nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒09‒11
fourteen papers chosen by
Peren Arin
Massey University

  1. The Economic Importance of Fiscal Rules By Michael J. Artis, Luca Onorante
  2. Who benefits from tax competition in the European Union? By Leon Bettendorf; Joeri Gorter; Albert van der Horst
  3. Soft Budget Constraints as a Risk Sharing Arrangement in an Economic Federation By Lindahl, Erica; Westermark, Andreas
  4. Public Investment and Budgetary Consolidation in Portugal By Alfredo M. Pereira; Maria de Fátima Pinho
  5. Welfare Implications of Peer Punishment in Unequal Societies By Visser, Martine
  6. Rational Entrepreneurship in Local China: Exit Plus Voice for Preferential Tax Treatments By Zhu, Z.; Hendrikse, G.W.J.; Krug, B.
  7. Pareto Improving Taxes By J. D. Geanakoplos; H. M. Polemarchakis
  8. Maximum-Revenue versus Optimum-Welfare Export Taxes By Clarke, Roger; Collie, David R.
  9. Bridging the Great Divide in South Africa: Inequality and Punishment in the Provision of Public Goods By Visser, Martine; Burns, Justine
  10. The Equity Trap, the Cost Capital and the Firm´s Growth Path By Lindhe, Tobias; Södersten, Jan
  11. REGULATION AND OPPORTUNISM: HOW MUCH ACTIVISM DO WE NEED? By Aleix Calveras; Juan-José Ganuza; Gerard Llobet
  12. The Effect of a Transaction Tax on Exchange Rate Volatility By Markku Lanne; Timo Vesalay
  13. Social Security Reform with Uninsurable Income Risk and Endogenous Borrowing Constraints By Juan A. Rojas; Carlos Urrutia
  14. Government Health Expenditures and Health Outcomes By Farasat A.S. Bokhari; Yunwei Gai; Pablo Gottret

  1. By: Michael J. Artis, Luca Onorante
    Abstract: The present paper provides an assessment of the effect of the recent revision of the Stability and Growth Pact (SGP) on the European economies. A set of structural VARs, one for each eurozone country, is estimated. The estimated models are then used to assess the possible effect of alternative sets of fiscal rules, with particular attention to the Stability and Growth Pact in its old and reformed versions. The investigation suggests that fiscal policy has had in the past a limited smoothing effect on the cycle, and therefore the cost of the old rules in the corrective arm of the Pact was also limited. As for the reform of the Pact, the analysis is overall supportive of the new country-specific Medium Term Objectives. The modified rules of the Excessive deficit procedure are likely to give the governments only a limited extra leeway to reduce the variability of the cycle.
    Keywords: European Monetary Union, Stability and Growth Pact, fiscal-monetary interactions
    JEL: E61 E62 E62
    Date: 2006
  2. By: Leon Bettendorf; Joeri Gorter; Albert van der Horst
    Abstract: Statutory tax rates have declined in the European Union in the recent decades. An applied general equilibrium model on corporate taxation sheds light on the economic and welfare implications of tax rate reforms. Domestic distortions proof highly relevant as even unilateral reductions of the corporate income tax rate might reduce welfare if the labour tax rate has to be increased. Profit shifting induces countries to underbid each others tax rates, but this effect is sizable only if two countries are closely linked. The harmful external effects of CIT rate reductions are limited, which reduces the need for European coordination of CIT rates.
    Keywords: corporate income taxation; tax competition; applied general equilibrium model
    JEL: C68 E62 F23 H25
    Date: 2006–08
  3. By: Lindahl, Erica (Department of Economics); Westermark, Andreas (Department of Economics)
    Abstract: We analyze a model where the federal government provides risk sharing arrangements to municipalities investing in a local public good. The risk sharing arrangements are an income equalization system and a system allowing for a soft budget constraint, i.e., a bailout. Our main result is that a bailout system in combination with income equalization can be a more efficient risk sharing arrangement than an income equalization system only. Thus, the introduction of a bailout system is welfare improving.
    Keywords: Bailout; Fiscal federalism
    JEL: H72 H77
    Date: 2006–01–26
  4. By: Alfredo M. Pereira (Department of Economics, College of William and Mary); Maria de Fátima Pinho (Instituto Superior de Contabilidade e Administração)
    Abstract: In this paper we find that public investment in durable goods has a positive effect on long-term economic performance in Portugal. We also find that these positive effects are not strong enough for public investment to pay for itself in the form of future tax revenues. Therefore, cuts in public investment, although costly in terms of long-term economic performance seem to be an effective way of alleviating pressure on the public budget. It is important to note, however, that this general result is in contrast with the evidence found in this paper for public investment in equipment, a small component of public investment in durable goods, as well as with evidence elsewhere for public investment in transportation infrastructures. For these, the effects on output are strong enough for public investment to pay for itself. Therefore, cuts in these two types of public investment, would have negative long-term economic effects as well as negative long-term budgetary effects. Clearly, not all public investment is created equal.
    Keywords: public investment, economic growth, budgetary consolidation, Portugal
    JEL: C32 E62 H54 O52
    Date: 2006–08–30
  5. By: Visser, Martine (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We show that peer sanctioning increases cooperation in public goods experiments more in unequally endowed groups than in equally endowed groups. Punishment results in a redistribution of wealth from high to low endowment players within groups. <p>
    Keywords: Inequality; cooperation; punishment; public goods; welfare and poverty; social norms
    JEL: C90 D63 H41 I30 Q20 Z13
    Date: 2006–01–31
  6. By: Zhu, Z.; Hendrikse, G.W.J.; Krug, B. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: Bearing the legacy from central-planned system, the tax system in local China still lacks transparency and, in many cases, the liabilities of firms, especially those with extensive influences, are subject to negotiation despite the new tax-reform 1994. Applying Hirschman’s Exit-Voice theory, we construct a game model of interplay between firm and local government, in terms of exit and voice for preferential tax treatments, thereby revealing dynamics of these two options under rational entrepreneurship of economizing transaction cost. Suggested by the model, exit not only induces firm to opt for voice, it also underpins firm’s voice that forces local government to compromise. Particularly, when holding private information of exit cost, firm is able to mimic behaviors of those with high mobility so as to boost the effectiveness of voice. The empirical cases fully illustrate such rational entrepreneurship of exit plus voice to profit from local preferential policy.
    Keywords: Exit;Voice;Preferential Tax Treatments;Tax Competition;China;
    Date: 2006–03–10
  7. By: J. D. Geanakoplos; H. M. Polemarchakis
    Date: 2006–09–02
  8. By: Clarke, Roger (Cardiff Business School); Collie, David R. (Cardiff Business School)
    Abstract: In a game between two exporting countries, both countries may be better off if they both delegate to policymakers who maximise tax revenue rather than welfare. However, both countries delegating to policymakers who maximise revenue is not necessarily a Nash equilibrium. The game may be a prisoner's dilemma where both countries are better off delegating to policymakers who maximise revenue, but both will delegate to policymakers who maximise welfare in the Nash equilibrium. This result is obtained in the Bertrand duopoly model of Eaton and Grossman (1986) and the perfectly competitive model of Panagariya and Schiff (1995).
    Keywords: Trade Policy; Export Taxes; Game Theory; Delegation
    JEL: C72 F11 F12 F13
    Date: 2006–08
  9. By: Visser, Martine (Department of Economics, School of Business, Economics and Law, Göteborg University); Burns, Justine (University of Cape Town, Private Bag,)
    Abstract: We explore the effect of income inequality and peer punishment on voluntary provision of public goods in an experimental context. Our sample draws from nine fishing communities in South-Africa where high levels of inequality prevail. We find that aggregate cooperation is higher in both the voluntary contribution mechanism (VCM) and punishment treatments for unequal groups. Once peer sanctioning is introduced over-contribution by low relative to high endowment players observed in the VCM treatment is significantly enhanced. Demand for punishment by low and high endowment players are similar, irrespective of differences in relative costs, and in unequal groups free-riding is punished more, specifically by low endowment players. We observe inequality aversion both in endowments and with respect to the interaction of endowments and contributions: high endowment players receive more punishment, but also receive more punishment for negative deviation from the group mean share. <p>
    Keywords: Inequality; cooperation; punishment; public goods experiments
    JEL: C90 D63 H41 Q20
    Date: 2006–08–31
  10. By: Lindhe, Tobias (Finansdepartementet); Södersten, Jan (Department of Economics)
    Abstract: This paper reconsiders Sinn’s (1991) nucleus theory of the corporation by comparing two different regimes for the equity trap. In the first of these, all cash paid to the shareholders is taxed as dividends, in the second, shareholders are allowed a tax-free return of capital contributed through new issues. A substantial difference is found between the regimes in the seize of initial equity injections, although in both regimes, no dividends are paid until a new long-run equilibrium is reached. Contrary to Sinn, we find that with optimal behavior, the cost of new equity is lower than suggested by conventional formulae.
    Keywords: dividend taxation; equity trap; cost of capital; nucleus theory; growth path
    JEL: H24 H25 H32
    Date: 2006–09–05
  11. By: Aleix Calveras; Juan-José Ganuza; Gerard Llobet (CEMFI, Centro de Estudios Monetarios y Financieros)
    Abstract: This paperanalyzes the current trend towards firms' self-regulation as opposed to the formal regulation of a negative externality. Firms respond to increasing activism in the market (conscious consumers that take into account the external effects of their purchase) by providing more socially responsible goods. However, because regualtion is the outcome of a political process, an increase in activism might imply and inefficiently higher externality level. This may happen when a majority of non-activist consumers collectively free-ride on conscious consumers. By determining a softer than optimal regulation, they benefit from the behavior of firms, yet they have access to cheaper (although less efficient) goods.
    Keywords: Activism, corporate social responsability, voting and regulation.
    JEL: D72 H42 L51 M14 Q52
    Date: 2005–10
  12. By: Markku Lanne; Timo Vesalay
    Abstract: We argue that a transaction tax is likely to amplify, not dampen, volatility in the foreign exchange markets. Our argument stems from the decentralized trading practice and the presumable discrepancy between 'informed' and 'uninformed' traders' valuations. Since informed 'traders' valuations are likely to be less dispersed, a transaction tax penalizes informed trades disproportionately, leading to increased volatility. Empirical support for this prediction is found by investigating the effect of transaction costs on the volatility of DEM/USD and JPY/USD returns. High-frequency data are used and an increase in transaction costs is found to have a significant positive effect on volatility.
    Keywords: Transaction tax; exchange rates; volatility
    JEL: F31 F42 G15 G28
    Date: 2005
  13. By: Juan A. Rojas (Universidad Carlos III de Madrid); Carlos Urrutia (Centro de Investigacion Economica (CIE), Instituto Tecnologico Autonomo de Mexico (ITAM))
    Abstract: We study the aggregate effects of a social security reform in a large overlapping generations model where markets are incomplete and households face uninsurable idiosyncratic income shocks. We depart from the previous literature by assuming that, because of lack of commitment in the credit market, the borrowing constraint in the unique asset is endogenously determined by the agents' incentives to default on previous debts. We find that a model with exogenous borrowing constraints overestimates the positive effect of reforming social security on the capital stock and the saving rate, compared to our model with endogenous borrowing limit. The reason is that, in the latter, the size of precautionary savings is smaller because after the reform the incentives to default on previous debts are lower and consequently households face more relaxed borrowing limits. Adding retirement accounts to the basic model does not change these conclusions, although the quantitative importance of endogenizing borrowing constraints is reduced.
    Date: 2004–10
  14. By: Farasat A.S. Bokhari (Department of Economics, Florida State University); Yunwei Gai (Department of Economics, Florida State University); Pablo Gottret (Health Systems Development Cluster, World Bank)
    Abstract: This paper provides econometric evidence linking a country's per capita government health expenditures and per capita income to two health outcomes: under-five mortality and maternal mortality. Using instrumental variables techniques (GMM-H2SL), we estimate the elasticity of these outcomes with respect to government health expenditures and income while treating both variables as endogenous. Consequently, our elasticity estimates are larger in magnitude than those reported in literature, which may be biased up. The elasticity of under-five mortality with respect to government expenditures ranges from -.25 to -.42 with a mean value of -.33. For maternal mortality the elasticity ranges from -.42 to -.52 with a mean value of -.50. For developing countries, our results imply that while economic growth is certainly an important contributor to health outcomes, government spending on health is just as important a factor.
    Keywords: Under-five mortality, maternal-mortality, millennium development goals, government expenditures, elasticity
    Date: 2005–02

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