nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒04‒29
34 papers chosen by
Peren Arin
Massey University

  1. Public ownership, privatisation and regulation: social welfare counterfactuals for British Telecom By Massimo Florio; Riccardo Puglisi
  2. Dual Governance in State-Owned Banks By Rodolfo Apreda
  3. Endogenous Public Signals and Coordination By Stephen Morris; Hyun Song Shin
  4. Optimal Provision of Multiple Excludable Public Goods By Hanming Fang; Peter Norman
  5. Overcoming Participation Constraints By Hanming Fang; Peter Norman
  6. The industrial organisation of economic policy preparation in the Netherlands By Butter, Frank A.G. den
  7. Human Capital and Political Business Cycles By Akhmedov Akhmed
  8. Cooperation, Stability and Self-Enforcement in International Environmental Agreements: A Conceptual Discussion By Henry Tulkens; Parkash Chander
  9. Does Envy Destroy Social Fundamentals? The Impact of Relative Income Position on Social Capital By Benno Torgler; Justina A.V. Fischer
  10. Taxing Tourism in Spain: Results and Recommendations By Xavier Labandeira; Alberto Gago; Fidel Picos; Miguel Rodríguez
  11. Endogenous Technology and Tradable Emission Quotas By Michael Hoel; Rolf Golombek
  12. Taxation with representation: intergovernmental grants in a plebiscite democracy By Byron F. Lutz
  13. Fiscal multipliers and policy coordination By Gauti B. Eggertsson
  14. Public Good Spillover and Location of Firms By Nelly Exbrayat; Stéphane Riou
  15. Debt and Taxes: Evidence from bank-financed unlisted firms By Bartholdy, Jan; Mateus, Cesário
  16. Limits to Policy Reversal: Privatization in India By Siddhartha G. Dastidar; Raymound Fisman; Tarun Khanna
  17. The Reform of the Fiscal Institutions in Latin America By Eduardo A. Lora; Mauricio Cardenas
  18. Forecasting Long-Term Government Bond Yields: An Application of Statistical and AI Models By Marco Castellani; Emanuel Santos
  19. Excess burden and the cost of inefficiency in public services provision By António Afonso; Vítor Gaspar
  20. What Trickled Down? Federalism, State Government Fiscal Stress, and Local Government Outcomes By Swenson, David A.
  21. Keeping in Touch: A Benefit of Public Holidays By Joachim Merz; Lars Osberg
  22. Reform Redux: Measurement, Determinants and Reversals By Nauro F. Campos; Roman Horváth
  23. Economic integration and redistribuitive taxation By Haufler, Andreas; Klemm, Alexander; Schejederup, Guttorm
  24. The Fox News Effect: Media Bias and Voting By Stefano DellaVigna; Ethan Kaplan
  25. Political institutions, inequality, and agricultural growth : the public expenditure connection By Lopez, Ramon; Lederman, Daniel; Allcott, Hunt
  26. On Monopoly Power and Ramsey Taxation By Selim, Sheikh Tareq
  27. Regulation and Taxation of Casinos under State-Monopoly, Private Monopoly and Casino Association Regimes By Hasret Benar; Glenn P. Jenkins
  28. The Economics of Casino Taxation By Hasret Benar; Glenn P. Jenkins
  29. Informal but not Insignificant: Unregistered Workers in North Cyprus By Mustafa Besim; Glenn P. Jenkins
  30. IS THE VALUE ADDED TAX NATURALLY PROGRESSIVE? By Glenn P. Jenkins; Hatice Jenkins; Chun-Yan Kuo
  31. Evaluating the Relative Impact of Fiscal Incentives and Trade Policies on the Returns to Manufacturing in Taiwan 1955-1995 By Glenn P. Jenkins; Chun-Yan Kuo
  32. Social Security Reform in the US: Lessons from Hungary By András Simonovits
  33. Age Bias in Fiscal Policy: Why Does the Political Process Favor the Elderly? By Sita Nataraj Slavov
  34. Public versus Private Provision of Public Goods By Sita Nataraj Slavov

  1. By: Massimo Florio (University of Milan); Riccardo Puglisi (Department of Political Science, Massachusetts Institute of Technology)
    Abstract: Is privatization per se socially beneficial? Or do those benefits depend on the subsequent changes in the regulatory regime? In this paper, building on Vogelsang, Jones and Tandon (1994), we answer these questions by analyzing three different counterfactuals about British Telecom privatization and regulation. In the factual scenario, the British government decided to privatize British Telecom, and at the same time to establish an independent agency (OFTEL), which was to impose a price cap mechanism on BT services, in those market segments in which competition was unfeasible or limited. Our research strategy is to follow a simple ceteris paribus approach, and to change in each counterfactual only one aspect of the institutional setup. The analysis suggests that the change in ownership from public to private had negative welfare effects, under reasonable assumptions about the productive efficiency gains arising from it. Moreover, the paper studies the relationship between productive and allocative efficiency, by making hypotheses about the price changes induced by the new regulatory regime
    Keywords: privatization, regulation, British Telecom, welfare analysis,
    Date: 2006–01–25
  2. By: Rodolfo Apreda
    Abstract: State-owned enterprises set a clear example of a mixed governance, in which the public and private realms blend together to bring about a complex structure we are going to define as dual governance. This paper puts forth a new design of governance for state-owned banks. Firstly, the whole subject is framed within the transaction costs approach to financial intermediation. Next, we move on to the formal governance of state-owned banks. Afterwards, we focus on dual governance and expand on agency problems that arise from the fiduciary role, accountability, transparency, rent-seeking and soft-budget constraints. The paper's proposal hinges upon the subsidiarity portfolio, to which the state-owned bank should manage as a trustee only, so that dual governance could be enhanced. We conclude bringing forth a minimal set of dual governance principles.
    Keywords: governance, public governance, dual governance, state-owned banks, subsidiarity.
    JEL: G34 G21 D23 D73 H20
    Date: 2006–04
  3. By: Stephen Morris; Hyun Song Shin
    Date: 2006–04–20
  4. By: Hanming Fang (Cowles Foundation, Yale University); Peter Norman (University of British Columbia)
    Abstract: This paper studies the optimal provision mechanism for multiple excludable public goods when agents' valuations are private information. For a parametric class of problems with binary valuations, we characterize the optimal mechanism, and show that it involves bundling. Bundling alleviates the free riding problem in large economies in two ways: first, it can increase the asymptotic provision probability of socially efficient public goods from zero to one; second, it decreases the extent of use exclusions.
    Keywords: Public Goods Provision, Bundling, Exclusion
    JEL: H41
    Date: 2003–10
  5. By: Hanming Fang (Cowles Foundation, Yale University); Peter Norman
    Abstract: This paper shows that linking a sufficiently large number of independent but unrelated social decisions can achieve approximate efficiency. We provide regularity conditions under which a Groves mechanism amended with a veto game implements an efficient outcome with probability arbitrarily close to one, and satisfies interim participation, incentive and resource constraints.
    Keywords: Linking, Participation Constraints, Groves Mechanisms, Veto Power
    JEL: D61 D82 H41
    Date: 2005–05
  6. By: Butter, Frank A.G. den (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics)
    Abstract: In the institutional set-up of (economic) policy preparation in the Netherlands there is ample interaction between scientific insights and policy proposals. This Dutch polder model lays much emphasis on the social dialogue to come to an agreement on, and have public support for policy proposals. It was very much the idea of Jan Tinbergen winner of the first Nobel price in economics to have a clear separation in policy preparation between (i) trying to reach consensus on the working of the economy, as formalised in econometric models; (ii) come to a compromise on policy goals between the various minority parties of the government; and (iii) rely on independent and undisputed data collection by an autonomous Central Bureau of Statistics (CBS). The aim of this separation of responsibilities is to guarantee, as much as possible, the scientific quality of policy preparation and at the same time to gain public support for policy measures so that implementation costs are kept low. This paper discusses the working of this institutional set-up, its historical background and the mechanisms of quality control and reputation which are essential for the interaction between scientific knowledge and policy preparation to remain fruitful.
    Keywords: Economic policy; Polder model; Social dialogue; Interaction between science and policy
    JEL: E61 E66 H11
    Date: 2006
  7. By: Akhmedov Akhmed
    Abstract: Classical theory considers political business cycle as a result of either opportunistic behavior of government (opportunistic cycle) or aiming policy on certain constituency (partisan cycle). In this paper, we propose an alternative explanation of the phenomenon of political business cycle — experience of government. We propose an illustration that shows that elections infer cycles without any opportunism or ideology of incumbents. We also build a model with endogenous ego-rent. The model explains a channel to increase incentives, when none has commitment — governors need to develop skills to increase their value for public and increase probability to get re-elected. Using fiscal monthly data of Russian regions from 1996 to 2004, we got evidence both of positive effect of experience on performance and opportunistic component of the cycle. We also got evidence of diminishing return on experience.
    Keywords: Russia, elections, opportunistic business cycle, experience, sunk cost, Russian regions
    JEL: D72 E32 H72 P16
    Date: 2006–04–26
  8. By: Henry Tulkens (Center for operations research and econometrics (CORE)); Parkash Chander (National University of Singapore)
    Abstract: In essence, any international environmental agreement (IEA) implies cooperation of a form or another. The paper seeks for logical foundations of this. It first deals with how the need for cooperation derives from the public good aspect of the externalities involved, as well as with where the source of cooperation lies in cooperative game theory. In either case, the quest for efficiency is claimed to be at the root of cooperation. Next, cooperation is considered from the point of view of stability. After recalling the two competing concepts of stability in use in the IEA literature, new insights on the nature of the gamma core in general are given as well as of the Chander-Tulkens solution within the gamma core. Free riding is also evaluated in relation with the alternative forms of stability under scrutiny. Finally, it is asked whether with the often mentioned virtue of “self enforcement” any conceptual gain is achieved, different from what is meant by efficiency and stability. A skeptical answer is offered, as a reply to Barrett’s (2003) attempt at giving the notion a specific content.
    Keywords: International Environmental Agreements, Cooperation, Stability, Self-enforcement
    JEL: C6 C7 C71 D62 H23 Q58
    Date: 2006–02
  9. By: Benno Torgler (Yale Center for International and Area Studies); Justina A.V. Fischer (Swiss Institute for International Economics and Applied Economic Research (SIAW))
    Abstract: Research evidence on the impact of relative income position on individual attitudes and behaviour is sorely lacking. Therefore, this paper assesses such positional impact on social capital by applying 14 different measurements to International Social Survey Programme data from 25 countries. We find support for a positional concern effect or ‘envy’ whose magnitude in several cases is quite substantial. The results indicate that such an effect is non-linear. In addition, we find an indication that absolute income level is also relevant. Lastly, changing the reference group (regional versus national) produces no significant differences in the results.
    Keywords: Relative Income Position, Envy, Positional Concerns, Social Capital, Social Norms, Happiness
    JEL: Z13 H26 I31 D00 D60
    Date: 2006–02
  10. By: Xavier Labandeira (University of Vigo); Alberto Gago (University of Vigo); Fidel Picos (University of Vigo); Miguel Rodríguez (University of Vigo)
    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: Taxes, Tourism, Environment, Spain
    JEL: H22 L83 Q28
    Date: 2006–02
  11. By: Michael Hoel (University of Oslo); Rolf Golombek (Frisch Centre)
    Abstract: We study an international climate agreement that assigns emission quotas to each participating country. Unlike the simplest models in the literature, we assume that abatement costs are affected by R&D activities undertaken in all firms in all countries, i.e. abatement technologies are endogenous. In line with the Kyoto agreement we assume that the international climate agreement does not include R&D policies. We show that for a second-best agreement, marginal costs of abatement should exceed the Pigovian level. Moreover, marginal costs of abatement differ across countries in the second-best quota agreement with heterogeneous countries. In other words, the second-best outcome cannot be achieved if emission quotas are tradable.
    Keywords: Climate Policy, International Climate Agreements, Emission Quotas, Technology Spillovers
    JEL: H23 O30 Q20 Q25 Q28
    Date: 2006–03
  12. By: Byron F. Lutz
    Abstract: Economic theory predicts that unconditional intergovernmental grant income and private income are perfectly fungible. Despite this prediction, the literature on fiscal federalism documents that grant and private income are empirically non-equivalent. A large scale school finance reform in New Hampshire--the typical school district experienced a 200 percent increase in grant income--provides an unusually compelling test of the equivalence prediction. Most theoretical explanations for non-equivalence focus on mechanisms which produce public good provision levels which differ from the decisive voter's preferences. New Hampshire determines local public goods provision via a form of direct democracy--a setting which rules out these explanations. In contrast to the general support in the literature for non-equivalence, the empirical estimates in this paper suggest that approximately 92 cents per grant dollar are spent on tax reduction. These results not only document that equivalence holds in a setting with a strong presumption that public good provision decisions reflect the preferences of voters, but also directly confirm the prediction of the seminal work of Bradford and Oates (1971) that lump-sum grant income is equivalent to a tax reduction. In addition, the paper presents theoretical arguments that grant income capitalization and heterogeneity in the marginal propensity to spend on public goods may generate spurious rejections of the equivalence prediction. The heterogeneity argument is confirmed empirically. Specifically, the results indicate that lower income communities spend more of the grant income on education than wealthier communities, a finding interpreted as revealing that the Engel curve for education is concave.
    Keywords: Taxation
    Date: 2006
  13. By: Gauti B. Eggertsson
    Abstract: This paper addresses the effectiveness of fiscal policy at zero nominal interest rates. I analyze a stochastic general equilibrium model with sticky prices and rational expectations and assume that the government cannot commit to future policy. Real government spending increases demand by increasing public consumption. Deficit spending increases demand by generating inflation expectations. I derive fiscal spending multipliers that calculate how much output increases for each dollar of government spending (real or deficit). Under monetary and fiscal policy coordination, the real spending multiplier is 3.4 and the deficit spending multiplier is 3.8. However, when there is no policy coordination, that is, when the central bank is "goal independent," the real spending multiplier is unchanged but the deficit spending multiplier is zero. Coordination failure may explain why fiscal policy in Japan has been relatively less effective in recent years than during the Great Depression.
    Keywords: Fiscal policy ; Government spending policy ; Deficit financing ; Monetary policy
    Date: 2006
  14. By: Nelly Exbrayat (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - - [] - [Université Jean Monnet - Saint-Etienne] - []); Stéphane Riou (CREUSET (EA 3724) - Centre de Recherche Economique de l'Université de Saint Etienne - - [] - [Université Jean Monnet - Saint-Etienne] - [])
    Abstract: Impact of positive public good spillovers on international capital tax competition in a spatial economy with two countries imperfectly integrated and with different levels of productivity.
    Keywords: Localisation des entreprises; Economie internationale; Externalités;
    Date: 2006–03–13
  15. By: Bartholdy, Jan (Department of Business Studies); Mateus, Cesário (Department of Business Studies)
    Abstract: This paper analyzes the capital structure decision of non-listed bank-financed firms using a rich and unique new data set of Portuguese firms. These firms are rarely studied in capital structure contexts and differ from large listed firms in terms of agency and asymmetric information problems and funding sources. It is argued that the solution of agency and asymmetric information problems for large firms shows up on the balance sheet (as restrictions on debt) whereas for small firms these problems are solved by financial institutions and are therefore less apparent on the balance sheet. This makes it easier for small firms to exploit tax advantages of debt. The empirical analysis shows that debt tax shields and provisions for tax loss carry-forwards have an important impact on the capital structure of small firms. It is also found that the balance sheet variables used for large listed firms in different countries to model agency costs and asymmetric information do not work well for small non-listed firms. The only significant variables (besides tax variables) for small firms are bankruptcy (collateral) variables
    Keywords: Capital Structure; Debt; Marginal Tax Rate; Trade-off Theory;
    Date: 2006–04–19
  16. By: Siddhartha G. Dastidar; Raymound Fisman; Tarun Khanna
    Abstract: We examine the effect of regime change on privatization using the 2004 election surprise in India. In that election, the pro-reform BJP was un-expectedly defeated by a less reformist coalition. Government controlled companies that were being studied for complete privatization by the BJP dropped by 7.5 percent relative to private firms. By contrast, government controlled firms that were not being considered for privatization, or firms that had already been fully privatized firms, did not experience significant drop relative to private firms. Firms that the BJP had slated for definite future privatization experienced intermediate declines of approximately 3.5 percent. We interpret this as evidence consistent with investor belief of policy irreversibility in privatization, where reforms may reach a 'point of no return' beyond which future regimes have difficulty reversing those policies. Taking advantage of an 'intermediate' event where policies were expected to be more heavily influenced by the communist party, we still find evidence consistent with policy irreversibility.
    Date: 2006–03
  17. By: Eduardo A. Lora (Research Department, Inter-American Development Bank); Mauricio Cardenas (Fedesarrollo)
    Abstract: Fiscal deficits on average only 1.4% of GDP; debt coefficients on the decline; early debt repayments to the International Monetary Fund and massive repurchases of Brady bonds that 15 years ago were the last salvation for overly endebted governments. This doesn't look like Latin America, the region with the strongest tradition of macroeconomic instability in the world and the longest history of noncompliance with its public debt commitments. However, these are some of the fiscal events that have been occurring since the beginning of 2006, a particularly favorable time for the region (Available only in Spanish).
    Keywords: Fiscal institutions; budget institutions; decentralization; tax policy; Latin America.
    Date: 2006–04
  18. By: Marco Castellani; Emanuel Santos
    Abstract: This paper evaluates several artificial intelligence and classical algorithms on their ability of forecasting the monthly yield of the US 10-year Treasury bonds from a set of four economic indicators. Due to the complexity of the prediction problem, the task represents a challenging test for the algorithms under evaluation. At the same time, the study is of particular significance for the important and paradigmatic role played by the US market in the world economy. Four data-driven artificial intelligence approaches are considered, namely, a manually built fuzzy logic model, a machine learned fuzzy logic model, a self-organising map model and a multi-layer perceptron model. Their performance is compared with the performance of two classical approaches, namely, a statistical ARIMA model and an econometric error correction model. The algorithms are evaluated on a complete series of end-month US 10-year Treasury bonds yields and economic indicators from 1986:1 to 2004:12. In terms of prediction accuracy and reliability of the modelling procedure, the best results are obtained by the three parametric regression algorithms, namely the econometric, the statistical and the multi-layer perceptron model. Due to the sparseness of the learning data samples, the manual and the automatic fuzzy logic approaches fail to follow with adequate precision the range of variations of the US 10-year Treasury bonds. For similar reasons, the self-organising map model gives an unsatisfactory performance. Analysis of the results indicates that the econometric model has a slight edge over the statistical and the multi-layer perceptron models. This suggests that pure data-driven induction may not fully capture the complicated mechanisms ruling the changes in interest rates. Overall, the prediction accuracy of the best models is only marginally better than the prediction accuracy of a basic one-step lag predictor. This result highlights the difficulty of the modelling task and, in general, the difficulty of building reliable predictors for financial markets.
    Keywords: interest rates; forecasting; neural networks; fuzzy logic.
  19. By: António Afonso; Vítor Gaspar
    Abstract: In this paper we revisit the literature on the economic consequences from inefficiency in public services provision. Following Dupuit (1844) and Pigou (1947) we argue that it is important to take the financing side explicitly into account. The fact that public expenditure financing must rely on distortional taxation implies that both direct and indirect costs are relevant when estimating the economic impacts of inefficiency in public services provision. Using Hicks’ compensating variation (following Diamond and McFadden (1974) and Auerbach (1985)) we show that these magnification mechanisms are not only conceptually relevant, they are also important from a quantitative point of view. Specifically, we rely on a range of estimates of public sector efficiency (from Afonso, Schuknecht and Tanzi (2005, 2006)) to illustrate numerically that the relative importance of indirect costs of public sector provision inefficiency, linked to financing through distortional taxation increases with the magnitude of the inefficiency.
    Keywords: Government efficiency; excess burden; taxes; spending.
    JEL: D11 E62 H21 H50
  20. By: Swenson, David A.
    Abstract: Much has been written about a shift in federal to state relationships during the 1990s. Couched in terms of a renewed fiscal federalism, devolution, or even the heady rhetoric of “reinventing” government both resources and public service authority flowed to the state governments. Somewhat less was said at the time regarding state governments’ relationships with local governments or the extent of federal re-distributions of resources beyond state governments to local governments. This paper is an investigation of some of the federalism transformations that occurred in the past decade or so. In particular, it assesses the flow of resources and spending at all levels of government and sorts out which show changes in relationships.
    JEL: H0
    Date: 2006–04–24
  21. By: Joachim Merz (University of Lueneburg and IZA Bonn); Lars Osberg (Dalhousie University)
    Abstract: This paper argues that public holidays facilitate the co-ordination of leisure time but do not constrain the annual amount of leisure. Public holidays therefore have benefits both in the utility of leisure on holidays and (by enabling people to maintain social contacts more easily) in increasing the utility of leisure on normal weekdays and weekends. The paper uses the variation (13 to 17) in public holidays across German Länder and the German Time Use Survey of 2001-02 to show that public holidays have beneficial impacts on social life on normal weekdays and weekends. Since these benefits are additional to the other benefits of holidays, it suggests that there is a case to be made for more public holidays.
    Keywords: public holidays, social contacts, social leisure time, time allocation, time use diaries, German Time Budget Survey 2001/02
    JEL: J22 I31 Z13 H40
    Date: 2006–04
  22. By: Nauro F. Campos (Brunel University, CEPR, WDI and IZA Bonn); Roman Horváth (Czech National Bank and IES, Charles University, Prague)
    Abstract: We construct objective measures of privatization, internal and external liberalization reform efforts, across countries over time, and investigate their determinants, reversals and macroeconomic impacts. We find that GDP growth determines external liberalization and privatization, concentration of political power drives internal liberalization, and democracy underpins all three. We find that FDI inflows reduce the probability of privatization reversals, labour strikes increase that of internal liberalization reversals, and OECD growth increase that of external liberalization reversals. We replicate previous studies and find that the macroeconomic effects of reform (when measured objectively) tend to be larger and more precisely estimated.
    Keywords: reform, liberalization, privatization, political economy, transition
    JEL: E23 D72 H26 O17
    Date: 2006–04
  23. By: Haufler, Andreas; Klemm, Alexander; Schejederup, Guttorm
    Abstract: We set up a simple political economy model where economic integration raises the profitability of multinational firms. In this setting redistributive taxation may rise following economic integration, if the effects of the widened income gap dominate the higher excess burden of the tax.
    JEL: F23 H20
    Date: 2006–04
  24. By: Stefano DellaVigna; Ethan Kaplan
    Abstract: Does media bias affect voting? We address this question by looking at the entry of Fox News in cable markets and its impact on voting. Between October 1996 and November 2000, the conservative Fox News Channel was introduced in the cable programming of 20 percent of US towns. Fox News availability in 2000 appears to be largely idiosyncratic. Using a data set of voting data for 9,256 towns, we investigate if Republicans gained vote share in towns where Fox News entered the cable market by the year 2000. We find a significant effect of the introduction of Fox News on the vote share in Presidential elections between 1996 and 2000. Republicans gain 0.4 to 0.7 percentage points in the towns which broadcast Fox News. The results are robust to town-level controls, district and county fixed effects, and alternative specifications. We also find a significant effect of Fox News on Senate vote share and on voter turnout. Our estimates imply that Fox News convinced 3 to 8 percent of its viewers to vote Republican. We interpret the results in light of a simple model of voter learning about media bias and about politician quality. The Fox News effect could be a temporary learning effect for rational voters, or a permanent effect for voters subject to non-rational persuasion.
    JEL: J0 D0 H0
    Date: 2006–04
  25. By: Lopez, Ramon; Lederman, Daniel; Allcott, Hunt
    Abstract: This paper brings together the literatures on the political economy of public expenditures and the determinants of economic growth. Based on a new dataset of rural public expenditures in a panel of Latin American economies, the econometric evidence suggests that non-social subsidies reduce agricultural GDP. Furthermore, the evidence suggests that political and institutional factors as well as income inequality are determinants of the size and structure of rural public expenditures, through which they have large and significant effects on agricultural GDP.
    Keywords: Public Sector Expenditure Analysis & Management,Economic Theory & Research,Public Sector Economics & Finance,Political Economy,Pro-Poor Growth and Inequality
    Date: 2006–04–01
  26. By: Selim, Sheikh Tareq (Cardiff Business School)
    Abstract: This paper examines the equivalence of the two key results that dominate the discussion on Ramsey tax policy with imperfect competition. With imperfectly competitive intermediate goods market, the long run Ramsey policy is consistent with capital tax or subsidy, and this result is generally dominant if the government is permitted or not permitted to use any other subsidy, or if the government has access to consumption tax. This is an important extension of the two effect result due primarily to Guo & Lansing (1999). Access to consumption tax but no access to labor subsidy enables the government to reduce labor tax in monopoly sector to zero, but the two effect result for capital taxation remains unaltered. Qualifying Judd’s (1997) principle of optimal capital subsidy requires full confiscation of profits, or subsidizing capital income at a rate that may be larger than the first best subsidy rate. The strong motivation to tax capital assists in explaining the repeal of the Investment Tax Credit scheme in the US.
    Keywords: Optimal taxation; Monopoly power; Ramsey policy
    JEL: D42 E62 H21 H30
    Date: 2006–04
  27. By: Hasret Benar (Department of Economics, Eastern Mediterranean University); Glenn P. Jenkins (Department of Economics, Queen's University)
    Abstract: This paper considers alternative forms of regulation and taxation of the casino sector. The model considers the situation of a typical tourist destination country that is using casinos to attract and entertain foreign tourists. The objective is to invest in the sector efficiently while maximizing the amount of government revenue or profits accruing to the country. The regulator must determine how the price of gambling will be set, how many casinos will be allowed to enter the industry and the form and rates of taxation. Four alternative forms of regulation are considered: price regulation, state-owned monopoly, private monopoly and casino association regulation. Turnover taxes on the amount of funds gambled and also annual taxation of the fixed costs of the casinos are evaluated. Applications of the models are carried out for North Cyprus. The conclusion is that the economic efficiency costs and the revenue losses from the absence of effective regulation in these tourist destinations can be very substantial with welfare costs equal to the approximately 75 percent of the tax revenue generated by this sector. Furthermore it shows that while a tax on turnover can be efficient in the case of a competitive industry or a cartel association form of regulation, it will be distortunary if a private monopoly is controlling the sector. In contrast a tax on fixed costs will lead to an efficient result in the case of a competitive or private monopoly cases, but it will lead to allocate inefficiencies if the sector is regulated by a casino association that can only control the number of casino entering the sector.
    Keywords: Casino regulation, taxation, state-monopoly, welfare cost
    JEL: H21 H32
    Date: 2006–04
  28. By: Hasret Benar (Department of Economics, Eastern Mediterranean University); Glenn P. Jenkins (Department of Economics, Queen's University)
    Abstract: In this paper, a model of the costs of a casino is developed that focuses on the implications for economic welfare of different taxation schemes for casinos. The situation being considered is in a country where casinos cater exclusively to foreign tourists. The goal of the country is to determine the maximum amount of taxes that can be extracted from the activities of this sector under different systems of taxation. When the price of gambling is set by regulation above its competitive level, the economic losses created by excessive investment in the sector can be reduced by taxation. A turnover tax on the amount gambled can maximize both tax revenue and the economic welfare of the country. Due administrative constraints, a number of countries rely on the taxation of the casinos’ fixed assets or a combination of a turnover tax and a tax on fixed costs. The model is applied to the situation in North Cyprus. The annual economic efficiency loss from its poorly designed tax policies on casino gambling is estimated to be about 0.5 percent of GDP.
    Keywords: Casino, taxation, gambling, tourism, economic benefit
    JEL: H21 H32 H27
    Date: 2006–04
  29. By: Mustafa Besim (Department of Banking and Finance, Eastern Mediterranean University); Glenn P. Jenkins (Department of Economics, Queen's University)
    Abstract: The size of the informal labour force and its contribution to the national income of North Cyprus has been an issue of considerable controversy and political significance. Because of the relatively free movement of labour between Turkey and North Cyprus, a significant body of unregistered workers have accumulated in North Cyprus. The findings are that from 1996 to 2000 the informal employment is between 35 to 40 per cent of the total labour force. Because not all the informal sectors production is excluded from the official national income statistics, the understatement of the official statistics is estimated to be between 12 to 17 percent of GNP. The fiscal losses are estimated to be about 9 percent of total tax revenues and a loss of social security revenues is approximately 38 per cent of the total annual contributions.
    Keywords: Cyprus, informal sector, informal labour force, fiscal losses, unrecorded income, underground economy
    JEL: H26 H24
    Date: 2006–04
  30. By: Glenn P. Jenkins (Department of Economics, Queen's University); Hatice Jenkins (Department of Banking and Finance, Eastern Mediterranean University); Chun-Yan Kuo (John Deutsch Institute, Department of Economics, Queen’s University)
    Abstract: A broad based consumption tax, such as a value added tax, is generally considered to be a regressive tax. This conclusion, however, has not taken into account the fact that in developing countries the commodities on which poor households spend most of their income, even if they are included in the legal tax base, are administratively impractical to tax. This paper employs a rich data set on household incomes and expenditures for the Dominican Republic. The data set covers 2042 goods and services purchased by households of different income and consumption levels. It also contains information on the type of establishment from which the items were purchased. With this information we estimate the effective rate of tax that has been paid on each item purchased by households. These estimations include the effect of the different rates of the tax compliance across households with different expenditure levels. The results of the study show that the burden of the current VAT in the Dominican Republic is progressive over all the quintiles of household expenditure. Furthermore, if the base of the VAT is made comprehensive, the estimated incidence of the burden of the VAT is still progressive over all the quintiles household expenditure.
    Keywords: Value Added Tax, incidence, compliance
    JEL: H22 H26
    Date: 2006–04
  31. By: Glenn P. Jenkins (Department of Economics, Queen's University); Chun-Yan Kuo (John Deutsch Institute, Department of Economics, Queen’s University)
    Abstract: In this paper, an integrated cash flow model is developed to examine the relative impact of tax incentives, financial subsidies, and macroeconomic variables on the profitability of industrial investments. It allows for various variables to interact with each other. An application of the model is carried out for Taiwan, which implemented a variety of fiscal incentives over the past forty years. The principal policy conclusion is that trade and macroeconomic policies are much more important than income tax incentives or subsidized finance policies in determining the success of industrialization process. The effects of any of the fiscal incentives are found generally much smaller than those of the trade policies or the fundamental trends in macroeconomic variables such as the movement of the real exchange rate and the real wage rate.
    Keywords: tax incentives, export promotion, industrialization, real exchange rate, trade policy, Taiwan
    JEL: H25 F13 O12
    Date: 2006–04
  32. By: András Simonovits (Institute of Economics, Hungarian Academy of Sciences)
    Abstract: The partial privatization of the US Social Security system was clearly the top economic policy priority for the new Bush administration. While many famous economists, publicists and politicians support, others reject the partial privatization of the Social Security system. The international comparisons have been quite infrequent, concentrated on few countries (Chile, Great Britain and Sweden) and left out similar reforms introduced in similar situations, like in Hungary, Poland and other ex-communist countries. In this article I try to make up for this omission and outline the lessons from the Hungarian reform, started in 1998. The conclusion is simple: such a reform is possible but does not solve the problems of social security.
    Keywords: Social Security, Pensions, Prefunding of pensions, United States, Hungary
    JEL: H55 J26
    Date: 2006–04–24
  33. By: Sita Nataraj Slavov (Department of Economics, Occidental College)
    Abstract: Across countries, government expenditures tend to favor the elderly. This paper provides a political economy explanation for this phenomenon. I consider the classic problem of dividing a fixed payoff in an overlapping generations setting. Any share of the payoff can be given to any generation. Using a new solution concept for majority rule in dynamic settings (Bernheim and Nataraj, 2004), I demonstrate that policies favoring the old are easier to sustain politically than any other policies. This result appears across a broad class of majoritarian institutions and thus reflects general forces at work in the political process. Age bias arises because it is easy to induce the young to support policies favoring the elderly by promising them large rewards later in their lives. On the other hand, there is little flexibility to reward older generations in a similar manner. This asymmetry helps to generate broad political support for large public transfers to older individuals.
    Keywords: majority rule, overlapping generations, age bias, Condorcet winner, intergenerational transfers, Social Security
    JEL: D72 H55
    Date: 2001–11
  34. By: Sita Nataraj Slavov (Department of Economics, Occidental College)
    Abstract: It is well known that pure public goods are underprovided in static games with private, voluntary contributions. Public provision is usually modeled using a median voter framework, in which the public good is funded by a proportional income tax. This paper compares the private and public provision of public goods in dynamic settings. With private provision, it is possible to sustain cooperation and provide the public good efficiently. With public provision, dynamic majority-rule solutions exist even when taxes are not restricted to be proportional to income; thus, income redistribution can be chosen jointly with the level of the public good. At low discount factors, private provision tends to result in lower levels of the public good relative to public provision. As patience increases, however, public provision results in lower levels of the public good than private provision. This occurs because higher levels of income redistribution are sustainable under public provision. Such redistribution becomes increasingly feasible at higher discount factors, resulting in income subsidies for particular groups instead of higher levels of the public good. In contrast, under private provision, all groups are forced to settle for increases in the level of the public good. In terms of financing the public good, private provision tends to result in benefit taxation, with little variation in individual contribution rates. Public provision allows a wider range of tax rates, although there is a tendency towards benefit taxation when preferences vary and progressive taxation when incomes vary.
    Keywords: majority rule, Condorcet winner, public goods, voluntary donations, dynamic games
    JEL: H41 D72 C72
    Date: 2006–03

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