nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒05‒13
forty-one papers chosen by
Peren Arin
Massey University

  1. Redistribution by Insurance Market Regulation: Analyzing a Ban on Gender-Based Retirement Annuities By Amy Finkelstein; James Poterba; Casey Rothschild
  2. The Effects of Privatization on Efficiency : How Does Privatization Work? By Çaðla Ökten
  3. Intermediaries and Corruption By Cagla Okten Hasker; Kevin Hasker
  4. The value of flexible contracts; evidence from an italian panel of industrial firms By cipollone piero; Anita Guelfi
  5. Dynamic of economic referentials of public action: participation of actors in definition of collective choice (electric and water public utilities case study) (In French) By Anne ISLA (LEREPS-GRES)
  6. Scenarios, probability and possible futures By Minh Ha-Duong
  7. The Importance of Habit Formation for Environmental Taxation By Löfgren, Åsa; Nordblom, Katarina
  8. The Complex Attitudes to Alcohol Taxation By Nordblom, Katarina
  9. Do Politicians Free-ride? - an empirical test of the common pool model By Tyrefors, Björn
  10. Demand for Environmental Quality: An Empirical Analysis of Consumer Behavior in Sweden By Ghalwash, Tarek
  11. Daughters and Left-Wing Voting By Andrew J. Oswald; Nattavudh Powdthavee
  12. Mutual Monitoring in Teams: Theory and Experimental Evidence on the Importance of Reciprocity By Jeffrey Carpenter; Samuel Bowles; Herbert Gintis
  13. Friendship in a Public Good Experiment By Marco Haan; Peter Kooreman; Tineke Riemersma
  14. Deregulating Job Placement in Europe: A Microeconometric Evaluation of an Innovative Voucher Scheme in Germany By Henrik Winterhager; Anja Heinze; Alexander Spermann
  15. The Impact of Brazil’s Tax-Benefit System on Inequality and Poverty By Herwig Immervoll; Horacio Levy; José Ricardo Nogueira; Cathal O’Donoghue; Rozane Bezerra de Siqueira
  16. Public Preschool and Maternal Labor Supply: Evidence from the Introduction of Kindergartens into American Public Schools By Elizabeth Cascio
  17. Trade Liberalization with Heterogenous Firms By Richard E. Baldwin; Rikard Forslid
  18. Pay, Reference Points, and Police Performance By Alexandre Mas
  19. Intergenerational Risksharing and Equilibrium Asset Prices By John Y. Campbell; Yves Nosbusch
  20. Buy, Lobby or Sue: Interest Groups' Participation in Policy Making - A Selective Survey By Pablo T. Spiller; Sanny Liao
  21. Cities in Canadian Federalism By Enid Slack
  22. The Institutional Determinants of Early Retirement in Europe By Justina A.V. Fischer; Alfonso Sousa-Poza
  23. Sequencing fiscal decentralization By Martinez-Vazquez, Jorge; Bahl, Roy
  24. Evaluating Gains from Mergers in a Non-Parametric Public Good Model of Police Services. By Richard Simper; Tom Weyman-Jones
  25. Some policy proposals for future infrastructure investment in South Africa By Johan Fourie
  26. Keeping in Touch - A Benefit of Public Holidays By Joachim Merz; Lars Osberg
  27. Measuring Bipolarization, Inequality, Welfare and Poverty By Juan Gabriel Rodríguez
  28. How Can Renewable Portfolio Standards Lower Electricity Prices? By Fischer, Carolyn
  29. How Should Heavy-Duty Trucks Be Taxed? By Parry, Ian W.H.
  30. Should the Samuelson Rule Be Modified to Account for the Marginal Cost of Public Funds? By Dan Usher
  31. Bilateral Commitment By Sophie Bade; Guillaume Haeringer; Ludovic Renou
  32. Corporate Tax Evasion and Extortionist Governments By Ralph-C Bayer; Julia Kupzowa
  33. Tax Compliance and Firms' Strategic Interdependence By Ralph-C Bayer; Frank Cowell
  34. Raising Urban Productivity or Attracting People? Different Causes, Different Consequences By Stefano Magrini; Paul Cheshire
  35. The debates on Rignano's inheritance tax proposal. By Guido Erreygers; Giovanni Di Bartolomeo
  36. Emigration and Regime Stability: Explaining the Persistence of Cuban Socialism By Bert Hoffmann
  37. Decentralisation and Poverty Reduction: A Conceptual Framework for the Economic Impact By Susan Steiner
  38. Contingent Valuation of Mortality Risk Reduction in Developing Countries: A Mission Impossible? By Minhaj Mahmud
  39. Do Very High Tax Rates Induce Bunching? Implications for the Design of Income-Contingent Loan Schemes By Bruce Chapman; Andrew Leigh
  40. Increasing Returns to Education: Theory and Evidence By Alison Booth; Melvyn Coles; Xiaodong Gong
  41. Family Taxation: An Unfair and Inefficient System By Patricia Apps

  1. By: Amy Finkelstein; James Poterba; Casey Rothschild
    Abstract: This paper shows how models of insurance markets with asymmetric information can be calibrated and solved to yield quantitative estimates of the consequences of government regulation. We estimate the impact of restricting gender-based pricing in the United Kingdom retirement annuity market, a market in which individuals are required to annuitize tax-preferred retirement savings but are allowed considerable choice over the annuity contract they purchase. After calibrating a lifecycle utility model and estimating a model of annuitant mortality that allows for unobserved heterogeneity, we solve for the range of equilibrium contract structures with and without gender-based pricing. Eliminating gender-based pricing is generally thought to redistribute resources from men to women, since women have longer life expectancies. We find that allowing insurers to offer a menu of contracts may reduce the amount of redistribution from men to women associated with gender-blind pricing requirements to half the level that would occur if insurers were required to sell a single pre-specified policy. The latter "one policy" scenario corresponds loosely to settings in which governments provide compulsory annuities as part of their Social Security program. Our findings suggest that recognizing the endogenous structure of insurance contracts is important for analyzing the economic effects of insurance market regulations. More generally, our results suggest that theoretical models of insurance market equilibrium can be used for quantitative policy analysis, not simply to derive qualitative findings.
    JEL: D82 H55 L51
    Date: 2006–05
  2. By: Çaðla Ökten
    Date: 2005
  3. By: Cagla Okten Hasker; Kevin Hasker
    Date: 2005
  4. By: cipollone piero (Bank of Italy , research department); Anita Guelfi (confindustria, research department)
    Abstract: Since the mid-1980s fixed-term contracts have been used in many European countries to reduce firing costs. As this strategy may have led to segmented labour markets, recent policy interventions have enhanced permanent jobs by cutting their labour costs. Efficient design of these policies requires knowledge of the costs associated with employment protection legislation. In this paper we evaluate these costs by measuring firms’ willingness to trade fixed-term for open-ended contracts in exchange for a cut in the labour cost of permanent jobs. Our results are based on a panel of Italian firms in the engineering sector whose labour costs were reduced by a tax credit granted to firms hiring workers on open-ended rather than fixed-term contracts. The trade-off is identified by comparing how the composition of recruitment by type of contract changed for firms that received the tax credit and those that did not. Potential distortions due to self-selection into the programme, firm-specific timevarying shocks or mechanical correlation induced by the selection rule into the programme, are accounted for by estimating the spurious effect of the tax credit in the years when it was not in force. Estimation is carried out in both a parametric and non-parametric setting that uses p-score to control for different probabilities of receiving the tax credit. We found that firms value the possibility of hiring one per cent new workers on a fixed-term contract as much as a cut in the labour cost of an open-ended worker in the range of 1.3-2.8 per cent. This result helps to explain recent employment growth in Italy, where the share of fixed-term contracts among new hires grew from 34 to 42 per cent between 1995 and 2003. Using our most conservative results, we evaluate that the labour cost reduction associated with this expansion amounted to anything between 10.4 and 22.4 per cent. Given the elasticity of employment to wages, the advent of flexibility in the Italian labour market can account for a large share, between 37 and 80 per cent, of employment growth in the private sector.
    Keywords: tax credit, open-end contracts, fixed-term contracts, firing costs
    JEL: D78 H25 J23 J38
    Date: 2006–03
  5. By: Anne ISLA (LEREPS-GRES)
    Abstract: This paper discusses the economic referentials which underlie public intervention. First part presents our institutional approach. This one goes away from works based on rules as constraints or contracts between individualities. Our approach is based on rules as relations between actors which are part of social environment. Second part presents a tipology of economic referentials of public action and the principles of one\'s dynamic. Next, we propose a contextualisation using the electric and water public utilities case study.
    Keywords: public action, public utilities, general interest, participation, economic referentials, institution, institutional dynamic
    JEL: B52 H11 H41 K23 L94 L95 L97 Q25
    Date: 2006
  6. By: Minh Ha-Duong (CIRED - Centre International de Recherche sur l'Environnement et le Développement - - [CNRS : UMR8568] - [] - [Ecole des Hautes Etudes en Sciences Sociales][Ecole Nationale du Génie Rural des Eaux et des Forêts][Ecole Nationale des Ponts et Chaussées])
    Abstract: This paper provides an introduction to the mathematical theory of possibility, and examines how this tool can contribute to the analysis of far distant futures. The degree of mathematical possibility of a future is a number between O and 1. It quantifies the extend to which a future event is implausible or surprising, without implying that it has to happen somehow. Intuitively, a degree of possibility can be seen as the upper bound of a range of admissible probability levels which goes all the way down to zero. Thus, the proposition `The possibility of X is Pi(X) can be read as `The probability of X is not greater than Pi(X).<br /><br />Possibility levels offers a measure to quantify the degree of unlikelihood of far distant futures. It offers an alternative between forecasts and scenarios, which are both problematic. Long range planning using forecasts with precise probabilities is problematic because it tends to suggests a false degree of precision. Using scenarios without any quantified uncertainty levels is problematic because it may lead to unjustified attention to the extreme scenarios.<br /><br />This paper further deals with the question of extreme cases. It examines how experts should build a set of two to four well contrasted and precisely described futures that summarizes in a simple way their knowledge. Like scenario makers, these experts face multiple objectives: they have to anchor their analysis in credible expertise; depict though-provoking possible futures; but not so provocative as to be dismissed out-of-hand. The first objective can be achieved by describing a future of possibility level 1. The second and third objective, however, balance each other. We find that a satisfying balance can be achieved by selecting extreme cases that do not rule out equiprobability. For example, if there are three cases, the possibility level of extremes should be about 1/3.
    Keywords: Futures, futurible, scenarios, possibility, imprecise probabilities, uncertainty, fuzzy logic
    Date: 2006–04–27
  7. By: Löfgren, Åsa (Department of Economics, School of Business, Economics and Law, Göteborg University); Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We analyze how habit formation affects optimal environmental taxation, when consumption of a habitual good causes a negative external effect on the environment. In a simple two-period model, we show that optimal taxation is still Pigouvian, where tax rates equal marginal damage in each period. However, the magnitudes of the tax rates are affected by habit formation. Using simulations we show that since consumption of the habitual good increases over time, so does the optimal tax rate, implying a higher tax rate in period two than in period one. The discrepancy increases in habitual strength. Given the development of the tax rates over time we discuss the welfare loss from imposing a secondbest environmental tax and its relation to habitual strength. Further, we analyze how optimal taxation changes if we relax the assumption of time-consistency. <p>
    Keywords: Optimal taxation; environment; habit formation; secondbest; myopia
    JEL: D62 D91 H21 H23
    Date: 2006–04–27
  8. By: Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: Alcoholic beverages are taxed at very different rates across the European Union, which implies extensive cross-border shopping. Therefore, there is an ongoing debate about harmonization of alcohol taxes among countries. Sweden, with a tradition of high alcohol taxes due to public health arguments, has the highest alcohol taxes in the EU. But, because of this, the occurrence and possible problems caused by cross-border shopping are also extensive. Using a questionnaire survey I analyze the attitudes of Swedes’ to alcohol taxation and find that these two sides of the coin are important determinants. Many respondents want to decrease the alcohol tax, while some even want to increase it. Those most reluctant to a tax cut are those who regard increased alcohol consumption as a worrying problem and those living in areas where many adults are treated for alcohol related diseases. However, those who support the EU membership are more likely to support a tax cut to harmonize the Swedish tax with those in other EU countries. Those who live in regions where privately imported alcohol is substantial are also more positive toward a tax cut. <p>
    Keywords: taxation; cross-border shopping; tax harmonization; attitudes
    JEL: F15 H20
    Date: 2006–05–05
  9. By: Tyrefors, Björn (Dept. of Economic Statistics, Stockholm School of Economics)
    Abstract: This paper uses a compulsory amalgamation reform of municipalities in Sweden to test for geographical opportunistic political behavior. The reform has favorable characteristics from an econometrical and causal point of view, since it was based on observables. The reform gives the local government incentives to increase borrowing before the amalgamation takes place, since the cost will be shared by all tax payers in the amalgam. The strength of the incentive to free ride will be determined by the population size, relative to the population size of the amalgam. The law of amalgamation was decided upon in 1969 and postulated that all amalgamations should be finalized by the beginning of 1974. We test if relative population size affects budget deficits in the years after the decision of the reform, but before the amalgamation takes place. We find a significant and sizeable free riding effect. The result is robust to various specifications and tests and corresponds to a common pool type of behavior as in Weingast, Shepsle and Johnsen (1981).
    Keywords: common pool; selection on observables; amalgamations
    JEL: D72 E62 H72 H74
    Date: 2006–04–26
  10. By: Ghalwash, Tarek (Department of Economics, Umeå University)
    Abstract: In this paper we estimate the income elasticity of demand for recreational services and <p> other traditional groups of goods in Sweden and test for potential changes in such <p> estimates over the twentieth century. Due to the difficulty of directly observing the <p> demand for recreational services, we employ an indirect methodology by using the <p> demand for some outdoor goods as a proxy for the demand for recreational services. In <p> line with most prior research, our results confirm the expectation that recreational <p> services, as a public good, is a luxury good in Sweden. Our results also show that the <p> income elasticities for traditional goods are stable over time, indicating that consumer <p> preferences for expenditure on these specific commodities do not change over time.
    Keywords: Household demand; environmental services; income elasticities; Engel curves
    JEL: D12 H41 Q26
    Date: 2006–05–05
  11. By: Andrew J. Oswald (University of Warwick and IZA Bonn); Nattavudh Powdthavee (University of London)
    Abstract: This paper provides evidence that daughters make people more left-wing. Having sons, by contrast, makes them more right-wing. Parents, politicians and voters are probably not aware of this phenomenon - nor are social scientists. The paper discusses its economic and evolutionary roots. It also speculates on where research might lead. The paper ends with a conjecture: left-wing individuals are people who come from families into which, over recent past generations, many females have been born.
    Keywords: voting, gender, daughters, political preferences, attitudes
    JEL: D1 D72 H1 J7
    Date: 2006–04
  12. By: Jeffrey Carpenter (Middlebury College and IZA Bonn); Samuel Bowles (Santa Fe Institute and University of Siena); Herbert Gintis (Central European University and Santa Fe Institute)
    Abstract: Monitoring by peers is often an effective means of attenuating incentive problems. Most explanations of the efficacy of mutual monitoring rely either on small group size or on a version of the Folk theorem with repeated interactions which requires reasonably accurate public information concerning the behavior of each player. We provide a model of team production in which the effectiveness of mutual monitoring depends not on these factors, but rather on strong reciprocity: the willingness of some team members to engage in the costly punishment of shirkers. This alternative does not require small group size or public signals. An experimental public goods game provides evidence for the behavioral relevance of strong reciprocity in teams.
    Keywords: team production, public good, monitoring, punishment, experiment
    JEL: C92 H41 J41 J54 Z13
    Date: 2006–04
  13. By: Marco Haan (University of Groningen); Peter Kooreman (University of Groningen and IZA Bonn); Tineke Riemersma (University of Groningen)
    Abstract: We conduct a public good experiment with high school teenagers. Some groups exclusively consist of students that we know to be friends. Other groups exclusively consist of students that we know not to be friends, and that are mere classmates. We find that ‘friends’ contribute more to the public good than ‘classmates’ do. Contributions of ‘classmates’ sharply decrease in the last round, in line with the literature on public good experiments. However, contributions of ‘friends’ sharply increase in the last round.
    Keywords: experimental economics, public goods, friendship
    JEL: C91 C92 H41
    Date: 2006–04
  14. By: Henrik Winterhager (ZEW Mannheim); Anja Heinze (ZEW Mannheim); Alexander Spermann (ZEW Mannheim, University of Freiburg and IZA Bonn)
    Abstract: Job placement vouchers can be regarded as a tool to spur competition between public and private job placement activities. The German government launched this instrument in order to end the public placement monopoly and to subsidize its private competitors. We exploit very rich administrative data provided for the first time by the Federal Employment Agency and apply propensity score matching as a method to solve the fundamental evaluation problem and to estimate the effect of the vouchers. We find positive treatment effects on the employment probability after one year of 6.5 percentage points in Western Germany and give a measure for deadweight loss.
    Keywords: job placement, Active Labor Market Policy, matching
    JEL: J68 H25
    Date: 2006–04
  15. By: Herwig Immervoll (ISER, University of Essex and IZA Bonn); Horacio Levy (ISER, University of Essex); José Ricardo Nogueira (Universidade Federal de Pernambuco, Recife); Cathal O’Donoghue (National University of Ireland, Galway and IZA Bonn); Rozane Bezerra de Siqueira (Universidade Federal de Pernambuco, Recife)
    Abstract: The Brazilian government raises taxes amounting to 35% of GDP and spends more than two thirds of this on social programmes. These shares are in pair with the OECD averages and well in excess of Latin America averages. However, while tax-benefit systems in most OECD countries reduce income disparities very significantly, the Brazilian government has been much less successful in alleviating inequality and poverty. Focussing on taxes and cash transfers, this paper investigates the impact of the government budget on the income distribution in Brazil, and evaluates its efficiency and effectiveness in reducing inequality and poverty. We present BRAHMS, a new tax-benefit microsimulation model for Brazil and illustrate its use by evaluating the impact of policy on economic inequality. It is argued that microsimulation provides a valuable analytical tool for policy makers in emerging and developing countries in particular.
    Keywords: Brazil, inequality, poverty, redistribution, microsimulation
    JEL: H22 H23 C81
    Date: 2006–05
  16. By: Elizabeth Cascio
    Abstract: Beginning in the mid-1960s, many state governments, particularly in the South and West, began to subsidize kindergartens for the first time. These initiatives generated wide variation across states over time in the supply of seats for five year olds in public schools. This paper uses the staggered timing and age-targeting of these preschool expansions to examine how the provision of universal child care through public schools affects maternal labor supply. I find that single women with five year olds but no younger children were more likely to be employed once kindergartens were available. The estimated effect is large, implying that three mothers entered the labor force for every ten children enrolled in public school. By contrast, I detect no significant labor supply response among other single women with eligible children or among married mothers of five year olds. These findings complement other research suggesting that preschools targeted toward at-risk populations, such as children in single-parent families, are more cost effective than universal programs.
    JEL: H52 I20 J13 J22
    Date: 2006–05
  17. By: Richard E. Baldwin; Rikard Forslid
    Abstract: This paper examines the impact of trade liberalization with heterogeneous firms using the Melitz (2003) model. We find a number of novel results and effects including a Stolper-Samuelson like result and several results related to the volume of trade, which are empirically testable. We also find what might be called an anti-variety effect as the result of trade liberalization. This resonates with the often voiced criticism from antiglobalists that globalization leads the world to become more homogenous by eliminating local specialities. Nevertheless, we find that trade liberalization always leads to welfare gains in the model.
    JEL: H32 P16
    Date: 2006–05
  18. By: Alexandre Mas
    Abstract: Several theories suggest that pay raises below a reference point will reduce job performance. Final offer arbitration for police unions provides a unique opportunity to examine these theories, as the police officers either receive their requested wage or receive a lower one. In the months after New Jersey police officers lose in arbitration, arrest rates and average sentence length decline and crime reports rise relative to when they win. These declines are larger when the awarded wage is further from the police union's demand. The findings support the idea that considerations of fairness, disappointment, and, more generally, reference points affect workplace behavior.
    JEL: J0 J5 D0 H7
    Date: 2006–05
  19. By: John Y. Campbell; Yves Nosbusch
    Abstract: In the presence of overlapping generations, markets are incomplete because it is impossible to engage in risksharing trades with the unborn. In such an environment the government can use a social security system, with contingent taxes and benefits, to improve risksharing across generations. An interesting question is how the form of the social security system affects asset prices in equilibrium. In this paper we set up a simple model with two risky factors of production: human capital, owned by the young, and physical capital, owned by all older generations. We show that a social security system that optimally shares risks across generations exposes future generations to a share of the risk in physical capital returns. Such a system reduces precautionary saving and increases the risk-bearing capacity of the economy. Under plausible conditions it increases the riskless interest rate, lowers the price of physical capital, and reduces the risk premium on physical capital.
    JEL: G1 H3
    Date: 2006–05
  20. By: Pablo T. Spiller; Sanny Liao
    Abstract: The participation of interest groups in public policy making is unavoidable. Its unavoidable nature is only matched by the universal suspicion with which it has been seen by both policy makers and the public. Recently, however, there has been a growing literature that examines the participation of interest groups in public policy making from a New Institutional Economics perspective. The distinguishing feature of the New Institutional Economics Approach is its emphasis in opening up the black box of decision-making, whether in understanding the rules of the game, or the play of the game. In this paper we do not attempt to fairly describe the vast literature on interest group's behavior. Instead, the purpose of this essay for the New Institutional Economics Guide Book is to review recent papers that follow the NIE mantra. That is, they attempt to explicate the micro-analytic features of the way interest groups actually interact with policy-makers, rather than providing an abstract high-level representation. We emphasize the role of the institutional environment in understanding interest groups' strategies.
    JEL: H K L
    Date: 2006–05
  21. By: Enid Slack (International Tax Program, Rotman School of Management, University of Toronto)
    Abstract: We consider the place of cities, particularly large cities, in Canadian federalism from several perspectives. Although by most measures the current fiscal condition of Canadian cities seems fairly good, we argue that beneath this happy picture lies a less happy reality. Owing to the limited and relatively inelastic revenue base to which even the largest cities have access, the underlying basis of Canada’s urban prosperity is being eroded, with potentially damaging implications for national well-being over the long run. In an important sense, the roots of this problem lie in the fact that cities do not have any real role or voice in Canada’s federal structure. Since neither role nor voice is likely to be bestowed on them in the near future, however, we conclude by laying out a series of less fundamental actions that all levels of government have to undertake if they wish to maintain not only the present reputation of Canada’s big cities as ‘a nice place to live’ but also, more fundamentally, the urban dynamic that evidence around the world suggests increasingly underpins economic growth.
    Keywords: cities, local fiscal conditions, intergovernmental fiscal relations, Canada
    JEL: H77 H11 R51
    Date: 2006–05
  22. By: Justina A.V. Fischer; Alfonso Sousa-Poza
    Abstract: Low fertility rates combined with increases in early retirement pose a serious challenge to the sustainability of social security systems in most industrialized countries. Therefore, it is important for policy makers to understand the determinants of early retirement and especially the role that institutional factors play in the retirement decision. However, analyzing such factors ideally requires international microdata, which have in the past been largely unavailable. To fill this void, this paper investigates early retirement determinants across several European countries using the rich 2005 SHARE (Survey of Health, Aging and Retirement in Europe) microdataset, which produces more precise estimates of the effects of institutional and economic factors like pension systems, unemployment, and employment protection legislation. The analysis shows that pension systems offering generous early retirement options encourage early departure from the labor market. In addition, pension wealth accrual rate exerts a greater influence on early retirement decisions than does the average replacement rate, while stricter employment protection legislation has no significant impact.
    JEL: J26 J21 H55
    Date: 2006–04
  23. By: Martinez-Vazquez, Jorge; Bahl, Roy
    Abstract: While there is extensive knowledge about how to design fiscal decentralization policies, considerably less is understood about how a decentralization program should be sequenced and implemented. Countries embarking on decentralization often struggle with decisions about the essential components of decentralization, including the order of an introduction of decentralization policies, the number of years necessary to bring a full program on line, and the components of the transition strategy. The authors argue that the sequencing of decentralization policies is an important determinant of its success. The consequences of a poorly sequenced decentralization program can range from minor delays and complications to ineffectiveness and subsequent failing support of decentralization efforts, macroeconomic instability, and fundamental failure in public sector delivery. At a minimum, the strategy of " making it up as we go " will not lead to the same structure of decentralization as will a planned strategy. The paper raises two questions: First, is there an optimal sequencing for decentralization policies and implementation? The answer is that there is, and that following these sequencing rules can reduce the costs and risks of implementing fiscal decentralization. Second, to what extent do countries follow these optimal sequencing rules? The answer is, in general, they do not. The gap between theory and practice is a result of the complexity of sequencing design, which discourages fiscal planners from implementing the full process. In addition, sequencing requires a sustained discipline and vision for its implementation, as well as overcoming pressures from political actors, especially in developing countries.
    Keywords: Decentralization,Subnational Regional Economics,Economic Theory & Research,Teaching and Learning,Regional Rural Development
    Date: 2006–05–01
  24. By: Richard Simper (Dept of Economics, Loughborough University); Tom Weyman-Jones (Dept of Economics, Loughborough University)
    Abstract: The merger of police services in the UK has been suggested on the grounds that efficiency improvements will be possible. This paper applies a public good model of the police service to evaluate the potential efficiency gains from mergers of police services in England and Wales. We construct a dataset that reflects the public good nature of police service and allows for the exogenous imposition by Government of the level of police service budgets. Our main finding is that English and Welsh police force mergers could lead to increases in police staff resource efficiencies between 10% and 70%.
    Keywords: data envelopment analysis, police service efficiency, public goods
    JEL: C14 H41 L30
    Date: 2006–03
  25. By: Johan Fourie (Department of Economics, Stellenbosch University)
    Abstract: The South African government has begun to ramp up economic infrastructure investment. This is an important policy shift and in line with the government’s aim of increasing economic growth to 6% and halving poverty by 2014. It follows that we are left with the question: What are the most important areas for infrastructure investment, both type and location? This paper provides a short review of the essential characteristics of infrastructure as well as a guide to the past and present features of South Africa’s infrastructure stock. Three main policy proposals are made: provide basic infrastructure to all, improve the quality of existing infrastructure, and provide transnational infrastructure. Since 1994, the government has increased the access to basic services of a large part of the population, although there is still room for improvement. However, a lack of institutional and managerial capacity at the local level seems to be a constraint on delivering basic infrastructure services. Furthermore, comparative analysis reveals that the country’s infrastructure quality lag those of other countries. However, politicians may prefer to provide new infrastructure rather than improving existing infrastructure, as it provides a wider support base. This could lead to significant inefficiencies, especially with the politically sensitive 2010 Soccer World Cup approaching. Regional integration is an important long-term requirement to ensure sustainable economic growth and prosperity for the countries of southern Africa. Currently, South Africa is poorly integrated into the rest of Africa. The current transnational institutions – SACU, SADC, NEPAD – do not have the institutional and financial capacity to provide such infrastructure. A strong emphasis on providing transnational infrastructure – specifically transport, energy and ICT infrastructure – is proposed.
    Keywords: infrastructure, South Africa, basic services, transnational
    JEL: H54 N77 R53 L90
    Date: 2006
  26. By: Joachim Merz (Department of Economics and Social Sciences, Research Institute on Professions, University of Lüneburg); Lars Osberg (Department of Economics, 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
  27. By: Juan Gabriel Rodríguez (Universidad Rey Juan Carlos)
    Abstract: This paper analyzes the relationship between bipolarization and inequality, welfare and poverty measures. First, we clarify the similarities and differences between bipolarization and inequality measures. Second, it is shown that bipolarization is the difference between the welfare levels of the richer and poorer income groups when feelings of identification between individuals are based on their utility functions. In fact, bipolarization is interpreted as the welfare of the richer group that is wasted to compensate for income bipolarization. Third, a relationship between bipolarization measurement and the normalized poverty deficit index is established. These findings are applied to the polarization measures of Wolfson (1994), Esteban and Ray (1994) and Lasso de la Vega and Urrutia (2006).
    Keywords: bipolarization, inequality, welfare, poverty.
    JEL: D39 D63 H30
    Date: 2006
  28. By: Fischer, Carolyn (Resources for the Future)
    Abstract: Some studies of renewable portfolio standards find that regulations increase generation costs; others find that reduced demand for nonrenewable energy sources lowers natural gas prices and that electricity prices follow. This paper presents reasoning for why these predictions can vary in the direction as well as in the magnitude of their effects. The driving factors are the relative elasticities of electricity supply from both fossil and renewable energy sources. The availability of other baseload generation is another factor, whereas demand elasticity influences only the magnitude of the price effects, not the direction of those effects.
    Keywords: portfolio standards, natural gas, renewable energy, climate change
    JEL: Q4 Q5 H2
    Date: 2006–05–05
  29. By: Parry, Ian W.H. (Resources for the Future)
    Abstract: This paper develops and implements an analytical framework for estimating optimal taxes on the fuel use and mileage of heavy-duty trucks, accounting for external costs from congestion, accidents, pavement damage, noise, energy security, and local and global pollution. The analysis allows for endogenous fuel economy, increased auto travel (and externalities) in response to reduced truck congestion, and it distinguishes driving by truck type and region. We estimate the optimal (second-best) diesel fuel tax is $1.12 per gallon, and implementing it increases welfare by $1.34 billion per annum. However, optimizing over both fuel and mileage taxes, and differentiating mileage taxes by vehicle type and region, yields progressively higher welfare gains. The most efficient tax structure involves a diesel fuel tax of 69 cents per gallon and charges on trucks that vary between 7 and 20 cents per mile; implementing this tax structure yields welfare gains of $2.06 billion.
    Keywords: truck tax, diesel tax, external costs, welfare gains
    JEL: Q54 R48 H23
    Date: 2006–04–27
  30. By: Dan Usher (Queen's University)
    Abstract: Disputes over the marginal cost of public funds may be about its magnitude in any given time and place or about its role in cost-benefit analysis. This paper is about the latter. The Samuelson rule was devised for an omnipotent, omniscient and benevolent government. This paper is about how the Samuelson rule should be modified to take account of the impact upon total deadweight loss in the tax system from the required an increase in the tax rate to finance public projects as well as from the appearance of the projects themselves. A very simple device is employed to analyze these questions.
    Keywords: Samuelson rule, Marginal cost of public funds, Shadow price of public expenditure
    JEL: H41 H43
    Date: 2006–04
  31. By: Sophie Bade (Department of Economics, Penn State University); Guillaume Haeringer (Department of Economics, Universitat Autonoma de Barcelona); Ludovic Renou (School of Economics, University of Adelaide)
    Abstract: We consider non-cooperative environments in which two players have the power to commit but cannot sign binding agreements. We show that by committing to a set of actions rather than to a single action, players can implement a wide range of action profiles. We give a complete characterization of implementable profiles and provide a simple method to find them. Profiles implementable by bilateral commitments are shown to be generically inefficient. Surprisingly, allowing for gradualism (i.e., step by step commitment) does not change the set of implementable profiles.
    Keywords: Commitment, self-enforcing, treaties, inefficiency, agreements, Pareto-improvement.
    JEL: C70 C72 H87
    Date: 2006–05
  32. By: Ralph-C Bayer (School of Economics, University of Adelaide); Julia Kupzowa
    Abstract: We present a simple model of corporate tax evasion allowing for potentially bad governments that abuse their fiscal powers to extort monies from firms. Our model shows that the potential existence of extortionist governments provides incentives for corporate tax evasion and increases enforcement costs.
    Keywords: Tax Evasion, Extortion, Corporate Taxation.
    JEL: H26 H11 D82
    Date: 2006–05
  33. By: Ralph-C Bayer (School of Economics, University of Adelaide); Frank Cowell
    Abstract: We focus on a relatively neglected area of the tax-compliance literature in economics, the behaviour of firms. We examine the impact of alternative audit rules on receipts from a tax on profits in the context of strategic interdependence of firms. In the market firms may compete in terms of either output or price. The enforcement policy can have an effect on firms' behaviour in two dimensions - their market decisions as well as their compliance behaviour. An appropriate design of the enforcement policy can thus have a "double dividend" by manipulating firms in both dimensions.
    Keywords: Tax compliance, evasion, oligopoly.
    JEL: H20 H21
    Date: 2006–05
  34. By: Stefano Magrini (Department of Economics, University Of Venice Cà Foscari); Paul Cheshire (Department of Geography and Environment, London School of Economics)
    Abstract: This paper investigates growth differences in the urban system of the EU12 over the last decades of the 20th Century. Models in which growth of real GDP p.c. and rates of population growth are the dependent variables are compared. This suggests that it makes sense to model GDP growth in a European context. The analysis supports the conclusion that systems of urban governance are significantly related to economic growth, as is the distribution of highly skilled human capital and R&D activity. In addition, evidence is found supporting the conclusion that integration shocks in the EU favour core areas but when all else is controlled for peripheral regions experienced a systematic positive growth differential. Careful testing for spatial dependence reveals that national borders are significant barriers to adjustment but we can resolve such problems by including a set of variables designed to reflect spatial economic adjustment mechanisms where cities are densely packed so their economies interact. Models of population growth show some similar results but interesting and revealing differences. Strong evidence is found that there are substantial national border effects impeding the emergence of a full spatial equilibrium across the EU’s urban system. Better climate is the single most significant variable but only when expressed relative to the national (not EU) mean. As with economic growth, there are significant national border effects in patterns of spatial dependence. Concentrations of human capital and R&D, however are if anything negatively associated with attracting population – a finding which parallels the finding that a better climate relative to the national mean is associated with slower rather than faster growth of real GDP per capita.
    Keywords: growth; cities; local public goods; human capital; convergence; territorial competition
    JEL: H41 H73 O18 R11 R50
    Date: 2006
  35. By: Guido Erreygers; Giovanni Di Bartolomeo
    Abstract: In the inheritance tax debates of the 1920s the proposals formulated by the Italian philosopher Eugenio Rignano occupied a prominent position. Since then, his contribution has been largely, although not completely, forgotten. This paper reviews the Rignano’s ideas by focusing upon its origins and upon the reactions to Rignano’s proposal in the 1920s, both in Italy and elsewhere.
    Keywords: inheritance tax debates, economic thought, Rignano’s proposal..
    JEL: B31 B51 H21 H24 H63
    Date: 2005–07
  36. By: Bert Hoffmann (GIGA Institute for Ibero-American Studies)
    Abstract: The ‘Cuban safety-valve theory’ explains sustained survival of Cuban socialism in part through the high levels of emigration, following Hirschman’s model of ‘exit’ undermining ‘voice’. The article argues that this remains insufficient in two important ways. Taking a closer look at the crisis years since 1989, at least as important as the opening of exit options was the Cuban state’s capacity to rein in uncontrolled emigration and to reassure its ‘gatekeeper role’. In addition, the transnationalization of voice and exit must be taken into account as a crucial factor, as much in feeding the regime’s anti-imperialist discourse as, paradoxically, by generating sustained economic support from the emigrants.
    Keywords: Emigration, Regime Stability, Transnational Networks, Cuba, USA
    JEL: D31 H5 O15
    Date: 2005–06
  37. By: Susan Steiner (GIGA Institute of African Affairs)
    Abstract: This paper contributes to providing insights into the impact of decentralisation on poverty. It starts out with an overview of which role decentralisation plays in strategies and policies for poverty eradication and derives economic and political impact channels. It concentrates on the economic channel, the reasoning of which is rooted in fiscal federalism theory. It shows that decentralisation cannot only influence poverty by assigning expenditure responsibility to lower levels of government but also by assigning tax-raising power, which has so far been neglected by the literature. The paper concludes by pointing out a number of possible risks for realising the poverty-reducing potential of decentralisation.
    Keywords: Local public goods, local revenue, poverty
    JEL: I38 H72 H71
    Date: 2005–06
  38. By: Minhaj Mahmud (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: We examine the effect of training the respondents regarding probabilities and risk reductions, in addition to using visual aids to communicate risk and risk reductions, in a contingent valuation survey of mortality risk reduction in Bangladesh. We elicit individuals’ risk perception and find that people on average overestimate the mortality risk at younger ages and underestimate it at older ages. Our results indicate a significantly higher WTP for the trained sub-sample, and WTP is sensitive to the magnitude of risk reduction both with and without the training.
    Keywords: Contingent valuation; risk reduction; WTP; sensitivity to scope; training respondents; Bangladesh
    JEL: I1 D6 D8 H4
    Date: 2006–01
  39. By: Bruce Chapman (CEPR, RSSS, ANU); Andrew Leigh (SPEAR Centre, RSSS, ANU)
    Abstract: We test whether very high marginal tax rates affect taxpayer behaviour, using a unique policy. Under the Higher Education Contribution Scheme – an income-related university loans scheme in Australia – former students with a debt face a sharp discontinuity. At the first repayment threshold they are required to repay a percentage of their entire income, resulting in an effective marginal tax rate that could be regarded as being as high as 76,000 percent. We formally model the taxpayer decision, and then use a sample of taxpayer returns provided to us by the tax office to investigate whether taxpayers bunch below the repayment threshold. We find a statistically significant degree of bunching below the threshold, but the effect is economically small. On net, we estimate that both the deadweight cost and the budgetary loss are less than A$1 million per year, a small fraction of the amount annually repaid through the Higher Education Contribution Scheme. The result has an important implication for the design of income contingent loans for higher education, such as those being introduced in the UK for tuition in September 2006. This is that it is possible to design arrangements in which the first income threshold of repayment is apparently high, but which are still able to deliver relatively high revenue streams in the early stages of income contingent policy reform without important tax payment avoidance consequences. Our findings also reinforce earlier research suggesting only minimal bunching around kink points in taxation schedules.
    Keywords: bunching, marginal tax rates, responses to taxation, income-related loans
    JEL: H31 H52
    Date: 2006
  40. By: Alison Booth (Economics Program, RSSS, ANU); Melvyn Coles; Xiaodong Gong
    Abstract: We model educational investment and labor supply in a competitive economy with home and market production. Heterogeneous workers are assumed to have different productivities both at home and in the workplace. We show that there are increasing returns to education at the labor market participation margin, and that these depend directly on the elasticity of labor supply with respect to wages. Thus the increasing returns to education problem will be most relevant for women or other types with large enough home productivity. We estimate a three equation recursive model of working hours, wages and years of schooling, and find empirical support for the main predictions of the model.
    Keywords: returns to education, home production, labor supply
    JEL: H24 J13 J24 J31 J42
    Date: 2006
  41. By: Patricia Apps (University of Sydney, RSSS - ANU)
    Abstract: This paper presents an analysis of the 2005-06 family tax system comprising the personal income tax, the Medicare Levy, Family Tax Benefits Parts A and B and tax offsets. The results show that most families are now taxed, in effect, on the basis of joint income. Through a succession of reforms the Howard Government has shifted the tax burden to two-earner families to such an extent that many now pay close to the same amount of tax as a family in which only one parent need work to earn the same income while the other works full time at home. This is a defining feature of joint taxation. The study also finds that families face a marginal rate schedule that is no longer progressive but tends to have an inverted U-shaped profile – working families in the middle of the distribution face the highest marginal rates. As a consequence, the incomes of second earners in low and average wage families are taxed effectively at the highest average rates in the economy. The study explains why the system is unfair and seriously damaging for the economy in its effects on female labour supply in an ageing population. On the basis of the results, the paper argues for a return to a progressive individual income tax system, to improve support for families and to raise female participation and productivity.
    Keywords: Income taxation, labour supply, household
    JEL: H24 H31 J22
    Date: 2006

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