nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒07‒21
24 papers chosen by
Peren Arin
Massey University

  1. Fiscal Federalism and Economic Growth By Jan K. Brueckner
  3. Personal Income Tax Elasticity in Turkey: 1975-2005 By Yesim Kustepeli; Onur Sapci
  4. Public Goods and Budget Deficit By Abraham Neyman; Tim Russo
  5. Income Taxes and the Composition of Pay By Giorgio Brunello; Simona Comi; Daniela Sonedda
  6. Tax policies to promote private charitable giving in DAC countries By David Roodman; Scott Standley
  7. The Impact of Legislature and Citizens on the Budgeting Process in Switzerland: Lessons for Central and Eastern Europe By Krisztina Tóth
  8. The Effects of Political Fragmentation on Fiscal Deficits in Turkey By Yesim Kustepeli; Gülcan Önel
  9. On the Economic and Fiscal Effects of Investment in Road Infrastructure in Portugal By Alfredo M. Pereira; Jorge M. Andraz
  10. Valence Advantages and Public Goods Consumption: Does a Disadvantaged Candidate Choose an Extremist Position? By Raphaël Soubeyran
  11. Pigou’s Dividend versus Ramsey’s Dividend in the Double Dividend Literature By Miguel Rodríguez; Eduardo L. Giménez
  12. Retirement in Non-Cooperative and Cooperative Families By Hærnes, Erik; Jia, Zhiyang; Strøm, Steinar
  13. Bilateral Commitment By Guillaume Haeringer; Sophie Bade; Ludovic Renou
  14. Giving Gifts to Groups: How Congestible is Altruism? By James Andreoni
  15. SSI, Labor Supply, and Migration By David Neumark; Elizabeth T. Powers
  16. Born on the First of July: An (Un)natural Experiment in Birth Timing By Joshua S. Gans; Andrew Leigh
  17. Does the Quality of Training Programs Matter? Evidence from Bidding Processes Data By Alberto Chong; Jose Galdo
  18. When Inertia Generates Political Cycles By Raphäel Soubeyran
  19. Directed Technical Change and Climate Policy By Vincent M. Otto; Andreas Löschel; John Reilly
  20. A Theory of Voting Patterns and Performance in Private and Public Committees By Daniel Seidmann
  21. Public services: are composite measures a robust reflection of performance in the public sector? By Rowena Jacobs; Maria Goddard; Peter C Smith
  22. The Effects of Budget Deficit Reduction on Exchange Rate: Evidence from Turkey By Yaprak Gulcan; Mustafa Erhan Bilman
  23. Coalition Governments in a Model of Parliamentary Democracy By Siddhartha Bandyopadhyay; Mandar Oak
  24. Can R&D-Inducing Green Tariffs Replace International Environmental Regulations? By Alireza Naghavi

  1. By: Jan K. Brueckner (Department of Economics, University of California-Irvine)
    Abstract: This paper uses an endogenous-growth model with overlapping generations to explore the connection between fiscal federalism and economic growth. The analysis shows that federalism, which allows public-good levels to be tailored to suit the differing demands of young and old consumers, who live in different jurisdictions, increases the incentive to save. This stronger incentive in turn leads to an increase in investment in human capital, and a byproduct of this higher investment is faster economic growth.
    Date: 2005–10
  2. By: Jorge E. Restrepo; Hernán Rincón
    Abstract: Structural VAR and Structural VEC models were estimated for Chile and Colombia, aiming at identifying fiscal policy shocks in both countries between 1990 and 2005. The impulse responses obtained allow the calculation of a pesofor- peso ($/$) effect on output of a shock to public spending and to the government's net tax revenues, providing a good notion of the incidence of fiscal policy shocks in both countries. When public finances are under control, as they are in Chile, fiscal policy seems to be more effective than when they lack stability and credibility, as seems to be the case of Colombia since the mid nineties.
    Date: 2006–07–01
  3. By: Yesim Kustepeli (Department of Economics, Faculty of Business, Dokuz Eylül University); Onur Sapci (Department of Economics, Faculty of Business, Dokuz Eylül University)
    Abstract: The estimation of tax elasticity; the response of tax revenues to changes in income, is important for at least three reasons: i) formulating government budgets and monitoring tax collections (Sen, 2002), ii) the specification of tax functions, iii) the automatic stabilizing properties of the tax system and the public sector deficit (Hutton, Lambert; 1980, 1982). Among the various approaches to tax elasticity calculation in literature (Tanzi, 1969, 1976; Greytak and McHugh, 1978; Hutton and Lambert, 1980; Ehdaie, 1990), the most famous approach is Tanzi’s Method due to its simplicity and the consensus about its correctness of elasticity estimates. Johansen cointegration tests for the period 1975 - 2005 show that personal income tax elasticity in Turkey is around 0.95, indicating almost unit elasticity. Increasing income can be considered as insurance to maintain an equivalent increase in tax revenue; however it doesn’t seem to be the way to obtain higher tax revenues.
    Keywords: Personal income tax, tax elasticity, Tanzi method
    JEL: E62 H24
    Date: 2006–07–11
  4. By: Abraham Neyman; Tim Russo
    Date: 2006–07–15
  5. By: Giorgio Brunello (University of Padova, CESifo and IZA Bonn); Simona Comi (University of Milano Bicocca); Daniela Sonedda (University of Piemonte Orientale and CRENoS)
    Abstract: According to the standard principal-agent model, the optimal composition of pay should balance the provision of incentives with the individual demand for insurance. Do income taxes alter this balance? We show that the relative share of PRP on total pay is reduced by higher average taxes, and is affected in a complex way by higher marginal tax rates. Empirical evidence based on the British Household Panel Survey, which exploits the UK 1999 Tax Reform, supports the theoretical predictions of the tax-augmented principal-agent model.
    Keywords: performance related pay, income taxes
    JEL: J33 H24
    Date: 2006–07
  6. By: David Roodman; Scott Standley
    Abstract: Researchers have written hundreds of papers on the causes and consequences of official foreign aid, while paying almost no attention to private overseas giving, by individuals, universities, foundations, and corporations. Yet private giving is significant—some $15.5 billion/year, compared to more than $60 billion/year in public giving—and is in no small part an outcome of public policy. In most rich countries, tax deductions and credits lower the “price” of charity to donors. And governments with low tax revenue/GDP ratios leave more money in private pockets for private charity. To correct the near-complete lack of information on this de facto aid policy, we survey officials of 21 donor nations on the use of tax incentives to promote private charity. From the results, we develop an index of the overall incentive for private charity, expressed as a percentage increase over the hypothetical giving level absent incentives. France’s tax code creates the largest price incentive while those of Austria, Finland, and Sweden offer none. Factoring in the income effect of the tax ratio, Australia, Ireland, Germany, and the United States move to the top, with combined price and income effects sufficient to double private giving. As a result, tax policy appears to have nearly doubled private overseas giving from donor countries in 2003, from a counterfactual $8.0 billion. Two-thirds of the $7.5 billion increase occurred in the United States. Of that, nearly 40% appears to be U.S. charity to Israel. According to 21-country scatter plots, countries with lower church attendance and more faith in the national legislature have lower taxes (stronger income effect), but average levels of targeted tax incentives. Income (GDP/capita) does correlate with private overseas aid/capita, but also with public aid/capita, so that the two aid flows are complementary in magnitude.
    Keywords: Foreign aid, charitable giving, tax incentives
    JEL: F35 H24
    Date: 2006–02
  7. By: Krisztina Tóth (Chaire de Finances Publiques)
    Abstract: Scholars evaluating national and local budget procedures in Central and Eastern Europe generally advocate a greater role for legislative bodies and citizens. Mature federations and decentralised countries in Western Europe are often cited as prime examples of participatory budgeting which is supposed to lead to greater fiscal discipline, a better allocation of public resources and higher administrative efficiency. This paper investigates the strengths and weaknesses of legislative activism in Switzerland, with special regard to its ability to answer the double challenge resulting from a push for new expenditures and lower taxes, on one side, and an attempt to maintain deficit levels close to zero, on the other. While the strong consensus orientation, the careful regulation of revenue and expenditure assignment, as well as the systematic use of voters' right to direct participation are perceived as key to the success of the Swiss democracy, this study also highlights how these features can limit the effective influence of the parliament on budgeting and planning. Central and East European countries may learn several lessons from the Swiss case, all of which are rather thought to add an input to long-term reforms rather than provide immediate solutions. The analysis points out some serious limitations of the hierarchical budgeting model as well as the consequences of a haphazard and opaque expenditure and revenue assignment. It reminds, however, that the dynamic process of post-socialist transition requires governments and parliaments to preserve a great deal of flexibility in the budget procedure. At the same time, new methods of public management and a greater transparency of public budgets are examples of tools that may be introduced on the medium term without the risk of slowing down the transition process.
    Keywords: parliament; legislative; budgetary procedure; direct democracy; intergovernmental fiscal relations; public administration; transition economies; Switzerland
    JEL: H61 H62 H70 H83
    Date: 2005–07
  8. By: Yesim Kustepeli (Department of Economics, Faculty of Business, Dokuz Eylül University); Gülcan Önel (Department of Economics, Faculty of Business, Dokuz Eylül University)
    Abstract: Recent theoretical and empirical research has considered how differences in political arrangements affecting national policy formation might explain variation in fiscal policies pursued (Volkerink and de Haan, 2001). The experience of high government deficits of developed nations in the 1980s led researchers to analyze the reasons for this and among other factors they have argued that political variables could also explain budget deficits (Sutter, 2003). This study aims to investigate the effects of the political parties for fiscal deficits in Turkey for 1976-2004 period. Our results show that the most important variable in explaining the budget deficit to GDP ratio in Turkey is its lagged value. The political dispersion index variable, which measures the effect of the number of parties in the government in power, has proven to have a minor effect. Only the coalition governments with two or more parties are found to have higher budget deficit to GDP ratios. Ideology of the governments in power is important for the budget deficit to GDP ratio when it is considered with the number of parties in the government in power. In general, it can be said that polarization, fragmentation and ideology of the governments do not play an important role in explaining the budget deficit to GDP ratio.
    Keywords: Budget deficits, political fragmentation, dispersion indexes
    Date: 2005–11–23
  9. By: Alfredo M. Pereira (Department of Economics, College of William and Mary); Jorge M. Andraz (Faculdade de Economia, Universidade do Algarve)
    Abstract: The objective of this paper is to investigate the economic and fiscal impact of road infrastructure investment in Portugal, focusing on the effects for each region of both local investments and investments in other regions. We estimate VAR models for the national economy as well as for each of the five administrative regions in the country. Empirical results suggest that investment in road infrastructures has been a powerful instrument to increase private investment, new permanent jobs and to promote long-term growth in all regions. More importantly, investment in road infrastructure, both at the aggregate level and for each one of the five administrative regions, generates fiscal effects that largely exceed the initial investment itself. Accordingly, there is no trade off in the long-term between the potentially positive economic effects and the potentially negative budgetary effects of such investments, i.e., both economic and budgetary effects are positive. As a corollary, policies that would reduce current road investment as a response to the current budgetary concerns will result in lower long-term growth as well as worse future budgetary conditions.
    Keywords: public invesetment, road transportation infrastructure, regional spillovers, Portugal
    JEL: C32 H54 R53
    Date: 2006–07–13
  10. By: Raphaël Soubeyran (Université de la Mediterrannée)
    Abstract: Does a disadvantaged candidate always choose an extremist program? When does a less competent candidate have an incentive to move to extreme positions in order to differentiate himself from the more competent candidate? If the answer to these questions were positive, as suggested in recent work (Ansolabehere and Snyder (2000), Aragones and Palfrey (2002), Groseclose (1999), and Aragones and Palfrey (2003)), this would mean that extremist candidates are bad politicians. We consider a two candidates electoral competition over public consumption, with a two dimensional policy space and two dimensions of candidates heterogeneity. In this setting, we show that the conclusion depends on candidates relative competences over the two public goods and distinguish between two types of advantages (an absolute advantage and comparative advantage in providing the two public goods).
    Keywords: Candidate Quality, Extremism, Public Goods Consumption
    JEL: C72 D72
    Date: 2006–06
  11. By: Miguel Rodríguez (Universidade de Vigo); Eduardo L. Giménez (Universidade de Vigo)
    Abstract: This paper deals with the welfare analysis of green tax reforms. The aims of this paper are to highlight misinterpretations of policy assessments in the double dividend literature, to specify which of the efficiency costs and benefits should be ascribed to each dividend, and then, to propose a definition for the first dividend and the second dividend. We found the Pigou’s dividend more appropriate for policy guidance, in contrast to the Ramsey’s dividend usually found in mainstream literature. Therefore, we take up some authors’ recent claims about the need of unambiguous and operative definitions of these dividends both for empirical purposes, and political advice. Finally, the paper analyzes a green tax reform for the US economy to illustrate the advantages of our definitions for policy assessment. The new definitions proposed in this paper i) overcome some shortcoming of the mainstream current definitions in the literature regarding overestimation of the efficiency costs; and, ii) provide information by themselves and not as a partial view of the whole picture.
    Keywords: Double Dividend, Green Tax Reforms, Ramsey’s Dividend, Pigou’s Dividend
    JEL: H23 Q58
    Date: 2006–06
  12. By: Hærnes, Erik (The Ragnar Frisch Centre for Economic Research); Jia, Zhiyang (Dept. of Economics, University of Oslo); Strøm, Steinar (Dept. of Economics, University of Oslo)
    Abstract: Models for non-cooperative as well as cooperative behavior of families are estimated on data from Norway from 1994 to 1998. The models aim at explaining labor supply behavior of married couples the first five months after the husband becomes eligible for early retirement, while the wife is not eligible. Estimates and predictions derived from the different models are compared. Econometric tests find that the Stackelberg model with the male as the leader is the best. Simulations with the estimated models show that taxing pension income the same way as labor income would reduce the propensity to retire early considerably.
    Keywords: family labor supply; retirement; econometric models; policy simulations
    JEL: D10 H55 J26
    Date: 2005–12–11
  13. By: Guillaume Haeringer (Universitat Autònoma de Barcelona); Sophie Bade (Penn State University); Ludovic Renou (Napier Building)
    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
  14. By: James Andreoni
    Date: 2006–07–15
  15. By: David Neumark (Department of Economics, University of California-Irvine); Elizabeth T. Powers (Institute of Government and Public Affairs and Department of Economics, University of Illinois)
    Abstract: The Supplemental Security Income (SSI) program in the United States creates incentives for potential aged recipients to reduce labor supply prior to becoming eligible, and past research finds evidence of such behavior for older men. There may be a migration response to across-state variation in SSI benefits, which is of interest in its own right and can bias estimates of the effects of SSI benefits on labor supply. We fail to find evidence that older individuals migrate in response to SSI benefits, or that the labor supply disincentive effects of SSI are spurious and instead reflect migration behavior.
    Keywords: Supplemental Security Income; Migration; Labor supply
    JEL: H72 I38 J38
    Date: 2006–02
  16. By: Joshua S. Gans; Andrew Leigh
    Abstract: It is well understood that government policies can distort behaviour. But what is less often recognized is the anticipated introduction of a policy can introduce its own distortions. We study one such “introduction effect”, using evidence from a unique policy change in Australia. In 2004, the Australian government announced that children born on or after July 1, 2004 would receive a $3000 “Baby Bonus.” Although the policy was only announced a few months before its introduction, parents appear to have behaved strategically in order to receive this benefit, with the number of births dipping sharply in the days before the policy commenced. On July 1, 2004, more Australian children were born than on any other single date in the past thirty years. We estimate that over 1000 births were “moved” so as to ensure that their parents were eligible for the Baby Bonus, with about one quarter being moved by more than two weeks. Most of the effect was due to changes in the timing of inducement and caesarean section procedures. This birth-timing event represents a considerable opportunity for health researchers to study the impact of planned birthdays and hospital management issues.
    Keywords: introduction effect, timing of births, policy distortion
    JEL: H31 J13
    Date: 2006–07
  17. By: Alberto Chong (Inter-American Development Bank); Jose Galdo (Syracuse University and IZA Bonn)
    Abstract: We estimate the effect of training quality on earnings using a Peruvian program, which targets disadvantaged youths. The identification of causal effects is possible because of two attractive features in the data. First, selection of training courses is based on public bidding processes that assign standardized scores to multiple proxies for quality. Second, the evaluation framework allows for the identification and comparison of individuals in treatment and comparison groups six, 12, and 18 months after the program. Using difference-indifferences kernel matching methods, we find that individuals attending high-quality training courses have higher average and marginal treatment impacts. External validity was assessed by using five different calls over a nine-year period.
    Keywords: training, quality, earnings, bidding, matching methods
    JEL: I38 H43 C13 C14
    Date: 2006–07
  18. By: Raphäel Soubeyran (GREQAM)
    Abstract: We propose a simple infinite horizon of repeated elections with two candidates. Furthermore we suppose that the government policy presents some degree of inertia, i.e. a new government cannot completely change the policy implemented by the incumbent. When the policy inertia is strong enough, no party can win the election a consecutive infinite number of times.
    Keywords: Political Cycles, Inertia
    JEL: D72 H7
    Date: 2006–06
  19. By: Vincent M. Otto (Wageningen University and MIT); Andreas Löschel (European Commission); John Reilly (Joint Program on the Science and Policy of Global Change)
    Abstract: This paper studies the cost effectiveness of climate policy if there are technology externalities. For this purpose, we develop a forward-looking CGE model that captures empirical links between CO2 emissions associated with energy use, directed technical change and the economy. We find the cost-effective climate policy to include a combination of R&D subsidies and CO2 emission constraints, although R&D subsidies raise the shadow value of the CO2 constraint (i.e. CO2 price) because of a strong rebound effect from stimulating innovation. Furthermore, we find that CO2 constraints differentiated toward CO2-intensive sectors are more cost effective than constraints that generate uniform CO2 prices among sectors. Differentiated CO2 prices, through technical change and concomitant technology externalities, encourage growth in the non-CO2 intensive sectors and discourage growth in CO2-intensive sectors. Thus, it is cost effective to let the latter bear relatively more of the abatement burden. This result is robust to whether emission constraints, R&D subsidies or combinations of both are used to reduce CO2 emissions.
    Keywords: Directed Technical Change, Climate Policy, Computable General Equilibrium Model, R&D
    JEL: D58 H21 H23 O33 O38
    Date: 2006–06
  20. By: Daniel Seidmann (University of Nottingham)
    Abstract: We analyze voting in private and public committees whose members care about the selected decision and the rewards which outsiders pay for representing their interests. We characterize the voting pattern and performance in both committees; and we test these implications on the voting patterns of monetary policy committees.
    Date: 2006–04
  21. By: Rowena Jacobs (Centre for Health Economics, The University of York); Maria Goddard (Centre for Health Economics, The University of York); Peter C Smith (Centre for Health Economics, The University of York)
    Abstract: A composite indicator is an aggregated index comprising individual performance indicators. Composite indicators integrate a large amount of information in a format that is easily understood and are therefore a valuable tool for conveying a summary assessment of performance in priority areas. This research investigates the degree to which composite measures are an appropriate metric for evaluating performance in the public sector. Do they reflect accurately the performance of organisations? To what degree are they influenced by the uncertainty surrounding underlying indicators on which they are based? Are they robust and stable over time? The construction of composite measures creates specific methodological challenges that make such questions especially pertinent. We address these through a series of quantitative analyses of panel data relating to healthcare (Star ratings of NHS acute Trusts) and local government (Comprehensive Performance Assessment (CPA) ratings of authorities) in England where composites have been widely used. The creation of a composite comprises a number of important steps, each of which requires careful judgement. These include the specification of the choice of indicators, the transformation of measured performance on individual indicators, the specification of a set of weights on individual indicators, and combining the indicators using aggregation methods or decision rules. We use Monte Carlo simulations to examine the robustness of performance judgements to these different technical choices. We show the extent to which composites provide stable performance rankings of organisations over time and assess whether variations are due to genuine performance improvement or merely the result of random statistical variation. The analysis suggests that the judgements that have to be made in the construction of the composite can have a significant impact on the resulting score. Technical and analytical issues in the design of composite indicators have important policy implications. We highlight the issues which need to be considered in the construction of robust composite indicators so that they can be designed in ways which will minimise the potential for producing misleading performance information which may fail to deliver the expected improvements or even induce unwanted side-effects.
    Keywords: performance measurement, performance indicators, composite indicators
    Date: 2006–06
  22. By: Yaprak Gulcan (Department of Economics, Faculty of Business, Dokuz Eylül University); Mustafa Erhan Bilman (Department of Economics, Faculty of Business, Dokuz Eylül University)
    Abstract: This study investigates the effect of budget deficit reduction on exchange rate between US dollar and Turkish lira (TL). Our article aims to illustrate that the evidence on the relationship between budget deficits and exchange rates is not clear-cut and to explain why the theoretical approaches that underlie the relationship are ambiguous while there is general agreement that cutting budget deficits and debt will lower interest rates. The relationship between deficit reduction and exchange rates has caused a debate among the most famous monetary policy makers and researchers. [Melvin (1989), Mishkin (1992), Greenspan (1995), Thiessen (1995), Krugman (1995), Feldstein (1995)] In addition, budget deficit can be counted as one of the most common and major problem that influences the macroeconomic stability in developing economies. In this sense, cointegration method and causality tests were used in order to find out the possible effects of budget deficit reduction on exchange rates during the period of 1960-2003 in Turkey.
    Keywords: Budget deficits, exchange rates, cointegration analysis
    JEL: H62 F31
    Date: 2005–12–12
  23. By: Siddhartha Bandyopadhyay (University of Birmingham); Mandar Oak (Williams College)
    Abstract: We analyze the relative importance of party ideology and rents from office in the formation of coalitions in a parliamentary democracy. In equilibrium, the types of coalitions that are formed may be minimal winning, minority or surplus and they may be ideologically `disconnected'. The coalitions that form depend upon the relative importance of rents of office and seat shares of the parties. If rents are high, governments cannot be surplus. With low rents or the formateur close to the median, minority governments occur for a wider ideological dispersion. Further, there is a non-monotonic relationship between connectedness of coalitions and rents.
    Keywords: Coalitions, Ideology, Rents
    JEL: C72 D72 H19
    Date: 2006–06
  24. By: Alireza Naghavi (University of Modena)
    Abstract: This paper investigates the link between trade and environment by exploring the effects of green tariffs on the location of firms, innovation and the environment. It shows that tariffs levied on polluting goods could result in less global pollution than harmonization of environmental standards by inducing more pollution abatement R&D, generating lower unit emissions from production, and reducing competition. Green tariffs reduce pollution by (1) shifting production to the region where environmental standards are respected, (2) strategically inducing abatement R&D by the Northern firm by granting the latter a higher market share, (3) creating abatement R&D by deterring delocation.
    Keywords: Environmental Standards, Multinationals, Location of Firms, Pollution Abatement R&D, Green Tariffs
    JEL: F13 F18 F23 H23 Q21 R38
    Date: 2006–06

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