nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒08‒05
68 papers chosen by
Peren Arin
Massey University

  1. Electoral Rules and Government Spending in Parliamentary Democracies By Torsten Persson; Gerard Roland; Guido Tabellini
  2. An empirical investigation of fiscal policy in New Zealand By Iris Claus; Aaron Gill; Boram Lee; Nathan McLellan
  3. Fundamental Determinants of the Effects of Fiscal Policy By Dennis P. J. Botman; Manmohan S. Kumar
  4. Expenditure Composition and Distortionary Tax for Equitable Economic Growth By Hyun Park
  5. Immigration and public spending By René Böheim; Karin Mayr
  6. Mixing Bismarck and Child Pension Systems: An Optimum Taxation Approach By Robert Fenge; Jakob von Weizsäcker
  7. The Tax System in India: Could Reform Spur Growth? By Hélène Poirson
  8. Ex-Post Redistribution in a Federation: Implications for Corrective Policy By Marko Köthenbürger
  9. Sustainability of Public Debt and Budget Deficit: Panel cointegration analysis for the European Union Member countries By Silika Prohl; Friedrich G. Schneider
  10. Interjurisdictional Competition for Higher Education and Firms By Marcel Gérard; Fernando Ruiz
  11. Fiscal Decentralization and Public Subnational Financial Management in Peru By Mercedes Garcia-Escribano; Ehtisham Ahmad
  12. Tax Avoidance, Endogenous Social Norms, and the Comparison Income Effect By Alessandro Balestrino
  13. The Impact of Globalization on the Composition of Government Expenditures: Evidence from Panel Data By Axel Dreher; Jan-Egbert Sturm; Heinrich Ursprung
  14. Tax incentives and the location of FDI : evidence from a panel of German multinationals By Buettner, Thiess; Ruf, Martin
  15. The different extent of privatisation proceeds in EU countries: A preliminary explanation using a public choice approach By Ansgar Belke; Frank Baumgärtner; Friedrich G. Schneider; Ralph Setzer
  16. Tax Evasion and Self-Employment in a High-Tax Country: Evidence from Sweden By Per Engström; Bertil Holmlund
  17. Fool the Markets? Creative Accounting, Fiscal Transparency and Sovereign Risk Premia By Kerstin Bernoth; Guntram B. Wolff
  18. Corruption and the shadow economy: An empirical analysis By Axel Dreher; Friedrich G. Schneider
  19. Did the Death of Australian Inheritance Taxes Affect Deaths? By Joshua S. Gans; Andrew Leigh
  20. The Provision of Local Public Services in a Risky Environment: An Application to Crime By Traub, Stefan
  21. Fool the markets? Creative accounting, fiscal transparency and sovereign risk premia By Bernoth, Kerstin; Wolff, Guntram B.
  22. Public-Private Partnerships--A Public Economics Perspective By Efraim Sadka
  23. Distribution and Development in a Model of Misgovernance By Blackburn, Keith; Forgues-Puccio, Gonzalo F.
  24. Mr. Ricardo's Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model By Silvia Sgherri; Tamim Bayoumi
  25. Short-Term Fiscal Spillovers in a Monetary Union By Agnes Benassy-Quere
  26. Taxation, Business Environment and FDI Location in OECD Countries By Dana Hajkova; Giuseppe Nicoletti; Laura Vartia; Kwang-Yeol Yoo
  27. Indirect Taxes on International Aviation By Jon Strand; Michael Keen
  28. A disaggregated framework for the analysis of structural developments in public finances By Kremer, Jana; Braz, Cláudia Rodrigues; Brosens, Teunis; Langenus, Geert; Momigliano, Sandro; Spolander, Mikko
  29. Taxes and the financial structure of German inward FDI By Ramb, Fred; Weichenrieder, Alfons J
  30. Intergenerational Risk Sharing by Means of Pay-as-you-go Programs – an Investigation of Alternative Mechanisms By Øystein Thøgersen
  31. Performance Related Pay and Labor Productivity By Anne C. Gielen; Marcel J.M. Kerkhofs; Jan C. van Ours
  32. Can Budget Institutions Counteract Political Indiscipline? By Ashoka Mody; Stefania Fabrizio
  33. Natural Volatility, Welfare and Taxation By Olaf Posch; Klaus Wälde
  34. Private Provision of a Complementary Public Good By Richard Schmidtke
  35. Enforcement and the Stability and Growth Pact: How Fiscal Policy Did and Did Not Change Under Europe's Fiscal Framework By Anthony Annett
  36. Why are Women Working So Much More in Canada? An International Perspective By Evridiki Tsounta
  37. The Top Shares of Older Earners in Canada By Michael R. Veall
  38. Quality Investment and Price Formation in the Performing Arts Sector: A Spatial Analysis By Traub, Stefan
  39. The Top Shares of Older Earners in Canada By Michael R. Veall
  40. The Tyranny of Rules: Fiscal Discipline, Productive Spending, and Growth By P R Agénor; D Yilmaz
  41. Public Debt, Money Supply, and Inflation: A Cross-Country Study and its Application to Jamaica By Lavern McFarlane; Wayne Robinson; Goohoon Kwon
  42. Measuring and Explaining Government Inefficiency in Developing Countries By Van de Sijpe, Nicolas; Rayp, Glenn
  43. Does Fiscal Policy Matter for the Trade Account? A Panel Cointegration Study By Christiane Nickel; Katja Funke
  44. How would formula apportionment in the EU affect the distribution and the size of the corporate tax base? An analysis based on German multinationals By Fuest, Clemens; Hemmelgarn, Thomas; Ramb, Fred
  45. Assessing the effects of local taxation using microgeographic data By Gilles Duranton; Laurent Gobillon; Henry G Overman
  46. Fiscal Discipline and Exchange Rate Regimes: Evidence from the Caribbean By Guillermo Tolosa; Rupa Duttagupta
  47. Subsidies for Wages and Infrastructure: How to Restrain Undesired Immigration By Robert Fenge; Volker Meier
  48. Foreign direct investment in the enlarged EU: do taxes matter and to what extent? By Wolff, Guntram B.
  49. Fiscal Policy and Interest Rates--How Sustainable Is the "New Economy"? By David Hauner; Manmohan S. Kumar
  50. Workfare, Monitoring, and Efficiency Wages By Christian Holzner; Volker Meier; Martin Werding
  51. Primary Surplus Behavior and Risks to Fiscal Sustainability in Emerging Market Countries: A "Fan-Chart" Approach By Xavier Debrun; Oya Celasun; Jonathan David Ostry
  52. Beware of Emigrants Bearing Gifts: Optimal Fiscal and Monetary Policy in the Presence of Remittances By Michael T. Gapen; Ralph Chami; Thomas F. Cosimano
  53. Edgeworth and Lindahl-Foley equilibria of a general equilibrium model with private provision of pure public goods By Monique Florenzano; Elena Del Mercato
  54. Legislature size and government spending in Italian regions: forecasting the effects of a reform. By Fiorino, Nadia; Ricciuti, Roberto
  55. Improving Public-spending Efficiency in Czech Regions and Municipalities By Philip Hemmings
  56. What determines informal hiring? Evidence from the Turkish textile sector By Fatih Savasan; Friedrich G. Schneider
  57. A Superior Hybrid Cash-Flow Tax on Corporations By Howell H. Zee
  58. Determinants of Public-Private Partnerships in Infrastructure By Etienne B. Yehoue; Mona Hammami; Jean-François Ruhashyankiko
  59. Evaluating Welfare with Nonlinear Prices By Peter C. Reiss; Matthew W. White
  60. Corruption and Development Indicators: An Empirical Review By Nelson Ramírez-Rondán; Saki Bigio
  61. Reflections on Quantitative Fiscal Conditionality in African PRGF-Supported Programs By Daria Zakharova; Annalisa Fedelino
  62. A Scheme for Efficient Subsidisation of Kerosene in India By Morris Sebastian; Pandey Ajay; Barua Samir K.
  63. Reasons for the U.S. growth period in the nineties: non-keynesian effects, asset wealth and productivity By Anton Burger
  64. Welfare Work Requirements with Paternalistic Government Preferences By Robert Moffitt
  65. Macroeconomic Effects and Policy Challenges of Population Aging By Hamid Faruqee; Natalia T. Tamirisa
  66. Government Debt in Emerging Market Countries: A New Data Set By Anastasia Guscina; Olivier Jeanne
  67. The Effect of Court-Ordered Hiring Quotas on the Composition and Quality of Police By Justin McCrary
  68. Is Crime Contagious? By Jens Ludwig; Jeffrey R. Kling

  1. By: Torsten Persson; Gerard Roland; Guido Tabellini
    Date: 2006–07–31
  2. By: Iris Claus; Aaron Gill; Boram Lee; Nathan McLellan (The Treasury)
    Abstract: This paper examines the effects of fiscal policy, measured by changes in government spending and net tax (government tax revenue less transfer payments), on New Zealand GDP. The framework of analysis is a structural vector autoregression (VAR) model of the New Zealand economy, employing and extending estimation techniques used by Blanchard and Perotti (2002). This model is then used to examine the dynamic effects of changes in government spending, taxes and transfers on GDP and the contributions of discretionary fiscal policy to New Zealand business cycles.
    Keywords: Fiscal policy, business cycle fluctuations, vector autoregression
    JEL: C32 E32 E62
    Date: 2006–07
  3. By: Dennis P. J. Botman; Manmohan S. Kumar
    Abstract: We explore the underlying determinants of the macroeconomic effects of fiscal policy and tax and social security reform using the Global Fiscal Model (GFM). We show that the planning horizon of consumers, access to financial markets, and the elasticity of labor supply, as well as the characteristics of utility and production functions, and the degree of competition are all critical for determining the impact of fiscal policy. Four topical fiscal policy issues, for a representative large and small economy, are examined: the effects of changes in government debt; higher government spending; tax reform; and privatization of retirement savings.
    Keywords: Fiscal policy , Public debt , Government expenditures , Tax reforms , Social security , Privatization , Economic models ,
    Date: 2006–03–31
  4. By: Hyun Park
    Abstract: This paper continues the study of optimal fiscal policy in a growing economy by exploring a case in which the government simultaneously provides three main categories of expenditures with distortionary tax finance: public production services, public consumption services, and state-contingent redistributive transfers. The paper shows that in a general equilibrium model with given exogenous fiscal policy, a nonlinear relation exists between the suboptimal longrun growth rate in a competitive economy and distortionary tax rates. When fiscal policy is endogenously chosen at a social optimum, the relation between the rate of growth and tax rates is always negative. These two conclusions suggest that the interaction between fiscal policy and growth may be complicated enough that it cannot be captured in a simple linear model using an aggregate measure of fiscal policy. The sources of nonlinearity include expectation and coordination of fiscal policy, impluse response of government policies, and the presence of positive externality due to government spending.
    Date: 2006–07–12
  5. By: René Böheim (Department of Economics, Johannes Kepler University Linz, Austria); Karin Mayr (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: We examine the effect of immigration on public spending from a theoretical (political economic) and an empirical perspective. We distinguish between public spending on private goods and on public goods. Our model implies that whether immigration increases or decreases public spending primarily depends on native’s preferences for private versus public good spending. We empirically test our theoretical hypotheses, the `fiscal effect’ and the `anti-social effect’ of immigration using OECD panel data for 1990--2001. Estimating a system of simultaneous equations for total public spending and the share of spending on private goods, we find evidence for a negative effect of low-skilled immigration on public spending which is attributable to an anti-social effect. The effect of high-skilled immigration on public spending is positive, as suggested by a fiscal effect.
    Keywords: immigration; cash transfers; public goods
    JEL: F2 H4 H5
    Date: 2005–12
  6. By: Robert Fenge; Jakob von Weizsäcker
    Abstract: The labor-leisure distortion of a pay-as-you-go pension system can be reduced through a stronger tax-benefit link or Bismarck pension system. Distortions of the fertility decision can be reduced through the introduction of a stronger child-benefit or child pension system. Within our optimal taxation framework, we find a Corlett-Hague result regarding the optimal mix of the two: if and only if children are more complementary to leisure should the tax-benefit link be given a positive weight at the expense of the child-benefit link. The model also allows us to examine the infertility insurance argument that may justify redistribution from families with children to those without implied by most pension systems. We find that the opposite redistribution, from the childless to those with children, would be efficient if individuals have low risk aversion. Redistribution in favor of the infertile would only be justified when risk aversion is high.
    Keywords: pay-as-you-go pension, fertility, externality, Bismarck pension, optimal taxation
    JEL: H23 H55 J13 J18
    Date: 2006
  7. By: Hélène Poirson
    Abstract: This paper assesses the effects of India's tax system on growth, through the level and productivity of private investment. Comparison of India's indicators of effective tax rates and tax revenue productivity with other countries shows that the Indian tax system is characterized by: (1) a high dependence on indirect taxes, (2) low average effective tax rates and tax productivity, and (3) high marginal effective tax rates and large tax-induced distortions on investment and financing decisions. The paper finds that the most recently proposed package of reforms would improve tax productivity and lower the marginal tax burden and tax-induced distortions. But firms that rely on internal sources of funds or face problems borrowing would continue to face high marginal tax rates.
    Keywords: Economic growth , India , Tax policy , Tax reforms , Indirect taxation , Tax rates ,
    Date: 2006–04–20
  8. By: Marko Köthenbürger
    Abstract: This paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy. According to the existing literature (assuming an ex-ante choice of transfers), the corrective grant is equal to the marginal damage/benefit inflicted by externality generation. When the federal government accommodates state finances ex-post, the grant differs in formula from existing prescription. Allocative federal policy corrects state policy incentives twofold. It entails a correction for the distortion in the marginal benefit of state spending (as in earlier literature) and for the distortion in the marginal cost of public funds induced by the ex-post provision of transfers. The required grant rule is generically disproportionate to the equilibrium externality (even with lump-sum taxation). Furthermore, the ex-post provision of transfers is critical for the nature of the equilibrium inefficiency. Equalizing transfers at least partly internalize consumption spill-overs, but simultaneously establishes a new source of inefficiency. As a final result, the existing prescription for allocative federal policy continues to apply if the public good is pure.
    Keywords: federalism, externality, corrective grant, equalization, commitment
    JEL: D62 H10 H30 H70
    Date: 2006
  9. By: Silika Prohl (University of St. Gallen, SIAW-HSG); Friedrich G. Schneider (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: In this study, we analyse the sustainability of fiscal policy of EU member countries within the panel cointegration and error-correction frameworks. Unlike the previous empirical papers in this area, we apply the test for panel cointegration between the primary budget deficit and the public debt defined in GDP ratios. Based on the cointegration test results, we conclude that the fiscal policy is consistent with the intertemporal budget constraint, i.e., it is sustainable in the panel of fifteen EU member countries over the period from 1970 to 2004. Hence, we show that the fiscal balance exhibits a significant structural change in the year 1992, when we apply the Banerjee and Carrion-i-Silvestre (2006) test for a structural break in the panel cointegration relationship. In a next step, we search for the politico-economic factors which explain the variation in the sustainable fiscal balance among the European countries. We evidence that the European fiscal rules have a significant positive effect on the improvement of the fiscal position of the governments of the EU member countries.
    Keywords: Sustainability; Budget Deficit; Panel Cointegration; Structural Breaks; Panel error-correction method
    JEL: H62 H63 C32
    Date: 2006–07
  10. By: Marcel Gérard; Fernando Ruiz
    Abstract: In this paper we consider two regions competing for the larger part of the investment by a mobile firm whose decision is based on the quality of human capital in each region. This in turn depends on the initial skill level and the amount of higher education in the region, with a possible spillover to the other region. Therefore each region, through subsidies, tries to attract a larger part of the academic community. Moreover a central government or agency helps the poorer region by providing it with an extra budgetary allocation. The game is nested in a series of settings which are compared, especially from the point of view of their redistributive efficiency. From a policy point of view, the paper, in line with the subsidiarity principle, first provides an argument for allocating a significant amount of the competence in matters of human capital formation, to the central authorities. It also set forth difficulties which can arise from centralizing such an amount of competence and pleas for clear rules governing the federation, especially ruling out discretionary and opportunistic behaviors of public authorities. Finally, it shows the importance of the central government being correctly informed, including being allowed to gather information by itself.
    Keywords: higher education, interjurisdictional competition, fiscal federalism, public infrastructure
    JEL: H41 H77 I20
    Date: 2006
  11. By: Mercedes Garcia-Escribano; Ehtisham Ahmad
    Abstract: There is increasing interest in fiscal decentralization in Peru as a mechanism to generate more involved decision-making at the subnational level. This is tempered with a continuing emphasis on overall fiscal stability. However, considerable work needs to be undertaken to define more clearly expenditure responsibilities and financing mechanisms that increase local accountability. In addition, a more transparent fiscal transfer system is needed, together with clarity in expenditure management at all levels of government. The paper suggests that a substantial work agenda is needed to extend the decentralization process with greater transparency.
    Keywords: Fiscal policy , Peru , Intergovernmental fiscal relations , Public finance , Fiscal transparency ,
    Date: 2006–05–17
  12. By: Alessandro Balestrino
    Abstract: We present a model of income tax avoidance with heterogeneous agents, assuming the presence of a comparison income effect and of a psychic cost (disutility) of tax dodging. We analyse the policy preferences of the agents, and identify a median-voter political equilibrium. Paralleling previous results in the optimal taxation literature, we show that the comparison income effect calls for a high degree of progressivity of the income tax; additionally, we find that this tendence is strengthened by the psychic cost of avoidance. We then model the endogenous formation of the stigma attached to the act of avoidance as a "conformism game". We argue that such stigma is motivated by the desire to make redistribution more effective, and that it is enhanced by the income comparison effect.
    Keywords: tax avoidance, social norms, conformism, comparison income, median voter
    JEL: D72 H26 H31
    Date: 2006
  13. By: Axel Dreher; Jan-Egbert Sturm; Heinrich Ursprung
    Abstract: According to the disciplining hypothesis, globalization restrains governments by inducing increased budgetary pressure. As a consequence, governments shift their expenditures in favour of transfers and subsidies and away from capital expenditures. This expenditure shift is potentially enhanced by citizens’ preferences to be compensated for the risks of globalization (“compensation hypothesis”). Employing two different datasets and various measures of globalization, we analyze whether globalization has indeed influenced the composition of government expenditures. For a sample of 108 countries, we examine the development of four broad expenditure categories for the period 1970-2001: capital expenditures; expenditures for goods and services; interest payments; and subsidies and other current transfers. A second dataset provides a much more detailed classification: public expenditures, expenditures for defence, order, economic environment, housing, health, recreation, education, and social expenditures. However, this second data set is only available since 1990 – and only for the OECD countries. Our results show that globalization did not influence the composition of government expenditures.
    Keywords: globalization, economic policy, government expenditure composition, tax competition
    JEL: C23 H70 H87
    Date: 2006
  14. By: Buettner, Thiess; Ruf, Martin
    Abstract: Using a firm-level dataset this paper investigates the impact of taxation on the decision of German multinationals to hold direct investments in other European countries or abroad. Controlling for firm-specific differences in the valuation of potential locations, the results confirm significant effects of tax incentives, market size, and of labor cost on cross-border location decisions. In accordance with Devereux and Griffith (1998) we find that the marginal tax rate has no predictive power for location decisions whereas effective average and statutory tax rates exert significant effects. In particular, the statutory tax rate has strong predictive power for the likelihood of direct investment holdings at a location. The results indicate that an increase in the statutory tax rate by 10 percentage points reduces the odds of observing some positive direct investment by approximately 20 %.
    Keywords: Location, FDI, Taxes, Firm-Level Panel Data, Fixed-Effects Logit Model
    JEL: F21 F23 H25 R38
    Date: 2005
  15. By: Ansgar Belke (University of Hohenheim, Department of Economics, Stuttgart, Germany); Frank Baumgärtner (University of Hohenheim, Department of Economics, Stuttgart, Germany); Friedrich G. Schneider (Department of Economics, Johannes Kepler University Linz, Austria); Ralph Setzer (Deutsche Bundesbank, Department of Economics, Frankfurt, Germany)
    Abstract: This paper empirically investigates the differences in the motives of raising privatisation proceeds for a panel of EU countries from 1990 to 2000. More specifically, we test whether privatisations can be mainly interpreted (a) as ingredients of a larger reform package of economic liberalisation in formerly overregulated economies, (b) as a reaction to an increasing macroeconomic problem pressure and (c) as a means to foster growth and increase tax income and relax the fiscal stance with an eye on the demands by integration of economic and financial markets. Whereas we are able to corroborate claim (a) only partly, we gain consistent evidence in favour of claims (b) and (c).
    Keywords: European Union; panel analysis; partisan theory; privatisation proceeds; state-owned enterprises
    JEL: H42 E62 L33
    Date: 2006–07
  16. By: Per Engström; Bertil Holmlund
    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. Underreporting 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
  17. By: Kerstin Bernoth; Guntram B. Wolff
    Abstract: We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both the official fiscal position and the expected “creative” part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia.
    Keywords: risk premia, government bond yields, creative accounting, stock-flow adjustments, gimmickry, transparency
    JEL: E43 E62 F34 G12 H60
    Date: 2006
  18. By: Axel Dreher (Department of Management, Technology, and Economics, KOF, ETH Zürich (Swiss Federal Institute of Technology Zurich), CH-8092 Zürich, Switzerland); Friedrich G. Schneider (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: This paper analyzes the influence of the shadow economy on corruption and vice versa. We hypothesize that corruption and shadow economy are substitutes in high income countries while they are complements in low income countries. The hypotheses are tested for a crosssection of 120 countries and a panel of 70 countries for the period 1994-2002. Our results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. We also find that stricter regulations increase both corruption and the shadow economy.
    Keywords: corruption; shadow economy; regulation; tax burden
    JEL: D73 H26 O17 O5
    Date: 2006–01
  19. By: Joshua S. Gans; Andrew Leigh
    Abstract: In 1979, Australia abolished federal inheritance taxes. Using daily deaths data, we show that approximately 50 deaths were shifted from the week before the abolition to the week after (amounting to over half of those who would have been eligible to pay the tax). Our results imply that over the very short run, the death rate is highly elastic with respect to the inheritance tax rate.
    Keywords: behavioural responses to taxation, timing of deaths, estate tax
    JEL: H26 I12
    Date: 2006–08
  20. By: Traub, Stefan
    Abstract: We state efficiency conditions for the provision of congestable local public goods that diminish individual-specific proprietary risks. The optimum level of such a public service is determined by equating the sum of the reductions of the expected property losses due to a better service level with the marginal costs of the service. The optimum size of the providing local authority in terms of population is obtained where the increase in proprietary risks due to congestion meets the decrease in contributions for the original citizens. As an empirical example, we employ Germany’s crime statistic in order to assess the efficiency of the provision of police services at the state level.
    Keywords: Local Public Goods, Congestion, Risk, Crime, Police
    JEL: D61 H41 R50
    Date: 2006
  21. By: Bernoth, Kerstin; Wolff, Guntram B.
    Abstract: We investigate the effects of official fiscal data and creative accounting signals on interest rate spreads between bond yields in the European Union. Our model predicts that risk premia contained in government bond spreads should increase in both, the official fiscal position and the expected ”creative” part of fiscal policy. The relative importance of these two signals depends on the transparency of the country. Greater transparency reduces risk premia. The empirical results confirm the hypotheses. Creative accounting increases the spread. The increase of the risk premium is stronger if financial markets are unsure about the true extent of creative accounting. Fiscal transparency reduces risk premia. Instrumental variable regressions confirm these results by addressing potential reverse causality problems and measurement bias.
    Keywords: Risk premia, government bond yields, creative accounting, stock-flow adjustments, gimmickry, transparency
    JEL: E43 E62 F34 G12 H6
    Date: 2006
  22. By: Efraim Sadka
    Abstract: Public-private partnerships (PPPs) involve the supply by the private sector of infrastructure and services deriving from infrastructure assets which have traditionally been supplied by the public sector. PPPs are spreading all over the world. It may be quite plausible that such arrangements were initially an attempt to evade expenditure controls and hide public budget deficits. But if they are properly designed and transparently reported, PPPs can enhance the efficiency of the provision of services that were formerly supplied solely by the public sector. This paper provides a public economics perspective on PPPs.
    Keywords: Public sector , Private sector , Infrastructure , Government expenditures , Budget deficits ,
    Date: 2006–04–05
  23. By: Blackburn, Keith; Forgues-Puccio, Gonzalo F.
    Abstract: This paper presents an analysis of bureaucratic corruption, income inequality and economic development. The analysis is based on a dynamic general equilibrium model in which bureaucrats are appointed by the government to implement a redistributive programme of taxes and subsidies designed to benefit the poor. Corruption is reflected in bribery and tax evasion as bureaucrats conspire with the rich in providing false information to the government. In accordance with empirical evidence, the model predicts a positive relationship between corruption and inequality, and a negative relationship between corruption and development.
    Keywords: Corruption, inequality, development.
    JEL: D31 D73 H26 O11
    Date: 2005
  24. By: Silvia Sgherri; Tamim Bayoumi
    Abstract: We estimate tax multipliers in a "Blanchard-Yaari" consumption model where Ricardian equivalence is broken because the private sector discounts the future at a faster rate than the real rate of interest. The model fits U.S. data since 1955 extremely well-entailing a discount wedge of around 20 percent a year and fiscal multipliers of 0.15-0.4-depending on the permanence of the change in taxes/transfers, and is much superior to one that assumes some consumers are fully Ricardian and others follow simple rules of thumb. The implied high private sector rate of discount has wide implications for policymakers.
    Date: 2006–07–13
  25. By: Agnes Benassy-Quere
    Abstract: In this paper, a simple, two-country, static model is developed in order to analyze short-run fiscal spillovers in a monetary union, depending on (i) the way fiscal policy is implemented (expenditures versus net taxes), (ii) the strength of the supply-side channel of tax policies compared to the demand-side channel, and (iii) the extent of central bank accommodation. It is shown that both a spending expansion and a tax cut produce positive spillovers on foreign output provided the central bank accommodates the shock, except if tax cuts have large supply-side effects. If the central bank does not accommodate the shock, the spillovers of a fiscal expansion are generally negative. However fiscal spillovers can be positive in the case of a tax cut because induced disinflation reduces or even reverses the reaction of the central bank. Due to financial liberalization, it is possible that demand-side channels of fiscal policy have become less powerful compared to supply-side channels. To the extent that interest-rate variations are smooth, this could reduce the positive spillover of a spending expansion while turning the spillover of a tax cut into the negative territory.
    Keywords: Fiscal policy; theoretical model; spillovers; monetary union; short run; tax and budget policy; models; monetary block
    JEL: E61 E62 F41
    Date: 2006–07
  26. By: Dana Hajkova; Giuseppe Nicoletti; Laura Vartia; Kwang-Yeol Yoo
    Abstract: This paper assesses the importance of taxation on foreign direct investment contributing to the literature in two ways. First, it relates bilateral FDI among OECD countries over the 1990s to a new set of estimates of corporate tax wedges that include many relevant aspects of FDI taxation. Second, it controls for a large set of additional policy and non-policy factors that may affect the attractiveness of a country for foreign investors. Furthermore, the empirical approach is novel in that it focuses on a semi-parametric estimation methodology that accounts for a number of unobserved effects possibly impinging on the choice of investment location by multinational enterprises. Consistent with previous findings, the estimation results suggest that corporate taxation has a non-negligible impact on FDI location choices. However, the results suggest that focusing only on taxation in home and host countries and omitting other policies (such as border policies and labour and product market settings) may lead to a serious overestimation of tax elasticities and their relevance for policy. <P>Fiscalité, environnement des entreprises et localisation des IDE dans les pays OCDE <BR>Cette étude évalue l'importance des politiques fiscales pour les investissements directs étrangers (IDE). Il contribue a littérature de deux façons: d'une part, l'étude établit un rapport entre les IDE bilatéraux dans les pays de l'OCDE pendant les années 90 et un nouvel ensemble d'indicateurs de taux effectifs d'imposition des sociétés couvrant plusieurs aspects de la taxation sur les IDE. D?autre part, il contrôle pour un ensemble des politiques économiques et autres facteurs susceptibles d'influencer l'attractivité d'un territoire pour les investisseurs étrangers. En outre, l'approche empirique est originale dans la mesure où elle utilise une méthodologie d'estimation semi-parametrique qui tient compte des effets inobservables affectant le choix de localisation des entreprises multinationales. En ligne avec les conclusions de la littérature, les résultats indiquent que l'imposition des sociétés a des incidences non-négligeables sur les choix de localisation des IDE. Cependant, les résultats indiquent qu'il est possible de sérieusement surestimer les élasticités par rapport aux taxes et leur importance politique en se concentrant seulement sur les impôts dans les pays d'origine et d'accueil des investissements, sans prendre en compte un certain nombre de politiques (telles que les obstacles frontaliers et le fonctionnement du marché du travail et des produits).
    JEL: C23 F21 F23 H23 H25 L50
    Date: 2006–07–24
  27. By: Jon Strand; Michael Keen
    Abstract: This paper examines the case for internationally coordinated indirect taxes on aviation (as a source of general revenue-not (necessarily) as a source of development finance). The case for such taxes is strong: the tax burden on international aviation is currently limited, yet it contributes significantly to border-crossing environmental damage. A tax on aviation fuel would address the key border-crossing externalities most directly; a ticket tax could raise more revenue; departure taxes face the least legal obstacles. Optimal policy requires deploying both fuel and ticket taxes. A fuel tax of 20 U.S. cents per gallon (10 percent, at today's fuel prices, corresponding to assessed environmental damage), or alternatively ticket taxes of 2.5 percent, would raise about US$10 billion if imposed worldwide, and US$3 billion if applied only in Europe.
    Keywords: Indirect taxation , Energy taxes , Transport , Environment ,
    Date: 2006–05–23
  28. By: Kremer, Jana; Braz, Cláudia Rodrigues; Brosens, Teunis; Langenus, Geert; Momigliano, Sandro; Spolander, Mikko
    Abstract: In this paper, we present a disaggregated framework for the analysis of past and projected structural developments in the most relevant revenue and expenditure categories and the fiscal balance. The framework, in particular, distinguishes between the effects of discretionary fiscal policy and of macroeconomic and other developments and is sufficiently standardised to be used in multi-country studies. Here, it is applied to Belgium, Finland, Germany, Italy, the Netherlands and Portugal over the period 1998 to 2004. During this period the structural primary balance ratio clearly worsened in all countries except Finland. In Belgium, Italy and the Netherlands, both revenue and expenditure contributed to the deterioration of the structural primary balance. In Germany the large deterioration in revenue was partially offset by the decline in the structural primary expenditure ratio, while the opposite was true for Portugal. The analysis highlights the various factors that contributed to these developments.
    Keywords: Structural budget balance, fiscal forecasting and monitoring, fiscal indicators
    JEL: E69 H20 H50 H60
    Date: 2006
  29. By: Ramb, Fred; Weichenrieder, Alfons J
    Abstract: The paper analyses the financial structure of German inward FDI. From a tax perspective, intra-company loans granted by the parent should be all the more strongly preferred over equity the lower the tax rate of the parent and the higher the tax rate of the German affiliate. From our study of a panel of more than 8,000 non-financial affiliates in Germany, we find only small effects of the tax rate of the foreign parent. However, our empirical results show that subsidiaries that on average are profitable react more strongly to changes in the German corporate tax rate than this is the case for less profitable firms. This gives support to the frequent concern that high German taxes are partly responsible for the high levels of intra-company loans. Taxation, however, does not fully explain the high levels of intra-company borrowing. Roughly 60% of the cross-border intra-company loans turn out to be held by firms that are running losses.
    Keywords: foreign direct investment, financial structure, taxation
    JEL: F23 H25
    Date: 2005
  30. By: Øystein Thøgersen
    Abstract: A pay-as-you-go (paygo) pension program may provide intergenerational pooling of risks to individuals’ labor and capital income over the life cycle. By means of a model that provides illuminating closed form solutions, we demonstrate that the magnitude of the optimal paygo program and the nature of the underlying risk sharing effects are very sensitive to the chosen combination of risk concepts and stochastic specification of long run aggregate wage income growth. In an additive way we distinguish between the pooling of wage and capital risks within periods and two different intertemporal risk sharing mechanisms. For realistic parameter values, the magnitude of the optimal paygo program is largest when wage shocks are not permanent and individuals in any generation are considered from a pre-birth perspective, i.e. a “rawlsian risk sharing” perspective is adopted.
    Keywords: social security, risk sharing, portfolio choice, persistence in income shocks
    JEL: D91 E32 G11 H55
    Date: 2006
  31. By: Anne C. Gielen (Tilburg University, CentER, OSA and IZA Bonn); Marcel J.M. Kerkhofs (OSA, Tilburg University); Jan C. van Ours (Tilburg University, CentER, CEPR and IZA Bonn)
    Abstract: This paper uses information from a panel of Dutch firms to investigate the labor productivity effects of performance related pay (PRP). We find that PRP increases labor productivity at the firm level with about 9% and employment with about 5%.
    Keywords: performance related pay, labor productivity
    JEL: C41 H55 J64 J65
    Date: 2006–07
  32. By: Ashoka Mody; Stefania Fabrizio
    Abstract: The budget is an expression of political rather than economic priorities. We confirm this proposition for a group of new and potential members of the European Union, finding that politics dominates. The contemporary practice of democracy can increase budget deficits through not only ideological preferences but also more fragmented government coalitions and higher voter participation. Long-term structural forces, triggered by societal divisions and representative electoral rules, have more ambiguous implications but also appear to increase budget pressures, as others have also found. However, our most robust, and hopeful, finding is that budget institutions-mechanisms and rules of the budget process-that create checks and balances have significant value even when the politics is representative but undisciplined, and when long-term structural forces are unfavorable.
    Keywords: Fiscal policy , Budgets , Budget deficits , Government expenditures , Political economy , Public finance , National budgets ,
    Date: 2006–05–19
  33. By: Olaf Posch; Klaus Wälde
    Abstract: Cyclical components are analytically computed in a theoretical model of stochastic endogenous fluctuations and growth. Volatility is shown to depend on the speed of convergence of the cyclical component, the expected length of a cycle and on the altitude of the slump. Taxes affect these channels and can therefore explain cross-country differences and breaks over time in volatility. With exogenous sources of fluctuations, a special case of our model, decentralized factor allocation is efficient. With endogenous fluctuations and growth, decentralized factor allocation is inefficient and (time-invariant) taxes can (de-) stabilize the economy. No unambiguous link exists between volatility and welfare.
    Keywords: endogenous fluctuations and growth, welfare analysis, taxation, stochastic continuous time model, poisson uncertainty
    JEL: C65 E32 E62 H30 O33
    Date: 2006
  34. By: Richard Schmidtke
    Abstract: For several years, an increasing number of firms have been investing in Open Source Software (OSS). While improvements in such a non-excludable public good cannot be appropriated, companies can benefit indirectly in a complementary proprietary segment. We study this incentive for investment in OSS. In particular we ask how (1) market entry and (2) public investments in the public good affect the firms' production and profits. Surprisingly, we find that there exist cases where incumbents benefit from market entry. Moreover, we show the counter-intuitive result that public spending does not necessarily lead to a decreasing voluntary private contribution.
    Keywords: Open Source Software, private provision of public goods, Cournot-Nash equilibrium, complements, market entry
    JEL: C72 L13 L86
    Date: 2006
  35. By: Anthony Annett
    Abstract: The Stability and Growth Pact has been a success in numerous EU countries, especially in guiding them toward underlying fiscal balance ahead of population aging. These countries tend to be smaller, subject to greater macroeconomic volatility, and reliant on a form of fiscal governance that emphasizes targets and contracts. Most of the new members share these characteristics. For the countries less compatible with the Pact, domestic governance reforms that increase the reputational costs for noncompliance can be useful complements to the fiscal framework.
    Keywords: Fiscal policy , Europe , European Union , Political economy , Budget deficits ,
    Date: 2006–05–12
  36. By: Evridiki Tsounta
    Abstract: This paper analyzes the role of the tax and benefit system in spurring the impressive increase in Canadian female labor participation in the last decade. Using annual panel data for 10 large industrial countries over the period 1980-2001, I find that reforms in the Canadian tax and benefit system in the mid-1990s account for at least one-third of the observed increase in female participation in the period 1995-2001. The analysis indicates that policy initiatives similar to the "family-friendly" policies introduced in Canada could boost female participation in other countries and help policymakers meet the challenges of population aging.
    Keywords: Labor markets , Canada , Taxation , Benefits , Tax systems , Population , Aging ,
    Date: 2006–04–20
  37. By: Michael R. Veall
    Abstract: Within the 65+ age group, the percentage of labour market income received by the top 1% of earners has increased from about 30% in 1982 to more than 60% in 2002. The trend is smooth, is roughly uniform across provinces and does not appear to have been accelerated by top marginal tax rate reductions in 1988. Hence there is little evidence from this time series that further marginal tax rate reductions would have an important permanent effect on aggregate labour supply for this age group. Moreover, it is unlikely that this period could provide evidence regarding aggregate labour supply effects for this group with respect to reductions in Old Age Security or Guaranteed Income Supplement clawbacks, because the top 1% of earners are above the income range served by these programs.
    Keywords: Income distribution of seniors, employment income of seniors
    JEL: H24 H55 J26
    Date: 2006–07
  38. By: Traub, Stefan
    Abstract: In this paper, we present a spatial model of the public provision of the performing arts. Agents behave boundedly rational. Art directors set performance quality according to their aspiration levels. While taking into account the spatial distribution of the population, administrative directors in calculating ticket prices ignore that they compete with neighboring performing arts organization (PAOs) for audience. The model is tested empirically using a spatial autoregressive (SAR) model with a complete data set of German PAOs and cities. Our data support the model and help to explain the size and distribution of losses in the public performing arts sector.
    Keywords: Performing Arts, Local Public Goods, Quality, Spatial Competition, Bounded Rationality
    JEL: H41 R59 Z10
    Date: 2005
  39. By: Michael R. Veall
    Abstract: Within the 65+ age group, the percentage of labour market income received by the top 1% of earners has increased from about 30% in 1982 to more than 60% in 2002. The trend is smooth, is roughly uniform across provinces and does not appear to have been accelerated by top marginal tax rate reductions in 1988. Hence there is little evidence from this time series that further marginal tax rate reductions would have an important permanent effect on aggregate labour supply for this age group. Moreover, it is unlikely that this period could provide evidence regarding aggregate labour supply effects for this group with respect to reductions in Old Age Security or Guaranteed Income Supplement clawbacks, because the top 1% of earners are above the income range served by these programs.
    Keywords: Income distribution of seniors, employment income of seniors
    JEL: H24 H55 J26
    Date: 2006–07
  40. By: P R Agénor; D Yilmaz
    Abstract: The performance of alternative fiscal rules is examined in an endogenous growth model with public capital and debt. In addition to investing in infrastructure, the government spends on maintenance and health. Infrastructure affects the production of both commodities and health services. The performance of a balanced budget rule, as well as standard and modified (including and excluding productive spending) golden rules and primary surplus rules are compared numerically. Under a range of plausible parameter configurations and spending shares, and as long as the debt-related risk premium is not too elastic, a primary surplus rule that excludes productive spending is shown to perform better than alternative rules in response to a variety of shocks. As a practical policy implication, we propose the definition of a transparent Core Productive Expenditure Program.
    Date: 2006
  41. By: Lavern McFarlane; Wayne Robinson; Goohoon Kwon
    Abstract: This paper provides comprehensive empirical evidence that supports the predictions of Sargent and Wallace's (1981) "unpleasant monetarist arithmetic" that an increase in public debt is typically inflationary in countries with large public debt. Drawing on an extensive panel dataset, we find that the relationship holds strongly in indebted developing countries, weakly in other developing countries, but generally not in developed economies. These results are robust to the inclusion of other variables, corrections for endogeneity biases, and relaxation of common-slope restrictions and are invariant over sub-sample periods. We estimate a VAR to trace out the transmission channel and find the impulse responses consistent with the predictions of a forward-looking model of inflation. Wealth effects of public debt could also affect inflation, as posited by the fiscal theory of the price level, but we do not find supportive evidence. The results suggest that the risk of a debt-inflation trap is significant in highly indebted countries, and pure money-based stabilization is unlikely to be effective over the medium term. Our findings stress the importance of institutional and structural factors in the link between fiscal policy and inflation.
    Keywords: Public debt , Jamaica , Money supply , Demand for money , Inflation , Fiscal policy , Economic models ,
    Date: 2006–05–17
  42. By: Van de Sijpe, Nicolas; Rayp, Glenn
    Abstract: We show the relevance of government expenditure inefficiency using the Barro (1990) model. We estimate government inefficiency for 52 developing countries using a data envelopment analysis. The estimated inefficiencies are subsequently used in a general to specific approach in order to identify their determinants. We find the government expenditure inefficiency is primarily determined by governance and political variables, and structural country variables. Economic policy determinants apparently count less. Government inefficiency of the Sub Saharan countries in the sample is substantially higher.
    Keywords: Government inefficiency, data envelopment analysis, economic development
    JEL: H21 H50 O23
    Date: 2005
  43. By: Christiane Nickel; Katja Funke
    Abstract: This paper analyzes the empirical relationship between fiscal policy and the trade account. Research prior to this paper did not consider that the components of private and public demand in the import demand equation exhibit different elasticities. Using pooled mean group estimation for annual panel data of the G-7 countries for the years 1970 through 2002, we provide empirical evidence that the composition of overall demand-i.e., the distribution among public demand, private demand, and export demand-has an impact on the magnitude of the trade account deficit.
    Date: 2006–06–22
  44. By: Fuest, Clemens; Hemmelgarn, Thomas; Ramb, Fred
    Abstract: This paper analyses the effects of introducing a common EU tax base with formula apportionment on the size of the EU wide tax base and on the distribution of the tax base between the EU member countries. We use a combined dataset of Deutsche Bundesbank’s Foreign Direct Investment data (MiDi) and corporate balance sheet data (Ustan and Hoppenstedt) for the tax base estimations. The data is used to construct i) a separate accounting and ii) a formula apportionment tax base for the firms in the sample. Our results suggest that due to border crossing loss-offset, the EU wide corporate tax base represented by our data sample shrinks significantly. Smaller countries which are usually considered to attract book profits under the current system, i.e. Ireland and the Netherlands, tend to lose a larger part of their tax base than larger countries like Germany, Italy, France or Great Britain. However, these results should be evaluated in the light of the limitations of the data used in this study since our analysis is based on German FDI data only. Furthermore, the calculations do not take into account behavioural responses of companies caused by such a system change.
    Keywords: EU Tax Base, Formula Apportionment, Multinational Companies
    JEL: F23 H25
    Date: 2006
  45. By: Gilles Duranton; Laurent Gobillon; Henry G Overman
    Abstract: We study the impact of local taxation on the location and growth of firms. Our empiricalmethodology pairs establishments across jurisdictional boundaries to estimate the impact of taxation. Our approach improves on existing work as it corrects for unobserved establishment heterogeneity, for unobserved time-varying site specific effects, and for the endogeneity of local taxation. Applied to data for English manufacturing establishments we find that local taxation has a negative impact on employment growth, but no effect on entry.
    Keywords: Local taxation, spatial differencing, borders, regression discontinuity
    JEL: H22 H71 R38
    Date: 2006–07–24
  46. By: Guillermo Tolosa; Rupa Duttagupta
    Abstract: This paper assesses the nature of fiscal discipline under alternative exchange rate regimes. First, it shows in a simple theoretical framework that fiscal agencies under a currency union with a fixed exchange rate can have the largest incentive to overspend or "free-ride" (compared to those under other exchange rate regimes) owing to their ability to spread the costs of overspending in terms of the inflation tax across both time-given the fixed exchange rate-and space-given the currency union. In contrast, such free-riding behavior does not arise under flexible regimes owing to the immediate inflationary impact of spending. Next, empirically, it shows that fiscal stances in countries with fixed pegs and currency unions regime demonstrate greater free-riding behavior than countries with more flexible regimes in 15 Caribbean countries during 1983-2004.
    Keywords: Fiscal policy , Caribbean , Monetary unions , Exchange rate regimes , Flexible exchange rates , Currency pegs ,
    Date: 2006–05–12
  47. By: Robert Fenge; Volker Meier
    Abstract: This paper investigates regional or international transfers as a means to prevent immigration into unemployment. We analyze a two-country model with free migration in which the rich country is characterized by minimum wage unemployment. Matching grants for investment in infrastructure are superior to wage subsidies because the former instrument leads to a stronger productivity growth in the poor country, reducing both migration flows and unemployment in the rich country. This result is shown to hold for a sufficiently low level of the regional policy budget. It explains the exclusive use of investment subsidies in the EU.
    Keywords: regional policy, public infrastructure, wage subsidies, unemployment, migration
    JEL: D62 H23 H54 H77 J61 R50
    Date: 2006
  48. By: Wolff, Guntram B.
    Abstract: Foreign direct investment is of increasing importance in the European Union. This paper estimates the effect of taxes on foreign direct investment (FDI) flows and on three sub-components of these flows for the countries of the en- larged European Union. The model in the spirit of gravity equations robustly explains FDI flows between the 25 member states. Sample selection needs to be addressed in the estimation. We show that the different subcomponents of FDI should and indeed do react differently to taxes. After controlling for unobserved country characteristics and common time effects, the top statutory corporate tax rate of both, source and host country, turn insignificant for total FDI and investment into equity. However, high source country taxes clearly increase the probability of firms to re-invest profits abroad and lower the percentage of debt financed FDI. This might reflect profit re-allocation to avoid taxes. Market size factors have the expected signs for total FDI. Non-productivity adjusted wages as determinants of FDI are less robust.
    Keywords: Foreign direct investment, FDI, corporate taxes, sample selection model, profit re-allocation
    JEL: E6 F2 F3 F4 H2 H8
    Date: 2006
  49. By: David Hauner; Manmohan S. Kumar
    Abstract: This paper explores the determinants of long-term government bond yields in the Group of Seven (G-7) economies and analyzes the factors that could explain the conundrum of very low rates in the face of a variety of adverse factors in recent years. In particular, the paper focuses on the deteriorating fiscal position in the G-7 economies and enquires which factors could have offset their impact on long-term interest rates, and how sustainable they are likely to be. A model of interest rate determination is elaborated and estimated for the G-7, with explicit emphasis on capital flows and public savings. The results suggest a high likelihood of a substantial impact of the weaker budgetary positions in the G-7 on global interest rates when the offsetting unprecedented capital flows slow down.
    Keywords: Interest rates , Fiscal policy , Foreign exchange reserves , Reserves , Group of Seven , Capital flows , Public sector savings , Economic models ,
    Date: 2006–05–10
  50. By: Christian Holzner; Volker Meier; Martin Werding
    Abstract: The impact of a stronger work requirement for welfare recipients in a workfare program is studied in an efficiency wage model where a representative firm chooses its level of monitoring activities. A stricter workfare policy raises employment and monitoring activities. It typically increases profits and reduces the tax rate. The impact on the net wage is ambiguous. Utility levels of employed workers and welfare recipients may increase even if the net wage declines. The utility differential between these two groups of workers shrinks.
    Keywords: workfare, welfare, efficiency wages, monitoring
    JEL: H53 J41 J60
    Date: 2006
  51. By: Xavier Debrun; Oya Celasun; Jonathan David Ostry
    Abstract: This paper proposes a probabilistic approach to public debt sustainability analysis (DSA) using "fan charts." These depict the magnitude of risks-upside and downside-surrounding public debt projections as a result of uncertain economic conditions and policies. We propose a simulation algorithm for the path of public debt under realistic shock configurations, combining pure economic disturbances (to growth, interest rates, and exchange rates), the endogenous policy response to these, and the possible shocks arising from fiscal policy itself. The paper emphasizes the role of fiscal behavior, as well as the structure of disturbances facing the economy and due to fiscal policy, in shaping the risk profile of public debt. Fan charts for debt are derived from the "marriage" between the pattern of shocks on the one hand and the endogenous response of fiscal policy on the other. Applications to Argentina, Brazil, Mexico, South Africa, and Turkey are used to illustrate the approach and its limitations.
    Keywords: Public debt , Emerging markets , Debt sustainability analysis ,
    Date: 2006–03–23
  52. By: Michael T. Gapen; Ralph Chami; Thomas F. Cosimano
    Abstract: This paper uses a stochastic dynamic general equilibrium model to investigate the influence of countercyclical remittances on the conduct of fiscal and monetary policy and trace their effects on real and nominal variables in a business cycle setting. We show that remittances raise disposable income and consumption, and insure against income shocks, thereby raising household welfare. However, remittances increase the correlation between labor and output, thereby producing a more volatile business cycle and increasing output and labor market risk. Optimal monetary policy in the presence of remittances deviates from the Friedman rule, highlighting the need for independent government policy instruments.
    Date: 2006–03–16
  53. By: Monique Florenzano (CES - Centre d'Economie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Elena Del Mercato (Department of Economics, University of Salerne - [University of Salerne])
    Abstract: Abstract. In this paper, we propose a definition of Edgeworth equilibrium for a private ownership production economy with (possibly infinitely) many private goods and a finite number of pure public goods. We show that Edgeworth equilibria exist whatever be the dimension of the private goods space, and can be decentralized, in the finite and infinite dimensional cases, as Lindahl-Foley equilibria. Existence theorems for Lindahl-Foley equilibria are a by-product of our results.
    Keywords: production economy; public goods; Edgworth equilibrium; Lindahl-Foley equilibrium; proper economy
    Date: 2006–07–13
  54. By: Fiorino, Nadia; Ricciuti, Roberto
    Abstract: We analyze the effect of different legislature size on per capita regional expenditure in Italy. According to the theory, legislature size has an indefinite effect on government spending because logrolling and transaction costs may have canceling effects. We find a large and significantly positive effect of the number of legislators. We use these findings to forecast the effects of the increase in the number of legislators that is taking place in some regions: a 10% increase in legislature size commands on average a 12% increase in per capita regional expenditure.
    Keywords: Legislature size, regional expenditure
    JEL: H72 H73
    Date: 2006–07
  55. By: Philip Hemmings
    Abstract: This paper looks at ways of ensuring Czech regions and municipalities are fully motivated to make efficiency improvements in public service provision and so help achieve countrywide fiscal sustainability. The very large number of small municipalities in the Czech Republic means that scale economies are difficult to exploit and the policy options for overcoming this problem are discussed. In the financing system there are issues of transparency and the balance between autonomy for the regions and municipalities and central-government power to direct resources. In terms of accountability, questions of oversight and transparency arise in the public-procurement system and benchmarking in cost and output in public services is not yet widely used. This Working Paper relates to the 2006 OECD Economic Survey of the Czech Republic ( <P>L'amélioration de l'efficience des dépenses publiques dans les régions et les communes en République tchèque <BR>Ce document porte sur les moyens de veiller à ce que les régions et communes tchèques soient pleinement encouragées à réaliser des gains d’efficience dans la prestation des services publics, et à contribuer ainsi à garantir la viabilité budgétaire de l’ensemble du pays. Le très grand nombre de petites communes que compte la République tchèque signifie que les possibilités d’économies d’échelle sont difficiles à exploiter, et les options envisageables pour résoudre ce problème sont examinées. Par ailleurs, le système de financement soulève des questions de transparence et d’équilibre entre l’autonomie des régions et des communes, d’une part, et les prérogatives de l’administration centrale en matière de répartition des ressources, d’autre part. En termes d’obligations redditionnelles, des questions de contrôle et de transparence se posent dans le domaine des marchés publics, et l’analyse comparative des coûts et des résultats reste peu utilisée dans les services publics. Ce Document de travail se rapporte à l'Étude économique de l'OCDE de la République tchèque 2006 (
    Keywords: dépenses publiques, public expenditure, Czech Republic, République tchèque, regions, municipalities, régions, communes
    JEL: H50 H70
    Date: 2006–07–18
  56. By: Fatih Savasan (Faculty of Economics and Administrative Sciences, Usak University, Usak, Turkey.); Friedrich G. Schneider (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: Most studies about the shadow economy focus on the estimation of the aggregate size. However, this study aims to address the sectoral or micro aspects of this phenomenon using the data from the textile sector in Turkey. It uses discriminant analysis and ordered and logistic regression models to unveil the determinants of the informal hiring in Turkey. It concludes that high competition, the skill structure of the employees, perceived penalty scheme, and the size of the firms in the sector are important factors of the textile firms hiring informally.
    Keywords: informal hiring in Turkish textile sector; discriminant analysis; logistic regression model; ordered regression
    JEL: O17 O5 D78 H2 H11 H26
    Date: 2006–06
  57. By: Howell H. Zee
    Abstract: This paper proposes a new hybrid cash-flow tax on corporations that, on one hand, taxes only excess corporate profits as they accrue, and, on the other hand, treats real and financial transactions neutrally. It is, therefore, a superior tax compared to the cash-flow tax on real transactions that seems to have gained common acceptance. The hybrid tax is a modified version of the cash-flow tax on real and financial transactions combined. The modification involves replacing expensing of fixed assets with normal depreciation allowances, but the undepreciated value of fixed assets is carried forward with interest at the opportunity cost of equity capital.
    Date: 2006–05–12
  58. By: Etienne B. Yehoue; Mona Hammami; Jean-François Ruhashyankiko
    Abstract: This paper presents an empirical analysis of the cross-country and cross-industry determinants of public-private partnership (PPP) arrangements. We find that PPPs tend to be more common in countries where governments suffer from heavy debt burdens and where aggregate demand and market size are large. Our findings also suggest that macroeconomic stability is essential for PPPs. We provide evidence on the importance of institutional quality, where less corruption and effective rule of law are associated with more PPP projects. PPPs are also more prevalent in countries with previous PPP experiences. At the industry level, we find that PPP determinants vary across industries depending on the nature of public infrastructure, capital intensity, and technology required. We also find that private participation in PPP projects depends on the expected marketability, the technology required, and the degree of "impurity" of the goods or services.
    Keywords: Infrastructure , Public sector , Private sector , Capital , Budgeting , Investment policy ,
    Date: 2006–04–27
  59. By: Peter C. Reiss; Matthew W. White
    Abstract: This paper examines how to evaluate consumer welfare when consumers face nonlinear prices. This problem arises in many settings, such as devising optimal pricing strategies for firms, assessing how price discrimination affects consumers, and evaluating the efficiency costs of many transfer programs in the public sector. We extend prior methods to accommodate a broad range of modern pricing practices, including menus of pricing plans. This analysis yields a simpler and more general technique for evaluating exact consumer surplus changes in settings where consumers face nonlinear prices. We illustrate our method using recent changes in mobile phone service plans.
    JEL: D12 D40 H20 L10
    Date: 2006–07
  60. By: Nelson Ramírez-Rondán (Central Bank of Peru); Saki Bigio (New York University)
    Abstract: In this paper we report international evidence on the relationship between corruption and several development indicators such as economic stability, quality in educational expenditures, fiscal income, inequality, investment and economic growth. We first show how this relationship is negative by presenting simple unconditional correlations between corruption and these indicators. We then procede to quantify the effects of corruption on growth: we estimate a Dynamic Panel Data model for a sample of 80 countries and taking 1960-2000 as our sample period. Our findings suggest that in improvement in corruption indicators from levels in Latina America and Africa to developed country standards would increase output growth in 0,5% and 0,7% respectively.
    Keywords: Corruption, Development, Growth
    JEL: D73 O11 O50
    Date: 2006–06
  61. By: Daria Zakharova; Annalisa Fedelino
    Abstract: We survey quantitative fiscal conditionality in selected sub-Saharan African PRGFsupported programs, and assess the conditionality against some possible benchmarks and best practices. While noting many caveats, the paper suggests some possible scope for further attuning of this conditionality to countries' specific macro-fiscal situations. The paper also offers some suggestions on how quantitative fiscal conditionality might be further enhanced.
    Date: 2006–05–12
  62. By: Morris Sebastian; Pandey Ajay; Barua Samir K.
    Abstract: The distortions in price based subsidisation are very severe. The direct fiscal cost of ensuring that a rupee of value is delivered to all household users of kerosene is as high as Rs.3 and when the consideration is the benefit that finally reaches the poor “below the poverty line” consumers it is much more. This is well known. This excludes the indirect costs in the form of negative externalities imposed by adulteration, and environmental costs. Worse still are the “third order” effects of entrenched rent seeking and corruption of distribution networks and the conversion of retailing to patronage. In such situation reform and deregulation become problematic. At the core of all these failures in the “price arbitrage” that arises when price based subsidies are resorted to. The total fiscal losses on account of kerosene subsidisation are in excess of Rs. 24,000 crore far above the conventional estimates (around Rs. 8000 – 10,000 crore) which do not recognise the fiscal cost of diversion and adulteration. This paper studies the current design of the public distribution system and price based subsidisation to bring out the perversities, and argues that a complete replacement is called for. The Public Distribution System (PDS) which had value in an era of shortage and rationing has no role today. Market based distribution can bring down the direct costs since now kerosene distribution could then enjoy the synergies of oil and provisions distribution channels. There is clear evidence that a significant percentage (about 40) of kerosene is diverted out of the PDS and sold at higher prices. The commission paid to the distribution channel, in particular to the retailers of kerosene does not make the business financially viable. The rents being earned by those associated with the distribution channel for kerosene are very large. The rent extractors have become so well entrenched over time that it is plausible that other agencies in the system and even the regulatory process itself may be hostage today to their influences. The indirect losses from use of sub-optimal fuel mix, product mix and investment decisions are very large and may harm the economy significantly in the long term. The subsidy through uniform low pricing of kerosene, though intended for the poor, is in fact not reaching them as they are in no position to buy much of the kerosene allotted to them even at the low issue prices being charged by the fair price shops. It is imperative to bring into play information and communication technologies so as to break the stranglehold of the distribution channel by capturing information at the point of sale and thereby creating a permanent audit trail of all relevant transactions. Only by empowering the target segment, the BPL families, by providing them with the freedom to choose the manner in which they would like to consume the subsidy intended for them can the problem be overcome. The well-documented failure of TPDS (Targeted Public Distribution System), implemented on an experimental basis, clearly demonstrates that tinkering with the existing system would not achieve the twin goal of benefiting the really poor and not-benefiting the non-poor. The direct subsidy scheme, which is based on free market pricing of kerosene, and therefore a radical departure from the current method of uniform low pricing is the answer for achieving effectiveness of subsidization. The subsidy is to be disbursed to the poor through smart cards and the accounting of disbursal is to be done using systems similar to those used by credit card companies. The purchasing power put in the hands of the beneficiaries would allow them to use it for spending on their choice of commodities and services and thereby not only enhance the use of subsidy to the full but would also add greatly to their welfare. The proposed system would almost completely eliminate the indirect losses arising from distorted choices since the price of kerosene would be market determined and therefore not relatively cheap compared to alternate fuels. A task force (TF) must be set-up for implementation, with wide-ranging powers and full financial backing of the government of India so as to be able to function autonomously. The task force should consist of eminently qualified individuals with diverse skills and known for their integrity and appreciation for the significance of the task to be performed. The critical task of identifying the beneficiaries at micro-level should be done using all possible sources of data and information (outlined in the report) so as to minimize both, Type I and Type II errors, that is, chance of exclusion of genuine beneficiary and chance of inclusion of spurious beneficiary in the list of target beneficiaries. There are interesting ways by which private information can be brought to bear, and incentive compatibility ensured in correct identification. The disbursement of subsidy should be such that the disbursement is recorded at the point of transaction and get immediately captured in a large centralized database, thereby creating a permanent audit trail, akin to operation of credit cards (details outlined in the report). The activities associated with initial identification of beneficiaries, disbursement of subsidies and updating the list of beneficiaries is to be done by well-qualified private agencies. The operations of the system should be monitored by an SPV to be specially created for the purpose and working under the broad supervision and direction of the task force. The SPV and the TF should ensure full transparency of operation of the private vendor and the scheme by making public all relevant information on the operation of the system and opting for periodic audit of operations. The appropriate organisation design and policy framework for the same is elaborated. The immediate gain to the exchequer from the proposed system, due to market based pricing of kerosene would be an estimated inflow of Rs. 14000 crore per year by way of additional taxes. This gain from additional taxes, based on certain assumptions, is expected to rise to over Rs. 37000 crore in 2010-11, at Jan. 2006 petroleum prices. The gain to the economy and society at large from elimination of indirect losses due to sub-optimal choices of fuel-mix, product-mix, and asset mix would be immense as they would be completely eliminated in the new system. The most important gain however is that the beneficiaries would be in a position to fully utilize their entitlements and spend the same on products and services of their choice, significantly enhancing thereby the utility of their consumption. This should also make direct subsidies politically rewarding.
    Keywords: Petroleum; Subsidies, India, Reform, Direct-Subsidies, Economic-Distortion, Microeconomics, Economic-Efficiency, Distribution, Targeting, Fiscal-Deficit, Government-expenditure, Public-distribution
    JEL: H2
    Date: 2006–07–24
  63. By: Anton Burger (Research Institute for Regulatory Economics, Vienna University of Economics & B.A.)
    Abstract: This paper investigates several possible reasons for the exceptional period of growth in the nineties in the US. These years can be characterised as a case of an expansionary fiscal consolidation as strong growth and structural surpluses were observed. Five different channels the literature suggests for relationships between government spending and consumption are investigated. There are hints that the economy did not work in a Keynesian way but there is no proof of the existence of a Non-Keynesian effect. Expectational effects could not be separated empirically from asset wealth. Whereas standard consumption estimations failed, a model adding a factor containing asset wealth and expectations was finally able to explain consumption from 1996 onwards. This has important implications for policy. Moreover, compositional effects were found to be important. The two main findings of the paper, namely an asset wealth/expectations effect and compositional effects support the interpretation of a positive link between public savings, asset values and growth.
    JEL: H30 H31 E60 E62
    Date: 2006–07
  64. By: Robert Moffitt
    Abstract: Work requirements in means-tested transfer programs have grown in importance in the U.S. and in some other countries. The theoretical literature which considers their possible optimality generally operates within a traditional welfarist framework where some function of the utility of the poor is maximized. Here we consider a case where society is paternalistic and instead has preferences over the actual work allocations of welfare recipients. With this social welfare function, optimality of work requirements is possible but depends on the accuracy of the screening mechanism which assigns work requirements to some benefit recipients and not others. Numerical simulations show that the accuracy must be high for such optimality to occur. The simulations also show that earnings subsidies can be justified with the type of social welfare function used here.
    JEL: H21 I38
    Date: 2006–07
  65. By: Hamid Faruqee; Natalia T. Tamirisa
    Abstract: This paper simulates the macroeconomic effects of population aging in a dynamic overlapping generations model of a small open economy. The model is calibrated to data for the Czech Republic, where population aging is proceeding at a pace comparable to that in other advanced countries in Europe. Simulations show that population aging is likely to slow economic growth and improvements in living standards. Although reforms to raise labor force participation and productivity growth can mitigate these adverse effects, they are unlikely to eliminate the need for fiscal reforms. The budget will come under pressure from rising age-related expenditures, and consolidation will be needed to preserve debt sustainability.
    Date: 2006–04–20
  66. By: Anastasia Guscina; Olivier Jeanne
    Abstract: This paper presents a new database on government debt in 19 emerging market countries since 1980. The data set focuses on the structure of debt in terms of jurisdiction of insurance, maturity, currency composition and indexation. The paper presents stylized facts on debt structures and preliminary evidence on their determinants. We observe substantial crosscountry variation in the structure of domestic debt and find it to be associated with countries' record of monetary stability.
    Keywords: Debt management , Public debt , Domestic debt , External debt , Emerging markets , Databases ,
    Date: 2006–04–26
  67. By: Justin McCrary
    Abstract: Arguably the most aggressive affirmative action program ever implemented in the United States was a series of court-ordered racial hiring quotas imposed on municipal police departments. My best estimate of the effect of court-ordered affirmative action on workforce composition is a 14 percentage point gain in the fraction African American among newly hired officers. Evidence on police performance is mixed. Despite substantial black-white test score differences on police department entrance examinations, city crime rates appear unaffected by litigation. However, litigation lowers slightly both arrests per crime and the fraction black among serious arrestees.
    JEL: H4 H7 J1 J4 J7 K3 K4
    Date: 2006–07
  68. By: Jens Ludwig (Georgetown University, NBER and IZA Bonn); Jeffrey R. Kling (Brookings Institution and NBER)
    Abstract: Understanding whether criminal behavior is "contagious" is important for law enforcement and for policies that affect how people are sorted across social settings. We test the hypothesis that criminal behavior is contagious by using data from the Moving to Opportunity (MTO) randomized housing-mobility experiment to examine the extent to which lower localarea crime rates decrease arrest rates among individuals. Our analysis exploits the fact that the effect of treatment group assignment yields different types of neighborhood changes across the five MTO demonstration sites. We use treatment-site interactions to instrument for measures of neighborhood crime rates, poverty and racial segregation in our analysis of individual arrest outcomes. We are unable to detect evidence in support of the contagion hypothesis. Neighborhood racial segregation appears to be the most important explanation for across-neighborhood variation in arrests for violent crimes in our sample, perhaps because drug market activity is more common in high-minority neighborhoods.
    Keywords: endogenous effects, social multiplier, arrests, social experiment
    JEL: H43 I18 J23
    Date: 2006–07

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