nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒06‒10
28 papers chosen by
Peren Arin
Massey University

  1. Input and Technology Choices in Regulated Industries: Evidence From the Health Care Sector By Daron Acemoglu; Amy Finkelstein
  2. The Dynamics of the Age Structure, Dependency, and Consumption By David Weil; Heinrich Hock
  3. Population Aging By David Weil
  4. Fiscal Decentralization: A Political Economy Perspective By Lockwood, Ben
  5. Decentralization and Electoral Accountability : Incentives, Separation, and Voter Welfare By Hendriks, Jean; Lockwood, Ben
  6. Status Equilibrium in Local Public Good Economies By Nouweland, Anne van den; Wooders, Myrna
  7. Relaxing Tax Competition through Public Good Differentation By Zissimos, Ben; Wooders, Myrna
  8. Capital Levies and Transition to a Consumption Tax By Louis Kaplow
  9. Taxation, Dividend Payments and Ex-Day Price Changes By Daunfeldt, Sven-Olov; Selander, Carina; Wikström, Magnus
  10. Optimal Marginal and Average Income Taxation under Maxi-min By Robin, BOADWAY; Laurence, JACQUET
  11. Optimal Taxation of Intermediate Goods in the Presence of Externalities: A Survey Towards the Transport Sector By Ahlberg, Joakim
  12. Political Budget Cycles and Fiscal Decentralization By Paula, GONZALEZ; Jean HINDRIKS; Ben, LOCKWOOD
  13. Progressive Taxation and Wage Setting when Unions Strategically Interact By Giorgio Brunello; Daniela Sonedda
  14. Performance Improvement in Public Organizations, How to Leverage ICT Investments By Olli Martikainen; Jussi Autere; Markku Nurmela
  15. The effects of the marginal tax rate in a matching model with endogenous labor supply By Alexis, PARMENTIER
  16. Population Aging, Fiscal Policies, and National Saving: Predictions for Korean Economy By Young Jun Chun
  17. Heterogeneity gap in stable juridiction structures By Anna, BOGOMOLNAIA; Michel, LE BRETON; Alexei, SAVVATEEV; Sholmo, WEBER
  18. $2.00 Gas! Studying the Effects of a Gas Tax Moratorium By Joseph J. Doyle, Jr.; Krislert Samphantharak
  19. Why Are Some Public Officials More Corrupt Than Others? By Jennifer Hunt; ;
  20. Control Rights in Public-Private Partnerships By Marco Francesconi; Abhinay Muthoo
  21. An overall inequality reducing and horizontally equitable tax sys tem with application to Polish data By Achille VERNIZZI; Maria Giovanna MONTI; Marek KOSNY
  22. Bribery: Who Pays, Who Refuses, What Are The Payoffs? By Jennifer Hunt; Sonia Laszlo;
  23. Explaining Welfare State Survival: The Role of Economic Freedom and Globalization By Bergh, Andreas
  24. Equilibrium Social Insurance with Policy-Motivated Parties By Philippe, DE DONDER; Jean, HINDRIKS
  25. Migration and Social Replacement Incomes: How to Protect Low-IncomeWorkers in the Industrialized Countries against the Forces of Globalizationand Market Integration By Sinn, Hans-Werner
  26. Private Investment and Government Protection By Carolyn Kousky; Erzo F.P. Luttmer; Richard J. Zeckhauser
  27. Tinkering toward accolades: School gaming under a performance accountability system By Randall Reback; Julie Berry Cullen
  28. Capital Flows and Monetary Policy By Javier Gómez Pineda

  1. By: Daron Acemoglu; Amy Finkelstein
    Abstract: This paper examines the implications of regulatory change for the input mix and technology choices of regulated industries. We present a simple neoclassical framework that emphasizes the change in relative factor prices associated with the regulatory change from full cost to partial cost reimbursement, and investigate how this affects firms’ technology choices through substitution of (capital embodied) technologies for tasks previously performed by labor. We examine these implications empirically by studying the change from full cost to partial cost reimbursement under the Medicare Prospective Payment System (PPS) reform, which increased the relative price of labor faced by U.S. hospitals. Using the interaction of hospitals’ pre-PPS Medicare share of patient days with the introduction of these regulatory changes, we document a substantial increase in capital-labor ratios and a large decline in labor inputs associated with PPS. Most interestingly, we find that the PPS reform seems to have encouraged the adoption of a range of new medical technologies. We also show that the reform was associated with an increase in the skill composition of these hospitals, which is consistent with technology-skill or capital-skill complementarities.
    JEL: H51 I18 L50 L51 O31 O33
    Date: 2006–05
  2. By: David Weil; Heinrich Hock
    Date: 2006
  3. By: David Weil
    Date: 2006
  4. By: Lockwood, Ben (University of Warwick and CEPR)
    Abstract: This paper surveys recent contributions to the study of fiscal decentralization which adopt a political economy approach. It is argued that this approach can capture, in a variety of formal models, the plausible and influential ideas (increasingly, supported by empirical evidence) that fiscal decentralization can lead to improved preference-matching and accountability of government. In particular, recent work on centralized provision of public good provision via bargaining in a legislature shows how centralization reduces preference-matching, and recent work using "electoral agency" models formalizes the accountability argument. These models also provide insights into when decentralization may fail to deliver these benefits.
    Keywords: Fiscal decentralization ; political economy ; local public goods
    JEL: H41 H70 H72
    Date: 2004
  5. By: Hendriks, Jean (Department of Economics, CORE, Universite Catholique de Louvain,); Lockwood, Ben (CEPR and Department of Economics, University of Warwick,)
    Abstract: This paper studies the relationship between fiscal decentralization and electoral accountability, by analyzing how decentralization impacts upon incentive and selection effects, and thus on voter welfare. The model abstracts from features such as public good spillovers or economies of scale, so that absent elections, voters are indifferent about the fiscal regime. The effect of fiscal centralization on voter welfare works through two channels : (i) via its effect on the probability of pooling by the bad incumbent; (ii) conditional on the probability of pooling, the extent to which, with centralization, the incumbent can divert rents in some regions without this being detected by voters in other regions (selective rent diversion). Both these effects depend on the information structure ; whether voters only observe fiscal policy in their own region, in all regions, or an intermediate case with a uniform tax across all regions. More voter information does not necessarily raise voter welfare, and under some conditions, voter would choose uniform over differentiated taxes ex ante to constrain selective rent diversion
    Date: 2004
  6. By: Nouweland, Anne van den (Department of Economics, Vanderbilt University,); Wooders, Myrna (Department of Economics, Vanderbilt University and Department of Economics, University of Warwick)
    Abstract: We define a concept of status equilibrium for local public good economies. A status equilibrium specifies one status index for each agent in an economy. These indices determine agents' cost shares in any possible jurisdiction. We provide an axiomatic characterization of status equilibrium using consistency properties.
    Date: 2005
  7. By: Zissimos, Ben (Dept of Economics, Vanderbilt University); Wooders, Myrna (Dept of Economics, Vanderbilt University)
    Abstract: This paper argues that, because governments are able to relax tax competition through public good differentiation, traditionally high-tax countries have continued to set taxes at a relatively high rate even as markets have become more integrated. The key assumption is that firms vary in the extent to which public good provision reduces costs. We show that Leviathan governments are able to use this fact to relax the forces of tax competition, reducing efficiency. When firms can ‘vote with their feet’ tax competition leads firms to locate in ‘too many’ jurisdictions. A ‘minimum tax’ further relaxes tax competition, further reducing efficiency.
    Keywords: asymmetric equilibrium ; core-periphery ; non-renegotiable minimum tax ; tax competition ; tax harmonization
    JEL: C72 H21 H42 H73 R50
    Date: 2003
  8. By: Louis Kaplow
    Abstract: The merits of capital levies depend on the likelihood of repetition, the extent of anticipation, and its effects on distribution. The relevance of these features, which in varying degrees is underdeveloped or underappreciated in pertinent literatures, is elaborated and then considered with regard to the problem of transition to a consumption tax. Other transition issues are distinguished, and specific attention is devoted to rate changes under a consumption tax and whether owners of preexisting capital are effectively compensated through higher net-of-tax returns due to repeal of the income tax. The analysis is also related to literature that examines dynamic models of taxation, particularly work simulating consumption tax transitions and assessing the optimality of capital taxation in the long run.
    JEL: H21 H23 H24 H25 K34
    Date: 2006–05
  9. By: Daunfeldt, Sven-Olov (Högskolan i Gävle); Selander, Carina (Department of Economics, Umeå University); Wikström, Magnus (Department of Economics, Umeå University)
    Abstract: The purpose of the paper is to study the effects of taxation on dividend payments and ex-dividend price changes in Sweden during 1991-1995. Under this period, dividends and capital gains were taxed at a flat rate. Tax changes in Sweden during the 1990s thus provide an opportunity to include direct measures of the tax treatment of dividends and capital gains in the empirical analysis, in contrast to previous studies. The results indicate that tax reforms have large effects on dividend payments, while the effects on ex-dividend price changes are less conclusive.
    Keywords: capital gain; censoring; dividend; flat tax; tax reform
    JEL: G12 G35 H24
    Date: 2006–06–02
  10. By: Robin, BOADWAY; Laurence, JACQUET (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: Using the Mirrlees optimal income tax model with a maxi-min social welfare function, we derive conditions for a decreasing marginal tax rate throughout the skill distribution, a strictly concave tax function in income and a single-peaked average tax schedule. With additive preferences and a constant labor supply elasticity, marginal tax rates are decreasing below the modal skill level, and will also decrease above the mode if aggregate skills are non-decreasing with the skill level. In this case and with a bounded skill distribution or with a constant hazard rate, the tax function is strictly concave in income and the average tax rate single-peaked. When quasilinear utility functions apply in either consumption or leisure, under fairly mild restrictions on the truncated or untruncated distribution function, marginal tax rates are decreasing in skill and the average tax profile is sinlgle-peaked. The distribution of skills has the same qualitative influence for either case of quasilinearity. These results continue to hold when there is bunching at the bottom due to a binding non-negativity constraint. We also illustrate how relaxing the assumption of constant elasticity of labor supply, generally used in the literature, modifies the results.
    Keywords: maxi-min, optimal income taxation
    JEL: H21
    Date: 2006–05–16
  11. By: Ahlberg, Joakim (VTI)
    Abstract: The paper surveys the literature on optimal taxation with emphasis on intermediate goods, or, more specific, freight (road) transport. There are two models frequently used, first, the one emanated from Diamond & Mirrlees' (1971) paper, where the production efficiency lemma made it clear that intermediate goods was not to be taxed. And, second, the Ramsey-Boiteux model where a cost-of-service regulation imposes a budget constraint for the regulated firm. In the latter model, in contrast to the first, freight transports (intermediate goods) are to be taxed in the Ramsey tradition, and thus trades the production efficiency lemma against a budget restriction. The paper also discusses welfare effects due to environmental tax reforms, with emphasis to what has become to known as the double dividend hypothesis. Finally, administrative costs in the context of optimal taxation is touched upon, a subject that is to a large degree repressed in optimal tax theory.
    Keywords: Optimal Taxation; Intermediate Goods; Transport; Welfare Effects; Environmental Tax; Administrative Costs
    JEL: H21 H23
    Date: 2006–06–01
    Abstract: In this paper, we study a model à la Rogoff (1990) where politicians distort fiscal policy to signal their competency, but where fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the incentive for pooling behavior and thus the probability of a PBC. One is the possibility of selective distortion : the incumbent can be re-elected with the support of just a majority of regions. The other is a cost distribution effect, which is present unless the random cost of producing the public goods is perfectly correlated across regions. Both these effects work in the same direction, with the general result that overall, the PBC probability is larger under centralization (decentralization) when the rents to office are low (high). Voter welfare under the two regimes is also compared : voters tend to be better off when the PBC probability is lower, so voters may either gain or lose from centralization. Our results are robust to a number of changes in the specification of the model.
  13. By: Giorgio Brunello (University of Padua); Daniela Sonedda (Universita' del Piemonte Orientale)
    Abstract: In a multisector economy with unionized labor markets, the interdependence of union wage claims - typical of industrial bargaining - affects the relationship between tax progressivity and wage pressure, which varies in a nonlinear fashion with the nature of the wage bargain, and can be hump-shaped. Our empirical analysis of 20 OECD countries for the period 1997-2004 shows that higher tax progressivity increases pre-tax wages (and unemployment) in countries characterized by industry level wage bargaining, and reduces them in countries with local or fully centralized bargaining.
    JEL: H24
    Date: 2006–05
  14. By: Olli Martikainen; Jussi Autere; Markku Nurmela
    Keywords: government performance, ICT diffusion, performance improvement
    JEL: H11 O33 O38 L30
    Date: 2006–06–02
  15. By: Alexis, PARMENTIER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: This paper analyzes the effects of the marginal tax rate on unemployment and economic efficiency in a matching model with homogenous agents when wages and working hours are bargained over. I show that the theoretical impact of a higher marginal tax rate on unemployment is ambiguous whatever the instantaneous utility in unemployment i.e. for an utility in unemployment that is either fixed or perfectly indexed on net wages. These results are in sharp contrast with the literature. Numerical simulations applied to France suggest that a higher marginal tax rate generally reduces the unemployment rate but at the expense of lower economic efficiency. The simulations point also out that the relation between the optimal marginal tax rate and the elasticity of labor supply is not monotonic.
    Keywords: Matching model; Marginal Tax Rate; Labor supply; Utility in unemployment
    JEL: D82 H21 H24 J64
    Date: 2006–04–01
  16. By: Young Jun Chun
    Abstract: This paper evaluates the effects of population aging and fiscal policies on national saving in Korean situation. For the prediction of the national savings rate of Korea for the next several decades, we employ a life-cycle model, which incorporates the generational accounting approach needed to assess the distribution of fiscal burden across generations. We found that the rapid population aging and long-term budgetary imbalance will substantially lower the national savings rate in Korea. A sensitivity analysis based on an alternative model, an altruistic family model, shows that these predictions are robust to the specification of altruism among generations. In addition, the estimation results of consumption functions with respect to various kinds of wealth suggest that the annuitization of wealth due to maturing of public pensions and introduction of reverse annuity mortgage is likely to further decrease the savings rate in the future.
    JEL: H3 H60 E21
    Date: 2006–05
  17. By: Anna, BOGOMOLNAIA; Michel, LE BRETON; Alexei, SAVVATEEV (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE)); Sholmo, WEBER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Keywords: Stability, Jurisdictions, Public Projects, Heterogeneity Gap
    JEL: D70 H20 H73
    Date: 2006–03–15
  18. By: Joseph J. Doyle, Jr.; Krislert Samphantharak
    Abstract: There are surprisingly few estimates of the effect of sales taxes on retail prices, especially at the firm level. Further, along both sides of a state border, a change in one state’s sales tax can shed light on the nature of competition, as a subset of firms effectively experiences a change in its marginal cost. This paper considers the suspension, and subsequent reinstatement, of the 5% gasoline sales tax in Illinois and Indiana following a temporary price spike in the spring of 2000. Earlier laws set the timing of the reinstatements, providing plausibly exogenous changes in the tax rates. Using a unique dataset of daily, gas station-level data, retail gas prices are found to drop by 3% following the suspension, and increase by 4% following the reinstatements. After linking the stations to driving distance data, some evidence suggests that the tax increases are associated with higher prices up to an hour’s drive into neighboring states.
    JEL: H2
    Date: 2006–05
  19. By: Jennifer Hunt; ;
    Abstract: Using detailed Peruvian data measuring bribery, I assess which types of public official are most corrupt and why. I distinguish between the bribery rate and the size of bribes received, and seek to explain the variation in each across public institutions. The characteristics of officials’ clients explain most of the variation for bribery rates, but none for bribe amounts. A measure of the speed of honest service at the institution explains much of the remaining variation for both bribery rates and amounts. The results indicate that the bribery rate is higher at institutions with bribe-prone clients, and that bribery rates and bribe amounts are higher where clients are frustrated at slow service. Faster and better service would reduce corruption. Overall, the judiciary and the police are by far the most corrupt institutions.
    Keywords: Corruption, bribery, institutions, governance.
    JEL: H4 K4 O1
    Date: 2005–09–01
  20. By: Marco Francesconi (University of Essex and IZA Bonn); Abhinay Muthoo (University of Essex)
    Abstract: This paper develops a theory of the allocation of authority between two parties that produce impure public goods. We show that the optimal allocation depends on technological factors, the parties’ valuations of the goods produced, and the degree of impurity of these goods. When the degree of impurity is large, control rights should be given to the main investor, irrespective of preference considerations. There are some situations in which this allocation is optimal even if the degree of impurity is very low as long as one party’s investment is more important than the other party’s. If the parties’ investments are of similar importance and the degree of impurity is large, shared authority is optimal with a greater share going to the lowvaluation party. If the importance of the parties’ investments is similar but the degree of impurity is neither large nor small, the low-valuation party should receive sole authority. We apply our results to a number of situations, including schools and child custody.
    Keywords: impure public goods, contractual incompleteness, allocation of authority, investment incentives
    JEL: D02 D23 H41 L31
    Date: 2006–05
  21. By: Achille VERNIZZI; Maria Giovanna MONTI; Marek KOSNY
    Abstract: A population of households is considered and each household is di stinguished by two attributes: pre-tax income and family size. To compare incomes in this heterogeneous environment an affine tran sformation is proposed as equivalent income function, from which income dependent equivalence scales are derived.By first, the hor izontal equity concern of a tax system has to be faced. Ebert and Lambert (2004) define horizontal equity requirements for income dependent scales. Applying the proposed scales a tax system can b e derived and we show that it satisfies the horizontal equity con ditions as defined by two authors. Then, we consider the redistri butive effects of a tax system by introducing an inequality param eterized measure as in Ebert and Moyes (2000). We show that, when the reference type family is fixed, the application of the sugge sted equivalence income function is such that the tax system can be overall inequality reducing provided that the reference type t ax function is average rate or minimal progressive. As it is know n, conditions ensuring that a tax system is overall inequality re ducing are not sufficient to guarantee inequality reduction withi n each set of households with the same size. We derive restrictio ns which allow the equivalent income function to generate a tax s ystem which is overall inequality reducing and within type inequa lity reducing. These restrictions concern the tax function for th e reference family type and the domain of incomes. To see where these restrictions come from, it is important to note that a tax system which is overall inequality reducing for a fixed reference may well increase inequality (or keep it unaltered) when another reference type is chosen. But, if a tax system is within type in equality reducing, it is also overall inequality reducing for any reference type. Ebert and Moyes (2000) show that only two partic ular form of equivalence function can be adopted when reference i ndependence is required. The first function yields an income inde pendent absolute scale; the second function yields an income inde pendent relative. The former has to be used when inequality is co nsidered from the absolute point of view, the latter has to be us ed when an intermediate between absolute and relative concept of inequality is adopted or when relative inequality is considered. Here we suggest only an income transformation function which ori ginates income depending scales. On considering inequality either in absolute or in relative sense, using this function we obtain a tax system which is overall inequality reducing and reference i ndependent if some restrictions hold on income domain, on the set of taxable income and on the tax function for the reference type : we think that these restrictions are not too limitative as it c an be understood from the applicative part. The paper is organize d as follows. In the first part, following Ebert-Lambert (2004), horizontal equity (HE) conditions are defined in both cases when equivalence scales are income dependent or income independent. Th en, following Ebert-Moyes (2000), we summarize what has to be mea nt for an overall inequality reducing tax system (OIR), for a wit hin type inequality reducing (WIR) tax system and for a reference independent tax system (RI). In the second part the paper we des cribe the particular affine income transformation function that w e adopt and we investigate on the conditions allowing to this fun ction to generate a tax system which is OIR and WIR. In the thir d part we simulate modifications to the present personal income t ax in Poland, with the aim to design a more family oriented syste m. The paper is completed by an appendix which analyzes the rela tion among the most important instruments used in the real world to take into account horizontal equity. Quotient, exemption and t ax credit are discussed under different hypotheses on tax functio n.
    Keywords: Family Taxation, Horizontal Equity, Vertical Equity, Overall inequality reduction, Family quotient, Exemptions, Tax credit
  22. By: Jennifer Hunt; Sonia Laszlo;
    Abstract: We provide a theoretical framework for understanding when an official angles for a bribe, when a client pays, and the payoffs to the client’s decision. We test this frame work using a new data set on bribery of Peruvian public officials by households. The theory predicts that bribery is more attractive to both parties when the client is richer, and we find empirically that both bribery incidence and value are increasing in household income. However, 65% of the relation between bribery incidence and income is explained by greater use of officials by high–income households, and by their use of more corrupt types of official. Compared to a client dealing with an honest official, a client who pays a bribe has a similar probability of concluding her business, while a client who refuses to bribe has a probability 16 percentage points lower. This indicates that service improvements in response to a bribe merely offset service reductions associated with angling for a bribe, and that clients refusing to bribe are punished. We use these and other results to argue that bribery is not a regressive tax.
    Keywords: Corruption, bribery, institutions, governance.
    JEL: H4 K4 O1
    Date: 2005–09–01
  23. By: Bergh, Andreas (Ratio)
    Abstract: Using the economic freedom index and the newly developed KOF-index of globalization, it is shown that the Scandinavian welfare states have experienced faster, bigger and more consistent increases in these areas, compared to the smaller European and the so called liberal welfare states. The market economy and globalization hence do not pose threats to these welfare states, but are instead neglected factors in explaining their survival and good economic performance. Big government decreases the economic freedom index by definition, but the welfare states compensate in other areas, such as legal structure and secure property rights.
    Keywords: Welfare state; growth; property rights; globalization; taxation; economic freedom
    JEL: F02 H11 P48
    Date: 2006–06–02
  24. By: Philippe, DE DONDER; Jean, HINDRIKS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: We study the political economy of social insurance with double heterogeneity of voters (i.e., different income and risk levels). Social insurance is financed through distortionary taxation and redistributes across income and risks. Individuals vote over the extent of social insurance, which they can complement on the private market. Private insurance suffers from adverse selection which results into insurance rationing. We model political competition a la Wittman, with two parties maximizing the utility of their members. Party membership is endogenously determined. We show that although individuals differ in two dimensions, their preference for social insurance can be aggregated into a single dimensional type function. We then resort to numerical simulations to solve the political equilibrium resort to numerical simulations to solve the political equilibrium outcome as a function of the distribution of income and risk. We obtain equilibrium policy differentiation with the Left party proposing more social insurance than the Right party. The Left party’s equilibrium membership is made of low risk and high income individuals, with high risk and low income individuals forming the Right party’s constituency. In equilibrium, each party is tying for winning. Unlike the median voter outcome, our equilibrium outcome depends on the whole income and risks distribution, and increasing income polarization leads both parties to propose less social insurance. We also compare the political equilibrium outcome with the Rawlsian and utilitarian outcomes.
    Keywords: electoral competition, endogenous parties, Wittman equilibrium, social insurance, adverse selection
    JEL: H23 H50
    Date: 2006–02–15
  25. By: Sinn, Hans-Werner
    Abstract: This paper discusses how an industrialized country could defend the wages and social benefits of its unskilled workers against wage competition from immigrants. It shows that fixing social standards harms the workers and that fixing social replacement incomes implies migration into unemployment. Defending wages with replacement incomes brings about first-order efficiency losses that outweigh the budget cost to the government. By contrast, wage subsidies involve much smaller welfare losses. While the exclusion of migrants from a national replacement program does not improve the situation, the (temporary) exclusion of migrants from a national subsidy program makes it possible to avoid a distortion of the migration pattern.
    Keywords: migration; unemployment; welfare
    JEL: F15 F22 I38 H5 J61
    Date: 2005
  26. By: Carolyn Kousky; Erzo F.P. Luttmer; Richard J. Zeckhauser
    Abstract: Hurricane Katrina did massive damage because New Orleans and the Gulf Coast were not appropriately protected. Wherever natural disasters threaten, the government -- in its traditional role as public goods provider -- must decide what level of protection to provide to an area. It does so by purchasing protective capital, such as levees for a low-lying city. We show that if private capital is more likely to locate in better-protected areas, then the marginal social value of protection will increase with the level of protection provided. That is, the benefit function is convex, contrary to the normal assumption of concavity. When the government protects and the private sector invests, due to the ill-behaved nature of the benefit function, there may be multiple Nash equilibria. Policy makers must compare them, rather than merely follow local optimality conditions, to find the equilibrium offering the highest social welfare. There is usually considerable uncertainty about the amount of investment that will accompany any level of protection, further complicating the government’s choice problem. We show that when deciding on the current level of protection, the government must take account of the option value of increasing the level of protection in the future.
    JEL: D81 D92 H54 Q54 R10
    Date: 2006–05
  27. By: Randall Reback (Barnard College, Columbia University); Julie Berry Cullen (UC-San Diego and NBER)
    Abstract: We explore the extent to which schools manipulate the composition of students in the test-taking pool in order to maximize ratings under Texas' accountability system in the 1990s. We first derive predictions from a static model of administrators' incentives given the structure of the ratings criteria, and then test these predictions by comparing differential changes in exemption rates across student subgroups within campuses and across campuses and regimes. Our analyses uncover evidence of a moderate degree of strategic behavior, so that there is some tension between designing systems that account for heterogeneity in student populations and that are manipulation-free.
    Keywords: school accountability; performance standard; caseload manipulation
    JEL: D82 H39 I28
    Date: 2006–05
  28. By: Javier Gómez Pineda
    Abstract: Capital flows often confront central banks with a dilemma: to contain the exchange rate or to allow it to float. To tackle this problem, an equilibrium model of capital flows is proposed. The model captures sudden stops with shocks to the country risk premium. This enables the model to deal with capital outflows as well as capital inflows. From the equilibrium conditions of the model, I derive an expression for the accounting of net foreign assets, which helps study the evolution of foreign debt under di¤erent policy experiments. The policy experiments point to three main conclusions. First, interest rate defenses of the exchange rate can deliver recessions during capital outflows even in financially resilient economies. Second, during unanticipated reversals in capital inflows, the behavior of foreign debt is not necessarily improved by containing the exchange rate. Third, an economy can gain resilience not by simply shifting the currency denomination of debt, but by both, shifting the denomination and floating the currency.
    Keywords: Sudden stops; Credit booms; Country risk; Fear of floating; Debt sustainability
    JEL: F41 F32 G15 H62 H63

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