nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒08‒26
forty-one papers chosen by
Peren Arin
Massey University

  1. Why Have Corporate Tax Revenues Declined? Another Look By Alan J. Auerbach
  2. The Church vs the Mall: What Happens When Religion Faces Increased Secular Competition? By Jonathan Gruber; Daniel M. Hungerman
  3. Is Crime Contagious? By Jens Ludwig; Jeffrey R. Kling
  5. The Taxation of Financial Capital under Asymmetric Information and the Tax-Competition Paradox By Wolfgang Eggert; Martin Kolmar
  6. Double Taxation, Tax Credits and the Information Exchange Puzzle By Wolfgang Eggert
  7. Can tax evasion tame Leviathan governments? By Manfred Gärtner; Frode Brevik
  8. Myopia and the Effects of Social Security and Capital Taxation on Labor Supply By Louis Kaplow
  9. Optimal Taxation of Entrepreneurial Capital with Private Information By Stefania Albanesi
  10. Introducing Family Tax Splitting in Germany: How Would It Affect the Income Distribution and Work Incentives? By Viktor Steiner; Katharina Wrohlich
  11. The welfare effects of pay-as-you-go retirement programs: the role of tax and benefit timing By Alan D. Viard
  12. How Progressive is the U.S. Federal Tax System? A Historical and International Perspective By Thomas Piketty; Emmanuel Saez
  13. Structural challenges towards the euro: fiscal policy By Gábor P. Kiss; Péter Karádi; Judit Krekó
  14. The Effect of Anticipated Tax Changes on Intertemporal Labor Supply and the Realization of Taxable Income By Adam Looney; Monica Singhal
  16. Informative Voting and the Samuelson Rule By Felix Bierbrauer; Marco Sahm
  17. The Growth in the Social Security Disability Rolls: A Fiscal Crisis Unfolding By David Autor; Mark Duggan
  18. Company Tax Reform in Europe and its Effect on Collusive Behavior By Dirk Schindler; Guttorm Schjelderup
  19. Tax policy at the outskirts of EU By Kolm, Ann-Sofie; Larsen, Birthe
  20. "The Changing Role of Employer Pensions: Tax Expenditures, Costs, and Implications for Middle-Class Elderly" By Teresa Ghilarducci
  21. Does Tax Evasion Affect Unemployment and Educational Choice? By Kolm, Ann-Sofie; Larsen, Birthe
  22. Optimal Simple and Implementable Monetary and Fiscal Rules: Expanded Version By Stephanie Schmitt-Grohé; Martín Uribe
  23. Consumption Commitments and Risk Preferences By Raj Chetty; Adam Szeidl
  25. Fiscal and monetary policy in the enlarged European Union. By Sabina Pogorelec
  27. Might a Securities Transactions Tax Mitigate Excess Volatility?: Some Evidence From the Literature By Markus Haberer
  28. The Chilean Pension Reform Turns 25: Lessons From the Social Protection Survey By Alberto Arenas de Mesa; David Bravo; Jere R. Behrman; Olivia S. Mitchell; Petra E. Todd
  29. Underfunded Regionalism in the Developing World By Nancy Birdsall
  30. Employer Matching and 401(k) Saving: Evidence from the Health and Retirement Study By Gary V. Engelhardt; Anil Kumar
  31. The Direct Substitution Between Government and Private Consumption in East Asia By Yum K. Kwan
  32. Policy Options for Financing the Future Health and Long-Term Care Costs in Japan By Tadashi Fukui; Yasushi Iwamoto
  33. Analysis of principal trends of mobility related to location policy, car ownership, supply policy and ageing of population By Patrick Bonnel; Pascal Pochet
  34. Delegation versus Communication in the Organization of Government By Rodney D. Ludema; Anders Olofsgård
  35. Market, Social Cohesion, and Democracy By José Antonio Ocampo
  36. Cohort Crowding: How Resources Affect Collegiate Attainment By John Bound; Sarah Turner
  37. Rationalizing the E-Rate: The Effects of Subsidizing IT in Education By Michael R. Ward
  38. Goals and Plans in Protective Decision Making By Howard Kunreuther
  39. Regulatory Exploitation and the Market for Corporate Controls By Leemore Dafny; David Dranove
  40. Monetary Equilibria in a Cash-in-Advance Economy with Incomplete Financial Markets By Jinhui H. Bai; Ingolf Schwarz
  41. Financial Regulations in Developing Countries: Can they Effectively Limit the Impact of Capital Account Volatility? By Liliana Rojas-Suarez

  1. By: Alan J. Auerbach
    Abstract: As a share of GDP, U.S. federal tax revenues from nonfinancial corporations have held relatively constant since the early 1980s, after falling precipitously during the late 1960s and the 1970s. But this relative constancy masks offsetting trends in the ratio of nonfinancial C corporation profits to GDP (declining) and the average tax rate on these profits (increasing). The average tax rate rose steadily between 1996 and 2003, an increase largely attributable to an unprecedented rise in the importance of tax losses. This rise casts some doubt on the importance of tax planning activities as a vehicle for reducing corporate taxes. So, too, does the relative stability of the rate of profit (relative to net assets), which might be expected to have declined had the understatement of profits for tax purposes been increasing.
    JEL: G32 H25
    Date: 2006–08
  2. By: Jonathan Gruber; Daniel M. Hungerman
    Abstract: Recently economists have begun to consider the causes and consequences of religious participation. An unanswered question in this literature is the effect upon individuals of changes in the opportunity cost of religious participation. In this paper we identify a policy-driven change in the opportunity cost of religious participation based on state laws that prohibit retail activity on Sunday, known as “blue laws.” Many states have repealed these laws in recent years, raising the opportunity cost of religious participation. We construct a model which predicts, under fairly general conditions, that allowing retail activity on Sundays will lower attendance levels but may increase or decrease religious donations. We then use a variety of datasets to show that when a state repeals its blue laws religious attendance falls, and that church donations and spending fall as well. These results do not seem to be driven by declines in religiosity prior to the law change, nor do we see comparable declines in membership or giving to nonreligious organizations after a state repeals its laws. We then assess the effects of changes in these laws on drinking and drug use behavior in the NLSY. We find that repealing blue laws leads to an increase in drinking and drug use, and that this increase is found only among the initially religious individuals who were affected by the blue laws. The effect is economically significant; for example, the gap in heavy drinking between religious and non religious individuals falls by about half after the laws are repealed.
    JEL: H1 J2
    Date: 2006–08
  3. By: Jens Ludwig; Jeffrey R. Kling
    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 local-area 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.
    JEL: H43
    Date: 2006–08
  4. By: Iris Claus
    Abstract: This paper develops an open economy model to assess the long-run effects of taxation where firms are finance constrained. Finance constraints arise because of imperfect information between borrowers and lenders. Only borowers (firms) can costlessly observe actual returns from production. Imperfect information and finance constraints magnify the effects of taxation. A reduction (rise) in income taxation increases (lowers) firms' internal funds and their ability to assess external finance to expand production. The findings thus underline the importance of incorporating access to finance into models that assess the impact of taxation.
    JEL: H2 E44 F41
    Date: 2006–08
  5. By: Wolfgang Eggert (University of Konstanz and CESifo); Martin Kolmar (University of G¨ottingen and CESifo)
    Abstract: This paper examines information sharing between governments in an optimaltaxation framework. We present a taxonomy of alternative systems of international capital-income taxation and characterize the choice of tax rates and information exchange. The model reproduces the conclusion of the previous literature that integration of international capital markets may lead to the under-provision of publicly provided goods. However, different to the existing literature under-provision occurs because of inefficiently coordinated expectations. We show that there exists a second equilibrium with an efficient level of public-good provision and complete and voluntary information exchange between national tax authorities.
    Keywords: tax competition, information exchange
    JEL: F42 F20 H21
  6. By: Wolfgang Eggert (Department of Economics, University of Konstanz)
    Abstract: This paper analyzes the choice of taxes and international information exchange by governments in a capital tax competition model. We explain situations where countries can choose tax rates on tax savings income and exchange information about the domestic savings of foreigners, implying that the decentralized equilibrium is efficient. However, we also identify situations with adverse welfare properties in which information exchange is compatible with zero taxes on capital income. The model helps to identify the linkage between voluntary information exchange and the choice of tax rates. It is shown that the recent development in information exchange treaties may not be useful to overcome the inefficiencies caused by decentralized tax setting.
    Keywords: withholding tax, tax credit, international tax competition, information exchange
    JEL: H77 H87 F42
    Date: 2005–06
  7. By: Manfred Gärtner; Frode Brevik
    Abstract: This paper looks at how income tax rates, consumption and public spending respond as venues for tax evasion open or close. The analysis draws on a 16-generation OLG model in which tax rates are determined in a repeated game between voters and a rent-seeking Leviathan government. Key insights are: (1) Effects on any generation alive when change takes place may differ substantially from steady state effects that accrue for generations yet to be born. (2) There is considerable intergenerational diversity in these effects that is not monotonous as we move from young to old. Combined, these results suggest that the political economy of pertinent institutional change may be quite complex.
    Keywords: Leviathan government, income tax, tax evasion, public spending, rent seeking
    JEL: E2 E62 F42 H2
    Date: 2006–07
  8. By: Louis Kaplow
    Abstract: Myopia is increasingly believed to be a significant determinant of behavior and also plays a central role in justifications for social security and policies toward the taxation of capital. It is important, however, to account for labor supply effects, particularly in light of the preexisting distortion due to labor income taxation. For example, might even actuarially fair social security have the highly distortionary effect of a tax on top of an existing tax (the income tax) because myopic individuals give excessive weight to present levies on earnings that finance distant future benefits? Similarly, might greater reliance on capital rather than labor income taxation be attractive because collections are in the future rather than when earnings are received? To answer these and other questions, this article analyzes the effect of such policies on labor supply in a model that explicitly incorporates myopic decision-making. Many of the results may seem counterintuitive. In most respects, even with myopia, social security has qualitatively different effects than those of a tax levied on top of an existing tax. Both social security and capital taxation may cause labor supply to rise or fall when individuals are myopic, depending on the curvature of individuals’ utility as a function of consumption. Moreover, whatever is the sign of these effects under one assumption about how myopia relates to labor supply decisions, the sign is reversed under the other assumption that is considered. Additionally, some interventions have a first-order effect on labor supply from the outset but others do not, and some labor supply effects rise with the magnitude of the intervention whereas others fall.
    JEL: D11 D91 H21 H24 H55 J22
    Date: 2006–08
  9. By: Stefania Albanesi
    Abstract: This paper studies optimal taxation of entrepreneurial capital and financial assets in economies with private information. Returns to entrepreneurial capital are risky and depend on entrepreneurs' hidden effort. It is shown that the idiosyncratic risk in capital returns implies that the intertemporal wedge on entrepreneurial capital that characterizes constrained-efficient allocations can be positive or negative. The properties of optimal marginal taxes on entrepreneurial capital depend on the sign of this wedge. If the wedge is positive, the optimal marginal capital tax is decreasing in capital returns, while the opposite is true when the wedge is negative. Optimal marginal taxes on other assets depend on their correlation with idiosyncratic capital returns. The optimal tax system equalizes after tax returns on all assets, thus reducing the variance of after tax returns on capital relative to other assets. If entrepreneurs are allowed to sell shares of their capital to outside investors, returns to externally owned capital are subject to double taxation- at the level of the entrepreneur and at the level of the outside investors. Even if entrepreneurs can purchase private insurance against their idiosyncratic risk, optimal asset taxes are essential to implement the constrained-efficient allocation if entrepreneurial portfolios are private information.
    JEL: D82 E22 E62 G18 H2 H21 H25 H3
    Date: 2006–08
  10. By: Viktor Steiner (DIW Berlin, Free University of Berlin and IZA Bonn); Katharina Wrohlich (DIW Berlin and IZA Bonn)
    Abstract: We analyze the effects of three alternative proposals to reform the taxation of families relative to the current German system of joint taxation of couples and child allowances: a French-type family splitting and two full family splitting proposals. The empirical analysis of the effects of these proposals on the income distribution and on work incentives is based on a behavioral micro-simulation model which integrates an empirical household labor supply model into a detailed tax-benefit model based on the German Socio Economic Panel. Our simulation results show that under each reform the lion’s share of the reduction in taxes would accrue to families with children in the upper part of the income distribution, and that expected labor supply effects are small for all analyzed family tax splitting reforms, both in absolute terms and relative to the implied fiscal costs.
    Keywords: household taxation, income distribution, work incentives, microsimulation
    JEL: H24 H31 J22
    Date: 2006–08
  11. By: Alan D. Viard
    Abstract: It is well known that pay-as-you-go retirement programs reduce steady-state welfare and the capital stock in dynamically efficient OLG economies. The common two-period OLG model obscures, however, the dependence of these effects on the ages at which taxes are paid and benefits are received. Program changes that shift taxes to older workers or benefits to younger retirees have effects similar to reductions in program size, yielding steady-state welfare gains and increases in capital accumulation while imposing transition costs on current generations. This analysis has policy implications for both tax and benefit timing.>
    Keywords: Social security ; Fiscal policy ; Taxation
    Date: 2006
  12. By: Thomas Piketty; Emmanuel Saez
    Abstract: This paper provides estimates of federal tax rates by income groups in the United States since 1960, with special emphasis on very top income groups. We include individual and corporate income taxes, payroll taxes, and estate and gift taxes. The progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s. This dramatic drop in progressivity is due primarily to a drop in corporate taxes and in estate and gift taxes combined with a sharp change in the composition of top incomes away from capital income and toward labor income. The sharp drop in statutory top marginal individual income tax rates has contributed only moderately to the decline in tax progressivity. International comparisons confirm that is it critical to take into account other taxes than the individual income tax to properly assess the extent of overall tax progressivity, both for time trends and for cross-country comparisons. The pattern for the United Kingdom is similar to the US pattern. France had less progressive taxes than the US or UK in 1970 but has experienced an increase in tax progressivity and has now a more progressive tax system than the US or the UK.
    JEL: H2
    Date: 2006–08
  13. By: Gábor P. Kiss (Magyar Nemzeti Bank); Péter Karádi (Magyar Nemzeti Bank, at the time of writing the study); Judit Krekó (Magyar Nemzeti Bank)
    Abstract: Broad theoretical consensus and vast empirical evidence reinforce the view that prudent fiscal policy – also advocated by the fiscal institutions of the eurozone – can support the stable long term growth. After presenting some general principles of the optimal fiscal policy, the paper analyses the questions of fiscal convergence necessary for the successful eurozone entry and membership of Hungary. The paper calculates the consolidation necessary to reach the 2008 deficit target set by the Convergence Program. Taking into account of not only the level of the government debt but also the relatively progressed state of the interest rate convergence, the potential reduction attainable in the interest balance is moderate. The main result of the paper is that the necessary consolidation measures are required to reduce the primary balance by approximately 3 percent. In case of cutting public expenditure it would require approximately 4 percent reduction taking into account the revenue content of those expenditures. The structure of macroeconomic growth is not expected to facilitate fiscal consolidation – as wage and consumption growth, which have major influence on the development of relevant tax-bases, are expected to be moderate – and no improvements in the balance are expected as a result of the EU accession. International experience, especially fiscal consolidations of eurozone member states, however, show that structural – i.e. quality-improving and sustainable – measures and the reform of the institutional framework are essential determinants of successful consolidations. Temporary measures and deficit reductions by creative accounting do not foster macroeconomic stabilization and their eventual reversal is highly probable.
    Keywords: Fiscal Consolidation, Optimal Debt Policy, Maastricht Criteria.
    JEL: E61 E62 H62 H63
    Date: 2005
  14. By: Adam Looney; Monica Singhal
    Abstract: We use anticipated changes in tax rates associated with changes in family composition to estimate intertemporal labor supply elasticities and elasticities of taxable income with respect to the net-of-tax wage rate. Changes in the ages of children can affect marginal tax rates through provisions of the tax code that are tied to child age and dependent status. We identify behavioral responses to these tax changes by comparing families who experienced a tax rate change to families who had a similar change in dependents but no resulting tax rate change. A primary advantage of our approach is that these changes can be anticipated, allowing us to estimate substitution effects that are not confounded by life-cycle income effects. We estimate an intertemporal elasticity of family labor earnings of 0.75 for families earning between $35,000 and $85,000 in the Survey of Income and Program Participation (SIPP) and find very similar estimates using the IRS-NBER individual tax panel.
    JEL: H2 H31 J22
    Date: 2006–08
  15. By: Francisco Alvarez-Cuadrado
    Abstract: We present a simple model of capital accumulation where agents care about their consumption relative to the consumption of other members of society. This concern with "envy" captures the intuition behind the growing body of empirical evidence that places interpersonal comparisons as a key determinant of well-being. In this context we quantify the extent of the distortions and welfare costs associated with envy. Under conservative estimates of envy we find that the implied welfare losses are substantial. Our analysis explores the implications of alternative policy arrangements designed to minimize the effects of the consumption externality. Our results suggest that if the optimal tax policy is not politically feasible restrictions on working hours provide an alternative tool to induce a market outcome that resembles the efficient allocation achieved under a benevolent central planner.
    JEL: D62 H21 H23 J22
    Date: 2006–08
  16. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Kurt-Schumacher-Str. 10, 53113 Bonn, Germany.; Marco Sahm (Lehrstuhl für Finanzwissenschaft, Ludwigstrasse 28 Vgb. III, 80539 München, Germany.
    Abstract: We study the classical free-rider problem in public goods provision in a large economy with uncertainty about the average valuation of the public good. Individual preferences over public goods are shaped by a skill and a taste parameter. We use a mechanism design approach to solve for the optimal utilitarian provision rule. The relevant incentive constraints for information aggregation ensure that individuals behave as if they were engaging in informative voting over the level of public good provision. It is shown that the use of information by an optimal provision rule is inversely related to the polarization of preferences which results from the properties of the skill distribution.
    Keywords: information aggregation, informative voting, public goods, two-dimensional heterogeneity
    JEL: H41 D71 D72 D82
    Date: 2006–07
  17. By: David Autor; Mark Duggan
    Abstract: More than 80 percent of nonelderly U.S. adults are insured against the risk of disabling physical or mental illness by Social Security Disability Insurance (SSDI). This article evaluates the causes of the extraordinary growth in SSDI enrollment, considers its fiscal ramifications, and discusses potential policy responses. While aggregate population health has improved by most measures in recent decades, the rate of SSDI receipt among nonelderly adults has nearly doubled since 1984. We project that SSDI receipt will rise by an additional seventy percent before reaching a steady state rate of approximately 6.5 percent of adults between the ages of 25 and 64, with cash benefit payments exceeding $150 billion annually (excluding Medicare). We trace the rapid expansion of SSDI to: (1) congressional reforms to disability screening in 1984 that enabled workers with low mortality disorders such as back pain, arthritis and mental illness to more readily qualify for benefits; (2) a rise in the after-tax DI income replacement rate, which strengthened the incentives for workers to seek benefits; (3) and a rapid increase in female labor force participation that expanded the pool of insured workers. Notably, the aging of the baby boom generation has contributed little to the growth of SSDI to date. Among several avenues for reducing SSDI growth, we suggest that the most promising are revamping the disability appeals process--in which the Social Security Administration currently loses nearly three-quarters of all appeals--and reducing the attractiveness of DI benefits for work-capable disabled individuals by providing additional access to public health insurance. By contrast, previous efforts to reduce the SSDI rolls by discontinuing benefits or by providing stronger return-to-work incentives have proved remarkably unsuccessful.
    JEL: H53 H55 I12 I18 J26
    Date: 2006–08
  18. By: Dirk Schindler (Department of Economics, University of Konstanz); Guttorm Schjelderup (Norwegian School of Economics and Business Administration an CESifo)
    Abstract: We study how harmonization of corporate tax systems affects the stability of international cartels. We show that tax base harmonization reinforces collusive agreements, while harmonization of corporate tax rates may destabilize or stabilize cartels. We also find that bilateral and full harmonization to a common standard is worse from society’s point of view than unilateral harmonization to a minimum tax standard.
    Keywords: Corporate tax systems, tacit collusion
    JEL: H87 L1
    Date: 2006–03–30
  19. By: Kolm, Ann-Sofie (Department of Economics, Copenhagen Business School); Larsen, Birthe (Department of Economics, Copenhagen Business School)
    Abstract: This paper provides an assessment of Greenland's tax system and contemplates changes that may be undertaken in the future to prepare for greater economic self-reliance and for the country's participation in the wider world economy. At the outskirts of Europe, Greenland is an autonomous part of the Danish kingdom, though currently not a member of EU. However, its cooperation with European countries and its dependency on international trade renders it necessary for the tax system in Greenland to be attuned to developments in the rest of the world. Drawing on a thorough international benchmarking analysis of Greenland's tax system, the paper's special focus will be on the corporate tax system and its interplay with personal taxation, as well on as the system of import duties. In particular, we carry out computations of effective marginal and average corporate tax rates, as well as average effective tax burdens on consumption, labour income and capital income, and compare these to similar measures for EU countries. In addition, we outline how Greenland's economic policy in other areas interferes with tax policy. Especially fishery regulation, management of government-owned companies, and housing policy have major implications for the tax system.
    Keywords: international benchmarking; effective tax rates; Greenland
    JEL: H26 I21 J64
    Date: 2006–11–12
  20. By: Teresa Ghilarducci
    Abstract: By any measure, pension coverage should be at an all-time high: the nation is richer and workers are older. However, the pension world is a paradox, as pension security falls for middle-class workers and pension spending increases. The United States government directly and indirectly spends more than half a trillion dollars on the elderly each year. Direct spending is mainly through Social Security and indirect spending through the tax code's special treatment of employer and personal retirement plans. The tax favoritism is an astonishing one fourth of the direct spending. But the nature of the tax subsidy is changing. The tax subsidy for 401(k) plans, which are beneficial to employers and higher-income workers, is overtaking that for traditional pensions, which cover lower-income workers and help expand pension coverage. Since tax policy is designed to meet a public purpose, perhaps the more than $100 billion dollars per year spent indirectly on pensions could be better spent? Using tax expenditure data from the federal budget and data from both employers' surveys (the Chamber of Commerce and the National Compensation Survey) and workers' surveys (the Bureau of Census's Current Population Survey), this study reflects on alternative pension polices that transform the tax subsidy and expand Social Security and traditional pensions. Such a sharp change in federal policy may stem the loss of pension security of middle-class workers and expand it for lower-income workers.
    Date: 2006–08
  21. By: Kolm, Ann-Sofie (Department of Economics, Copenhagen Business School); Larsen, Birthe (Department of Economics, Copenhagen Business School)
    Abstract: While examining the macroeconomic effects of government tax and punishment policies, this paper develops a three-sector general equilibrium model featuring matching frictions and worker-firm wage bargaining. Workers are assumed to differ in ability, and the choice of education is determined endogenously. Job opportunities in an informal sector are available only to workers who choose not to acquire higher education. We find that increased punishment of informal activities increases the number of educated workers and reduces the number of unemployed workers. Considering welfare, we show it is optimal to choose punishment rates so to more than fully counteract the distortion created by the government’s inability to tax the informal sector.
    Keywords: Tax evasion; underground economy; education; matching; unemployment.
    JEL: H26 I21 J64
    Date: 2006–11–12
  22. By: Stephanie Schmitt-Grohé; Martín Uribe
    Abstract: This paper computes welfare-maximizing monetary and fiscal policy rules in a real business cycle model augmented with sticky prices, a demand for money, taxation, and stochastic government consumption. We consider simple feedback rules whereby the nominal interest rate is set as a function of output and inflation, and taxes are set as a function of total government liabilities. We implement a second-order accurate solution to the model. Our main findings are: First, the size of the inflation coefficient in the interest-rate rule plays a minor role for welfare. It matters only insofar as it affects the determinacy of equilibrium. Second, optimal monetary policy features a muted response to output. More importantly, interest rate rules that feature a positive response to output can lead to significant welfare losses. Third, the welfare gains from interest-rate smoothing are negligible. Fourth, optimal fiscal policy is passive. Finally, the optimal monetary and fiscal rule combination attains virtually the same level of welfare as the Ramsey optimal policy.
    JEL: E52 E61 E63
    Date: 2006–08
  23. By: Raj Chetty; Adam Szeidl
    Abstract: Many households devote a large fraction of their budgets to "consumption commitments" -- goods that involve transaction costs and are infrequently adjusted. This paper characterizes risk preferences in an expected utility model with commitments. We show that commitments affect risk preferences in two ways: (1) they amplify risk aversion with respect to moderate-stake shocks and (2) they create a motive to take large-payoff gambles. The model thus helps resolve two basic puzzles in expected utility theory: the discrepancy between moderate-stake and large-stake risk aversion and lottery playing by insurance buyers. We discuss applications of the model such as the optimal design of social insurance and tax policies, added worker effects in labor supply, and portfolio choice. Using event studies of unemployment shocks, we document evidence consistent with the consumption adjustment patterns implied by the model.
    JEL: E2 H2 H5 J21 J64
    Date: 2006–08
  24. By: Leah Brooks
    Abstract: When the median voter's preference sets the level of local public goods, some voters are left unsatisfied. Is there an institution by which subsets of voters can resolve the collective action problem and increase the local provision of public goods? If so, what are the consequences? In response to problems such as crime and vandalism, neighborhood property owners have established Business Improvement Districts (BIDs) to provide local public goods. When a BID is approved by a majority of property owners in a neighborhood, state law makes contributions to the BID budget mandatory. This resolution of the neighborhood's collective action problem reduces crime - BIDs in the city of Los Angeles are robustly associated with crime declines of 5 to 9 percent. Indeed, crime falls regardless of estimation technique: fixed effects; comparing BIDs to neighborhoods that considered, but did not adopt, BIDs; using propensity score matching; and comparing BIDs to their neighbors. Strikingly, these declines are purchased cheaply. Attributing all BID expenditure to violent crime reduction, and thus ignoring the impact of BID expenditure on many quality-of-life crimes, BIDs spend $21,000 to avert one violent crime. This higher bound estimate is substantially lower than the $57,000 social cost of a violent crime.
    JEL: R5 H7
    Date: 2006–08
  25. By: Sabina Pogorelec (European Investment Bank, 100 boulevard Konrad Adenauer, L-2950 Luxembourg, Luxembourg.)
    Abstract: I build a quantitative two-country DSGE model of the European Union (EU) and investigate whether there are welfare gains from fiscal policy cooperation between the new EU members and the euro area (EMU). Fiscal cooperation is defined in terms ofjoint maximization of the weighted average of households’ welfare. I find that fiscal policy cooperation is welfare-reducing for both groups of countries. This result depends on a realistic assumption about the presence of foreign ownership of firms in the new EU countries. When there is no foreign ownership in the new EU countries, the euro area is indifferent between cooperating and not cooperating, but the new EU members still prefer not to cooperate with EMU in terms of fiscal policy. JEL Classification: E63; F42.
    Keywords: Fiscal policy cooperation; Foreign ownership of firms; Fiscal-monetary interactions; Enlarged European Union; Central and eastern European countries.
    Date: 2006–07
  26. By: Leah Brooks
    Abstract: A wealth of anecdotal evidence suggests that, in the wake of tax revolts, cities have responded with a proliferation of special assessment districts which directly link taxes and their local public good beneficiaries. Despite this, there is no systematic evidence on the adoption patterns of these districts, likely because they are not surveyed by the U.S. Census of Governments. This paper begins to fill this gap by reporting the results of a survey on the adoption patterns of one class of special assessment districts, Business Improvement Districts (BIDs), in the state of California. A BID is formed when a majority of merchants or property owners in a commercial neighborhood vote in favor of a package of local taxes and expenditures; once passed, assessments are legally binding on all members of the commercial neighborhood. I find that roughly half of all larger cities in California have at least one BID; among the universe of cities in four Southern California counties, that figure falls to about one-fifth. On the demand side, theory and evidence suggest that BIDs should be adopted in heterogeneous cities to supplement local public goods to neighborhood taste. On the supply side, theory argues that BIDs solve the collective action problem arising in the provision of public goods when the number of group members is large. In particular, older commercial neighborhoods have many landowners who may have trouble coordinating the provision of local public goods, in contrast to the single mall developer who can write contracts to internalize externalities. Combining the survey data with demographic, institutional and political data, I find strong support for the supply-side story, and some evidence that the interaction of supply and demand explain BID adoption.
    JEL: R5 H7
    Date: 2006–08
  27. By: Markus Haberer (Department of Economics, University of Konstanz)
    Abstract: International financial markets are said to be excessively volatile due to destabilizing speculation and excessive market volume. Transactions taxes might help. From studying the literature we conclude that there must be an optimal market liquidity, which minimizes excess volatility. There are two effects when imposing a transactions tax. Both reduce excess volatility in highly speculative markets when tax rates are small. The total tax effect then is unambiguous. However, in illiquid markets the tax might raise volatility.
    Keywords: International Financial Markets, Securities Transactions Tax, Excess Volatility
    JEL: G15 G18 H20
    Date: 2005–05
  28. By: Alberto Arenas de Mesa; David Bravo; Jere R. Behrman; Olivia S. Mitchell; Petra E. Todd
    Abstract: In 1980, Chile dramatically reformed its retirement system, replacing what was an old insolvent PAYGO program with a new structure that relies heavily on funded defined contribution individual accounts. In addition, eligibility and benefit requirements were standardized, and a safety net for old-age poverty was strengthened. Twenty-five years after this reform, the Chilean model is being re-assessed, in terms of coverage, contribution, investment, and retirement benefit outcomes. This paper introduces a recently-developed longitudinal survey of individual respondents in Chile, the Social Protection Survey (or Encuesta de Previsión Social, EPS), and illustrates some uses of this survey for microeconomic analysis of key aspects of the Chilean system.
    JEL: G23 H55 J14
    Date: 2006–08
  29. By: Nancy Birdsall
    Abstract: This paper argues that regional public goods in developing countries are under-funded despite their potentially high rates of return compared to traditional country-focused investments. Regional public goods only receive about 2.0-3.5 percent out of total ODA annually according to the definition used in this paper. The rate of return to regional investments is likely to be high, especially in Africa, where investments in regional infrastructure and institutional integration would reduce the high costs imposed by the region’s many small economies and many borders. There are several reasons for the under-funding of regional public goods. First, to produce regional infrastructure and manage multi-country institutions requires coordination among two or more developing country governments. The recent donor emphasis on countries’ “ownership” of their own priorities is more supportive of national programs. Second, bilateral donors prefer country-based transfers given their potential for providing geo-strategic and political benefits, and the multilateral banks have limited scope for lending for regional programs since their principal instrument is a loan to a single-country government that must guarantee its repayment. Countries could coordinate their borrowing, but that would require reaching agreement on attribution of the associated benefits to allow appropriate allocation of the burden of financing among two or more governments. Combined, these problems of coordination, (lack of) ownership, and attribution make financing of regional programs costlier for donors to arrange, and riskier in terms of their sustainability and benefits. In Africa the under-funding of regional public goods is primarily a political and institutional challenge to be met by the countries in this region. But the donor community ought to consider the opportunity cost – for development progress itself, in Africa and elsewhere – of its relative neglect, and explore changes in the aid architecture that would encourage more attention to regional goods.
    Keywords: development aid, donor community, aid reform
    JEL: F33 F35 O19 H41 R1
    Date: 2004–11
  30. By: Gary V. Engelhardt; Anil Kumar
    Abstract: Employer matching of employee 401(k) contributions can provide a powerful incentive to save for retirement and is a key component in pension-plan design in the United States. Using detailed administrative contribution, earnings, and pension-plan data from the Health and Retirement Study, this analysis formulates a life-cycle-consistent econometric specification of 401(k) saving and estimates the determinants of saving accounting for non-linearities in the household budget set induced by matching. The participation estimates indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) participation by 3.75 to 6 percentage points, and the estimated elasticity of participation with respect to matching ranges from 0.02-0.07. The parametric and semi-parametric estimates for saving indicate that an increase in the match rate by 25 cents per dollar of employee contribution raises 401(k) saving by $400-$700 (in 1991 dollars). The estimated elasticity of 401(k) saving to matching is also small and ranges from 0.09-0.12 overall, with just under half of this effect on the intensive margin. Overall, the analysis reveals that matching is a rather poor policy instrument with which to raise retirement saving.
    JEL: E21 H24 J32
    Date: 2006–08
  31. By: Yum K. Kwan
    Abstract: We investigate empirically the extent to which government consumption substitutes for private consumption in nine East Asia countries. Panel cointegrating regression uncovers a significantly positive elasticity of substitution between government and private consumption, implying on average government and private consumption are substitutes in East Asia. Country-by-country analysis, however, reveals diversity in the substitutability estimates. The four North East countries – China, Hong Kong, Japan, and Korea – tend to share similar and moderate values of the substitution elasticity. For the five ASEAN countries studied in this paper, the relationship between private and government consumption vary substantially, both in the sign and magnitude of the elasticity of substitution. Private and government consumption in Malaysia and Thailand are strong substitutes, but they are found to be complements in Indonesia and Singapore. In between is the Philippines which has a near zero elasticity of substitution.
    JEL: E6 H5
    Date: 2006–08
  32. By: Tadashi Fukui; Yasushi Iwamoto
    Abstract: As the Japanese population structure changes, health care and long-term care costs will steadily increase. The current style of financing (pay-as-you-go) will create a large increase in future burden of these costs. This paper studies an alternative policy that prefunds the social insurance benefits for the elderly. During a transition process, the proposed scheme maintains a higher contribution rate in order to accumulate sufficient funds. Under our baseline scenario, the sum of the contribution rates toward health insurance and long-term care insurance increases from 5.06 percent of earnings to 12.41 percent of the same. The rate of increase in overall burdens, including taxes and subsidies, is 63 percent. Our sensitivity analysis has shown that the quantitative implications of the increase in total burdens depend on social cost scenarios, the labor force, and the interest rate. However, labor force scenarios do not have a considerable impact on the rate of burden. As against this, the setting of social costs has a significant impact on the same. Even under the most optimistic scenario, the rate of increase in total burden is 34 percent. Even though we cannot predict the exact amount of the necessary contribution rate that is capable enough to transfer the funded system, what we are sure of is that a significant increase in the contribution rate is inevitable.
    JEL: H55 I10
    Date: 2006–08
  33. By: Patrick Bonnel (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat]); Pascal Pochet (LET - Laboratoire d'économie des transports - [CNRS : UMR5593] - [Université Lumière - Lyon II] - [Ecole Nationale des Travaux Publics de l'Etat])
    Abstract: no abstract
    Keywords: Mobility ; car ; Public transport ; Trends ; cohort effect ;
    Date: 2006–08–04
  34. By: Rodney D. Ludema; Anders Olofsgård (Department of Economics, Georgetown University)
    Abstract: When a government creates an agency to gather information relevant to policymaking, it faces two critical organizational questions: whether the agency should be given authority to decide on policy or merely supply advice, and what should the policy goals of the agency be. Existing literature on the first question is unable to address the second, because the question of authority becomes moot if the government can simply replicate its preferences within the agency. In contrast, this paper examines both questions within a model of policymaking under time inconsistency, a setting in which the government has a well-known incentive to create an agency with preferences that differ from its own. Thus, our framework permits a meaningful analysis of delegation versus communication with an endogenously chosen agent. The first main finding of the paper is that the government can do equally well with a strategic choice of agent, from which it solicits advice, instead of delegating authority, as long as the time inconsistency problem is not too severe. The second main finding is that the government may strictly prefer seeking advice to delegating authority if there is prior uncertainty with respect to what is the optimal policy. Classification-JEL Codes: D02, D23, D73, D8, H1
    Keywords: Political Economy, Delegation, Communication, Organizational Design, Time Inconsistency.
  35. By: José Antonio Ocampo
    Abstract: This paper offers three guiding principles for a better relationship between the economy and democracy: democracy as the extension of citizenship; democracy as diversity; and democracy as complementary to clear, strong macroeconomic rules. This view, it is argued, implies that economic and social institutions must be subject to democratic political choice. In this context, it analyses the role of both national and international institutions in improving the complementarity of the market, social cohesion and democracy. The central role of economic and social rights serves as the overarching framework for the analysis.
    Keywords: citizenship, democracy, social cohesion, market economy, inequality, property rights
    JEL: H1 H4 I3 E61 D6 F02
    Date: 2006–02
  36. By: John Bound; Sarah Turner
    Abstract: Analyses of college attainment typically focus on factors affecting enrollment demand, including the financial attractiveness of a college education and the availability of financial aid, while implicitly assuming that resources available per student on the supply side of the market are elastically supplied. The higher education market in the United States is dominated by public and non-profit production, and colleges and universities receive considerable subsidies from state, federal, and private sources. Because consumers pay only a fraction of the cost of production, changes in demand are unlikely to be accommodated fully by colleges and universities without commensurate increases in non-tuition revenue. For this reason, public investment in higher education plays a crucial role in determining the degrees produced and the supply of college-educated workers to the labor market. Using data covering the last half of the twentieth century, we find strong evidence that large cohorts within states have relatively low undergraduate degree attainment, reflecting less than perfect elasticity of supply in the higher education market. That large cohorts receive lower public subsidies per student in higher education explains this result, indicating that resources have large effects on degree production. Our results suggest that reduced resources per student following from rising cohort size and lower state expenditures are likely to have significant negative effects on the supply of college-educated workers entering the labor market.
    JEL: I23 H52
    Date: 2006–08
  37. By: Michael R. Ward (University of Texas at Arlington)
    Abstract: Starting in 1998, the E-Rate program has provided $2.25 billion to subsidize Internet access in schools and libraries serving low income populations in the US. I analyze the effect of E-Rate subsidies on educational outcomes for Texas high schools over the 1994-2003 time period. Consistent with previous economic analyses, I find few, if any, improvements in student achievements. I do find evidence that experienced teachers are reallocated within districts toward schools receiving E-Rate grants. I also find evidence that the pool of college entrance exam takers is affected by E-Rate grants such that relying on average scores could lead to incorrect conclusions.
    Keywords: Education, Internet, Subsidy
    JEL: J22 L86 I22 H20
    Date: 2005–10
  38. By: Howard Kunreuther
    Abstract: Protective decisions are often puzzling. Among other anomalies, people insure against non-catastrophic events, underinsure against catastrophic risks, and allow extraneous factors to influence insurance purchases and other protective decisions. Neither expectedutility theory nor prospect theory can explain these anomalies satisfactorily. We propose a constructed-choice model for general decision making. The model departs from utility theory and prospect theory in its treatment of multiple goals and it suggests several different ways in which context can affect choice. To apply this model to the above anomalies, we consider many different insurance-related goals, organized in a taxonomy, and we consider the effects of context on goals, resources, plans and decision rules. The paper concludes by suggesting some prescriptions for improving individual decision making with respect to protective measures.
    JEL: G22 H23
    Date: 2006–08
  39. By: Leemore Dafny; David Dranove
    Abstract: This paper investigates whether managers who fail to exploit regulatory loopholes are vulnerable to replacement. We use the U.S. hospital industry in 1985-1996 as a case study. A 1988 change in Medicare rules widened a pre-existing loophole in the Medicare payment system, presenting hospitals with an opportunity to increase operating margins by five or more percentage points simply by “upcoding” patients to more lucrative codes. We find that “room to upcode” is a statistically and economically significant predictor of whether a hospital replaces its management with a new team of for-profit managers. We also find that hospitals replacing their management subsequently upcode more than a sample of similar hospitals that did not, as identified by propensity scores.
    JEL: G3 H51 I11
    Date: 2006–08
  40. By: Jinhui H. Bai; Ingolf Schwarz (Department of Economics, Georgetown University)
    Abstract: The general equilibrium model with incomplete financial markets (GEI) is extended by adding fiat money, fiscal and monetary policy and a cash-in-advance constraint. The central bank either pegs the interest rate or money supply while the fiscal authority sets a Ricardian or a non-Ricardian fiscal plan. We prove the existence of equilibria in all four scenarios. In Ricardian economies, the conditions required for existence are not more restrictive than in standard GEI. In non-Ricardian economies, the sufficient conditions for existence are more demanding. In the Ricardian economy, neither the price level nor the equivalent martingale measure is determinate. Classification-JEL Codes: D52; E40; E50
    Keywords: Money; Incomplete Markets; Fiscal Policy; Indeterminacy
  41. By: Liliana Rojas-Suarez
    Abstract: This paper identifies two alternative forms of prudential regulation. The first set is formed by regulations that directly control financial aggregates, such as liquidity expansion and credit growth. An example is capital requirements as currently incorporated in internationally accepted standards; namely capital requirements with risk categories used in industrial countries. The second set, which can be identified as the “pricing-risk-right” approach, works by providing incentives to financial institutions to avoid excessive risk-taking activities. A key feature of this set of regulations is that they encourage financial institutions to internalize the costs associated with the particular risks of the environment where they operate. Regulations in this category include ex-ante risk-based provisioning rules and capital requirements that take into account the risk features particular to developing countries. This category also includes incentives for enhancing market discipline as a way to differentiate risk-taking behavior between financial institutions. The main finding of the paper is that the first set of regulations—the most commonly used in developing economies-- have had very limited usefulness in helping countries to contain the risks involved with more liberalized financial systems. The main reason for this disappointing result is that, by not taking into account the particular characteristics of financial markets in developing countries, these regulations cannot effectively control excessive risk taking by financial institutions. Moreover, the paper shows that, contrary to policy intentions, this set of prudential regulations can exacerbate rather than decrease financial sector fragility, especially in episodes of sudden reversal of capital flows. In contrast, the paper claims, the second set of prudential regulation can go a long way in helping developing countries achieving their goals. The paper advances suggestions for the sequencing of implementation of these regulations for different groups of countries.
    Keywords: regulation, liquidity, credit growth, pricing-risk-right, financial institutions, capital flows, developing countries
    JEL: O16 F30 F32 F33 F36 F43 H3 D81

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