nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒05‒27
twenty-six papers chosen by
Peren Arin
Massey University

  1. Markets Versus Governments: Political Economy of Mechanisms By Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
  2. Explaining de facto Judicial Independence By Bernd Hayo and Stefan Voigt
  3. (UBS Pensions Series 041)THE ECONOMICS OF PENSIONS By Peter Diamond; Nicholas Barr
  4. Optimal Government Regulations and Red Tape in an Economy with Corruption By Fabio Mendez; Facundo Sepulveda
  5. Non-linear adjustments in fiscal policy By Gabriella Legrenzi; Costas Milas
  6. Pension Reform in Germany: The Impact on Retirement Decisions By Axel Börsch-Supan; Barbara Berkel
  7. Tax Rates with Corruption: Labour-market Effects. Empirical Cross-country Comparisons on OECD Countries By Mária Lackó
  8. Income Taxes and Entrepreneurial Choice : Empirical Evidence from Germany By Frank M. Fossen; Viktor Steiner
  9. Taxing consumption in Jamaica By Kelly Edmiston; Richard M. Bird
  10. From Traditional DB to Notional DC Systems By Axel Börsch-Supan
  11. Asymmetries in the Growth of Governments By Gabriella Legrenzi
  12. Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden By Engström, Per; Holmlund, Bertil
  13. (UBS Pensions Series 040) PENSIONS: OVERVIEW OF ISSUES By Nicholas Barr
  14. From Public Pension to Private Savings: The Current Pension Reform Process in Europe By Axel Börsch-Supan
  15. Taxation and Technology Adoption: A Hotelling Approach By Ziesemer, Thomas; Kriechel, Ben
  16. Interwar U.K. unemployment: the Benjamin and Kochin hypothesis or the legacy of “just” taxes? By James M. Nason; Shaun P. Vahey
  17. The Effect of Taxes and Bans on Passive Smoking By Jérôme Adda; Francesca Cornaglia
  18. The Intrahousehold Allocation of Private and Public Consumption: Theory and Evidence from U.S. Data By Olivier Donni
  19. Should we redistribute in insolvency By John Armour
  20. Disparities in Pension Financing in Europe: Economic and Financial Consequences By Jean Chateau; Xavier Chojnicki
  21. The political economy of European federalism By Jean Michel Josselin (CREM - CNRS); Alain Marciano (University of Reims – CNRS – EconomiX – IDEP)
  22. Executive financial incentives and payout policy: firm responses to the 2003 dividend tax cut By Jeffrey R. Brown; Nellie Liang; Scott Weisbenner
  23. An Optional European Contract Law Code: Advantages and Disadvantages By Wolfgang Kerber
  24. Public-private sector wage differentials and returns to education in Djibouti By Seshan, Ganesh; Anos Casero, Paloma
  25. The Effect of Rewards and Sanctions in Provision of Public Goods By Martin Sefton; Robert S. Shupp; James Walker
  26. Social Cohesion By Lindqvist, Erik; Östling, Robert

  1. By: Daron Acemoglu; Michael Golosov; Aleh Tsyvinski
    Date: 2006–05–14
  2. By: Bernd Hayo and Stefan Voigt (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: A high degree of de facto judicial Independence (JI) functions as a crucial precondition of governments to credibly commit to legislative decisions, such as respecting private property rights. Thus, de facto JI should improve the allocative efficiency and may therefore contribute positively to economic growth. But JI as formally written down in legal texts is an imperfect predictor for de facto JI. This paper tries to identify the forces which determine de facto JI. A distinction between factors that can be influenced in the short run and those that are the result of historical development and that are exempt from short-term modification is made. Ascertaining the relative relevance of these two groups of variables promises to be policy-relevant. A rigorous empirical model reduction process is used in order to cope with the potential excess of explanatory variables. The explanatory variables for de facto JI that survive the reduction process are de jure JI, legal confidence of the public, extent of democratization, degree of press freedom, and the religious beliefs of the population.
    Keywords: Judicial independence, informal institutions, formal institutions
    JEL: D D H K
    Date: 2005
  3. By: Peter Diamond; Nicholas Barr
    Abstract: This paper sets out the economic analytics of pensions. After introductory discussion, successive sections consider the effects of different pension arrangements on labour markets, on national savings and growth, and on the distribution of burdens and benefits. These are controversial and politically higly salient. While we are open about expressing our own views, the main purpose of the paer is to set out the analytical process by which we reach them, to enable readers to form their own conclusions.
    Date: 2006–05
  4. By: Fabio Mendez; Facundo Sepulveda
    Abstract: We study an economy where agents are heterogeneous in entrepreneurial ability, and may decide to become workers or entrepreneurs. The government is motivated by a production externality to impose regulations on entrepreneurship, and sets a level of red tape -administered by public officials-to test regulation compliance. In an environment where some officials are corrupt, we study what are the optimal levels of regulations and red tape, and to what extent such policies reduce the welfare losses created by corruption. For each level of externalities, we find that high and low levels of corruption create qualitatively different distortions, which in turn changes the nature and reach of optimal policies. Under low levels of corruption and externalities, the government sets low levels of regulations and minimal red tape, and with these policies achieves the first best allocation. When externalities and corruption are above a threshold, only a second best allocation can be achieved. Moreover, when externalities are large, mandating higher levels of red tape is a Pareto improving policy.
    Keywords: Corruption, optimal policy, red tape, regulations.
    JEL: D73 D60 D63 H21
    Date: 2006–03
  5. By: Gabriella Legrenzi (Keele University, Department of Economics); Costas Milas (Keele University, Department of Economics)
    Abstract: We apply non-linear error-correction models to the analysis of fiscal policy. Our empirical analysis, based on Italy, shows that the burden of correcting budgetary disequilibria is entirely carried by changes in taxes, rather than changes in government spending or policy mixes. On the other hand, the tax instrument displays rigidities, as taxes are downward inflexible not only with respect to their long-run level, but also during periods of decreasing economic growth. As a consequence, structural expenditure reforms aiming at a higher degree of government expenditure adjustment are needed. This would also relax the asymmetries reported in the paper.
    Keywords: General government expenditure, general government revenues, budgetary disequilibria, persistence profile, asymmetries.
    JEL: C32 C51 C52 H20 H50
    Date: 2005–02
  6. By: Axel Börsch-Supan; Barbara Berkel (Mannheim Research Institute for the Economics of Aging (MEA))
    JEL: D1 J26 H55
    Date: 2004–11–11
  7. By: Mária Lackó (Institute of Economics, Hungarian Academy of Sciences)
    Abstract: The paper investigates how tax rates, corruption and institutional aspects of the labour market influence the size of the segments of the labour market such as unemployment, employment, self-employment and activity in the hidden economy. The novelty of our approach is the theoretical justification of the interaction between the perception of taxes and of corruption, as well as the establishment of a new concept and variable, the subjective tax rate. Alternative regression calculations are carried out on data for OECD countries for the period 1995 to 2000. The tests confirm the validity of the new variable and the results imply the need for a more sophisticated policy approach for influencing labour market outcomes.
    Keywords: Taxation, corruption, labour market, hidden economy
    JEL: D73 J2 H26
    Date: 2006–05–15
  8. By: Frank M. Fossen; Viktor Steiner
    Abstract: Entrepreneurial activity is often regarded as an engine for economic growth and job creation. Through tax policy, governments possess a potential lever to influence the decisions of economic agents to start and close small businesses. In Germany, the top marginal income tax rates were reduced exclusively for entrepreneurs in 1994 and 1999/2000. These tax reforms provided two naturally defined control groups that enable us to exploit the legislation changes as "natural experiments". First, the tax rate reductions did not apply to freelance professionals (Freiberufler), and second, entrepreneurs with earnings below a certain threshold were not affected. Using data from two different sources, the SOEP and the Mikrozensus (LFS), we analyse the effect of the tax cuts on transitions into and out of self-employment and on the rate of self-employment. We apply a "difference-in-difference-in-difference" estimation technique within a discrete time hazard rate model. The results indicate that the decrease in tax rates did not have a significant effect on the self-employment decision.
    Keywords: Taxation, entrepreneurship, natural experiment, difference-in-difference-in-difference estimation
    JEL: H24 H25 J23
    Date: 2006
  9. By: Kelly Edmiston; Richard M. Bird
    Abstract: In Jamaica, as in most countries, consumption taxes in the form of a value-added tax called the General Consumption Tax (GCT) and several excise taxes collectively known as the Special Consumption Tax (SCT) are critically important revenue sources, accounting for 37.4 percent of total revenues in fiscal year 2003/04 (27.7 percent for GCT alone) and an estimated 11.2 percent of GDP (8.3 percent for GCT alone). This paper first describes in some detail the present structure and administration of the GCT and SCT and then evaluates the performance of these taxes from several angles -- as revenue generators, with respect to their distributional effects and their relation to the shadow economic, their administrative aspect, and in international perspective. It concludes by setting out a number of recommendations for reform.
    Keywords: Jamaica ; Value-added tax
    Date: 2006
  10. By: Axel Börsch-Supan (Mannheim Research Institute for the Economics of Aging (MEA))
    JEL: H55 J14 J26
    Date: 2004–11–11
  11. By: Gabriella Legrenzi (Keele University, Department of Economics)
    Abstract: The growth of governments has traditionally been modelled within a welfare-driven context, where citizens/taxpayers increase their demand for publicly-provided goods and services in response to economic growth. However, the underlying linear approach does not consider the crisis intervention function of government spending that increases following contractions, rather than expansions, in domestic income. Our results point to a consistent counter-cyclical use of non-systematic government consumption expenditure.We also provide evidence of an upward bias in both discretionary and non-systematic government spending that can help explain the relevant growth of the Italian public sector.
    Keywords: Government spending, economic growth, automatic and discretionary fiscal policy.
    JEL: C32 C51 C52 H20 H50
    Date: 2005–03
  12. By: Engström, Per (Department of Economics); Holmlund, Bertil (Department of Economics)
    Abstract: Self-employed individuals have arguably greater opportunities than wage earners to underreport their incomes. The incentives for underreporting should be especially strong in an economy with generally high taxes. This paper uses recent income and expenditure data to examine the extent of underreporting of income among self-employed individuals in Sweden. A key hypothesis is that underreporting of incomes among the self-employed would be visible in the data as “excess food consumption”, for a given level of observed income. Our results confirm the underreporting hypothesis. In particular, we estimate that households with at least one self-employed member underreport their total incomes by around 30 percent. Under-reporting appears to be twice as prevalent among self-employed people with unincorporated businesses as among those with incorporated businesses.
    Keywords: Tax evasion; self-employment; Engel curves
    JEL: D12 H24 H25 H26
    Date: 2006–05–17
  13. By: Nicholas Barr
    Abstract: Many countries face increasing fiscal problems financing pensions in the face of population aging. There is controversy about th e underlying economic theory, about th e extent of the problem, and about th ebest mix of policies to protect old-age security. This paper establishes the areas of debate: gives thumbnail descriptions of pension arrangements in different countries; discusses the main analytical and empirical issues relevant to thinking about pension design; and assess a range of policy directions. The main conclusions are that what matters most is effective government and economic growth; that the debate between pay-as-you-go and funding is secondary; that good pension schemes can take many forms; and that there is a problem in financing pensions, but not a crisis.
    Date: 2006–05
  14. By: Axel Börsch-Supan (Mannheim Research Institute for the Economics of Aging (MEA))
    Abstract: Reforms of the public pension systems are on top of the European policy agenda. Current costs are high, and the pressures will increase due to population aging and negative incentive effects. This paper describes the causes of the current pension problems and the cures required to make the pay-as-you-go public pension systems in Continental Europe sustainable. There is no single policy prescription that can solve all problems at once. Reform elements include a freeze in the contribution and tax rates, an indexation of benefits to the dependency ratio, measures to stop the current trend towards early retirement, an adaptation of the normal retirement age to increased life expectancy; and more reliance on private savings – elements of a sustainable but complex multipillar system of retirement income provision.
    JEL: Z00
    Date: 2004–06–21
  15. By: Ziesemer, Thomas (University of Maastricht, Faculty of Economics); Kriechel, Ben (University of Maastricht, Research Centre for Education and the Labour Market (ROA))
    Abstract: Environmental regulation and competitiveness are issues that seem to be at odds. However, the `Porter Hypothesis' states that firms can actually gain in competitiveness if they are subject to stricter environmental regulation. We show in a simple model the basic setting of the problem to apply it then to a Hotelling framework. A non-adoption tax (adoption subsidy) is shown to destroy a non-adoption equilibrium in a closed economy model. We show that taxes not directly targeting the non-adoption problem may fail to have an adoption incentive on the firms. In an open economy model the Porter Hypothesis is shown to hold if (i) non-adoption taxes are higher than adoption costs for one country and lower for the other, and (ii) the returns of second adoption are insufficient to cover the net adoption costs.
    Keywords: environmental regulations, industrial competitiveness, taxation
    JEL: H25 L25 Q2
    Date: 2006
  16. By: James M. Nason; Shaun P. Vahey
    Abstract: Benjamin and Kochin (1979, Journal of Political Economy) present regression estimates to support their hypothesis that larger unemployment benefits increased U.K. unemployment post–World War I (WWI). The Benjamin-Kochin (BK) regression is easy to replicate. When the replication is widened to include income tax rates and WWI observations using Bayesian Monte Carlo methods, the evidence moves against the BK hypothesis and in favor of regressions that include the capital income tax rate. We explain these results with Daunton (2002, Just Taxes). He argues that U.K. tax rates were set during WWI and the interwar period to achieve an equitable, or “just,” mix of taxes and debt. Neoclassical theory suggests that capital income tax rates fluctuations created inefficient factor input allocations that drove up interwar U.K. unemployment.
    Date: 2006
  17. By: Jérôme Adda; Francesca Cornaglia
    Abstract: This paper evaluates the effect of excise taxes and bans on smoking in public places on the exposure to tobacco smoke of non-smokers. We use a novel way of quantifying passive smoking: we use data on cotinine concentration- a metabolite of nicotine- measured in a large population of non-smokers over time. Exploiting state and time variation across US states, we reach two important conclusions. First, excise taxes have a significant effect on passive smoking. Second, smoking bans have on average no effects on non smokers. While bans in public transportation or in schools decrease the exposure of non smokers, bans in recreational public places can in fact perversely increase their exposure by displacing smokers to private places where they contaminate non smokers, and in particular young children. Bans affect socioeconomic groups differently: we find that smoking bans increase the exposure of poorer individuals, while it decreases the exposure of richer individuals, leading to widening health disparities.
    Keywords: Passive smoking, Taxes, Bans
    JEL: I1 H
    Date: 2006–01
  18. By: Olivier Donni (THEMA, University of Cergy-Pontoise and IZA Bonn)
    Abstract: We adopt the collective approach to consumer behavior with egoistic agents, and assume that the household consumption is either private or public. We then show that (i) household demands have to satisfy testable constraints and (ii) some elements of the decision process can be retrieved from observed behavior. These results are based on a conditional demand (‘m-demand’) framework in which household demands are directly derived from the marginal rates of substitution. Finally, we present an empirical application using the U.S. Consumer Expenditure Survey. Overall, the data turn out to be consistent with the theoretical model.
    Keywords: collective decision, intra-household distribution, demand analysis, private good, public good, Lindahl price
    JEL: D11 D12 H41
    Date: 2006–05
  19. By: John Armour
    Abstract: The characterisation of a security interest as 'fixed' or 'floating' has generated much litigation in English courts. This is because a floating charge is subordinated by statute to other claims in the debtor's insolvency, whereas a fixed charge is not. This paper uses the example of the floating charge to argue that such statutory redistribution between claimants in corporate insolvency is generally undesirable.
    Keywords: corporate insolvency, law and finance, history of floating charge, bankruptcy priorities, secured credit.
    JEL: G32 G33 H23 K22 N43
    Date: 2006–03
  20. By: Jean Chateau; Xavier Chojnicki
    Abstract: We present a quantitative analysis of the impact of differential ageing and pension reforms on capital and labour market and, in particular, on intra-European capital flows. To this end, we develop a stylized general equilibrium model with overlapping generations of heterogeneous agents for the three largest European countries: France, Germany and the United-Kingdom. The model presents a structure halfway between pure general equilibrium models with rigorous microeconomic foundations accounting models where the macroeconomic environment remains exogenous. We show that the dynamics of capital accumulation and pension system sustainability are totally different depending on the assumption concerning economic openness. Two main conclusions may be drawn from the examination of the various prospective scenarios. First of all, the critical assumptions for PAYG systems are the future trend of the global factor productivity and the behavior of agents concerning activity and labour market participation. Secondly, in the long run, resorting to debt financing seems to be a dead end to finance retirement systems.
    Keywords: Public pensions; ageing; computable general equilibrium model
    JEL: H55 J1 C68
    Date: 2006–05
  21. By: Jean Michel Josselin (CREM - CNRS); Alain Marciano (University of Reims – CNRS – EconomiX – IDEP)
    Abstract: In spite of the clear objective assigned to the integration process in the 1950s, the institutional status of the European Union remains ambiguous and uneasy to define. The argument that we present in this article is that Europe has always hesitated between two forms of federalism. We use an agency framework and demonstrate that before the landmark cases Van Gend en Loos and Costa v. E.N.E.L., the European Union is mainly a confederation but it already contains elements of a federation. Afterwards, the institutional structure of the Union evolves towards a more centralised federalism but still shows lasting elements of a confederation.
    Keywords: Federation, confederation, political economy, European Union.
    JEL: D72 H11 K10 N41
    Date: 2006
  22. By: Jeffrey R. Brown; Nellie Liang; Scott Weisbenner
    Abstract: Using the 2003 reduction in dividend tax rates to identify an exogenous change in the after-tax value of dividends to shareholders, we test whether stock holdings among company executives is an important determinant of payout policy. We have three primary findings. First, we find that when top executives have greater stock ownership, and thus an incentive to increase dividends for personal liquidity reasons, there is a significantly greater likelihood of a dividend increase following the 2003 dividend tax cut, whereas no such relation existed in the prior decade when the dividend tax rate was much higher. This finding is strongest for dividend initiations, and is robust to a rich set of firm and shareholder characteristics. Second, we provide evidence that approximately one-third of the firms that initiated dividends in 2003, a higher share than in previous years, scaled back share repurchases by an amount sufficient to reduce their total payouts. This offset potentially raised the total tax burden on shareholders at these firms because share repurchases are still tax-advantaged relative to dividends. Third, we find that while dividend-paying firms with a larger fraction of individual shareholders had greater stock price gains in response to the tax cut, the market appears to have at least partially anticipated that executives with high stock ownership might raise dividends at the expense of share repurchases and increase the average tax burden for individuals, which is consistent with the presence of agency conflicts within the firm.
    Keywords: Dividends ; Taxation
    Date: 2006
  23. By: Wolfgang Kerber (Faculty of Business Administration and Economics, Philipps Universitaet Marburg)
    Abstract: Should the EU introduce an Optional European Contract Law Code and what should it look like? By applying economic theories of federalism and regulatory competition (legal federalism), it is shown why an Optional Code would be a very suitable legal instrument within a two-level European System of Contract Laws. By allowing private parties choice of law to a certain extent, it can combine the most important advantages of centralisation and decentralisation of competences for legal rules. Through differentiated analyses of three kinds of contract law rules (mandatory substantive rules, mandatory information rules and facilitative law), important conclusions can be reached: which kinds of contract law rules are most suitable to be applied on an optional basis (e.g. facilitative law) and which might be less so (e.g. information regulations). Furthermore a number of additional general conclusions about the design and scope of an Optional EU Code and some conclusions in regard to sales law are derived.
    Keywords: contract law, European Union, legal federalism, regulatory competition
    JEL: H7 K12 K33
    Date: 2006
  24. By: Seshan, Ganesh; Anos Casero, Paloma
    Abstract: Do public sector workers earn a wage premium in Djibouti and are the returns to education different across the sectors? The authors estimate private and public sector wage earnings using 1996 household survey data, while controlling for selectivity using Heckman ' s two stage approach. They find that Djiboutian public sector employees earn a wage premium, independent of their personal attributes and human capital endowments, and are more likely to be males and have parents in the public sector. Workers in the public sector earn higher private rates of return to education than do private sector workers with post-secondary schooling. These results raise concerns about current government hiring and wage-setting practices that generate distortions in the labor market and are not efficiently allocating labor and public resources.
    Keywords: Labor Markets,Public Sector Economics & Finance,Public Sector Management and Reform,Education For All,Education and Digital Divide
    Date: 2006–05–01
  25. By: Martin Sefton (University of Nottingham, United Kingdom); Robert S. Shupp (Department of Economics, Ball State University); James Walker (Department of Economics, Indiana University, Bloomington, IN)
    Abstract: A growing number of field and experimental studies in social dilemma settings focus on the institutional arrangements by which individuals are able to solve collective action problems. Important in this research is the role of reciprocity and institutions that facilitate cooperation via opportunities for monitoring, sanctioning, and rewarding others. This study contrasts sanction and reward institutions in the context of a public goods experiment. Sanctions represent a net loss, a cost to both the participant imposing the sanction and the individual receiving the sanction. Rewards represent a zero sum transfer from participants giving rewards to those receiving rewards. These institutions are compared in regard to their impact on overall levels of cooperation and economic efficiency.
    JEL: C92
    Date: 2005–02
  26. By: Lindqvist, Erik (Dept. of Economics, Stockholm School of Economics); Östling, Robert (Dept. of Economics, Stockholm School of Economics)
    Abstract: Although several economic theories predict that heterogeneity in preferences affects economic outcomes, there are few attempts to directly study this relationship. We measure the degree of social cohesion in a society by the standard deviation in responses to multiple-choice questions in the World Values Survey. Using cross-country data, we find that social cohesion is lower in countries that are poor, ethnically fragmented, situated close to the equator and where the level of trust is low. We also find social cohesion to have predictive power for the measures of government quality used by La Porta et al (1999), in particular infant mortality, and for income inequality. This paper does not try to decide whether these relationships are causal, but the results suggest that social cohesion may be a measurable and robust determinant of economic outcomes.
    Keywords: social cohesion; preference heterogeneity; trust; ethnic fractionalization
    JEL: H11 H20 H42 Z13
    Date: 2006–05–19

This nep-pbe issue is ©2006 by Peren Arin. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.