probabilistic aging model thus allows for a very parsimonious yet rather close approximation of demographic structure and life-cycle differences in earnings, wealth and consumption. Existing classes of overlapping generations models follow as special cases.
    Keywords: overlapping generations, aging, demographics, life-cycle earnings
    JEL: D58 D91 H55 J21
    Date: 2006
  44. By: Schabert, Andreas; van Wijnbergen, Sweder
    Abstract: Blanchard (2005) suggested that active interest rate policy might induce unstable dynamics in highly-indebted economies. We examine this in a dynamic general equilibrium model where Calvo-type price rigidities provide a rationale for inflation stabilization. Unstable dynamics can occur when the CB is aggressively raising the interest rate in response to higher expected inflation. The constraint on stabilizing interest rate policy is tighter the higher the primary deficit and the more open the economy is. If the government cannot borrow from abroad in its own currency, stability requires interest rate policy to be accommodating (passive). Inflation stabilization is nevertheless feasible if the CB uses an instrument not associated with default risk, e.g. money supply.
    Keywords: fiscal-monetary policy interactions; foreign debt; inflation targeting; policy implementation; sovereign default risk
    JEL: E52 E63 F41
    Date: 2006–03
  45. By: Lydia Mechtenberg; Roland Strausz
    Abstract: We analyze the two goals behind the European Bologna Process of increasing student mobility: enabling graduates to develop multi– cultural skills and increasing the quality of universities. We isolate three effects: 1) a competition effect that raises quality; 2) a free rider effect that lowers quality; 3) a composition effect that influences the relative strengths of the two previous effects. The effects lead to a trade–off between the two goals. Full mobility may be optimal, only when externalities are high. In this case, student mobility yields inef- ficiently high educational quality. For moderate externalities partial mobility is optimal and yields an inefficiently low quality of education.
    Keywords: Student mobility, Quality of higher education, Multi–cultural skills, Bologna Process
    JEL: D61 H77 I28
    Date: 2006–03
  46. By: Victor Matheson (Department of Economics, College of the Holy Cross); Robert Baade (Department of Economics and Business, Lake Forest College)
    Abstract: Hurricane Katrina devastated the city of New Orleans in late August 2005, and debates are now underway across the country concerning strategies for reconstructing the City. Both of New Orleans’s professional sports teams, the National Football League Saints and the National Basketball Association Hornets, left the city in the wake of the storm, and the question of what the city should provide in the way of financial accommodation to encourage them to return should be considered in devising a reconstruction plan. New Orleans has hosted a disproportionate share of mega-sports events in the United States given its size and demographics. An important question concerns whether these events have contributed enough to the New Orleans economy to justify reinvestment in infrastructure to restore New Orleans’s place as a leading host of professional sports and mega-events in the United States. This paper examines the economic impact of professional sports on the New Orleans economy and concludes that the redevelopment efforts of New Orleans are better directed at first providing infrastructure that will encourage the return of its middle class citizenry and the restoration of its culture. Playing host to professional sports and mega-events does have symbolic significance, but it is arguable that the city cannot afford to invite guests until it has the means to accommodate them.
    Keywords: sports, public finance, economic impact, New Orleans, Hurricane Katrina
    JEL: H25 H71 H40 L83 Q54
    Date: 2006–03
  47. By: Sonja Peterson
    Abstract: The European Emissions Trading Scheme for CO2 established in 2005 is the world's largest emissions trading scheme. Since it covers only some sectors of the European economies it can nevertheless not ensure that the Kyoto targets are reached at minimal cost. This paper first analyzes the conditions for cost efficiency in the current separated carbon markets accounting also for the possibilities of purchasing international carbon credits from outside the EU. A computable general equilibrium model is then used to assess the cost efficiency of current EU climate strategies. Finally, based both on the theoretical as well as the quantitative analysis, recommendations are derived for a better allocation of the reduction burden between the sectors participating in emissions trading, those that do not participate and international carbon purchases.
    Keywords: emissions trading, allocation, efficiency, separated markets
    JEL: H21 D61 Q48 D58
    Date: 2006–03
  48. By: Günther Rehme (Darmstadt University of Technology, Department of Economics)
    Abstract: In this paper education simultaneously affects growth and income inequality. More education does not necessarily decrease inequality when the latter is assessed by the Lorenz dominance criterion. Increases in education first increase and then decrease growth as well as income inequality, when measured by the Gini coefficient. There is no clear functional relationship between growth and measured income inequality. The model identifies regimes of this relationship which depend crucially on the production and schooling technology. Conventional growth regressions with human capital and inequality as regressors may miss the richness of the underlying nonlinearities, but viewed as approximations may still provide important information on the nonlinear relationship between growth and education.
    Keywords: Education, Growth, Inequality, Policy
    JEL: O4 I2 D31 H2
    Date: 2006–03

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