nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒09‒16
eighteen papers chosen by
Peren Arin
Massey University

  1. Pareto-Improving Bequest Taxation By Volker Grossmann; Panu Poutvaara
  2. Expansionary fiscal consolidations in Europe: new evidence By António Afonso
  3. TComparing Tax Rates Using OECD and GTAP6 Data By Gurgel, Angelo; Metcalf, Gilbert; Reilly, John
  4. The Revenue Impacts of Cross-border Sales and Tourism: Wine and Liquor Taxation By Todd M. Nesbit
  5. The quality of fiscal adjustment and the long-run growth impact of fiscal policy in Brazil By Blanco, Fernando; Herrera, Santiago
  6. Optimum Commodity Taxation in Pooling Equilibri By Eytan Sheshinski
  7. Excise Taxation and Product Quality: The Gasoline Market By Todd M. Nesbit
  8. Political and Institutional Determinants of the Cyclicality of Fiscal Policy: Evidence from the OECD and Latin America By Nuno Venes
  9. Transfer Pricing by U.S.-Based Multinational Firms By Andrew B. Bernard; J. Bradford Jensen; Peter K. Schott
  10. Correlated Equilibrium and the Pricing of Public Goods. By Joseph M. Ostroy; Joon Song
  11. How Corruption Hits People When They Are Down By Jennifer Hunt
  12. Rules Rather Than Discretion: Lessons from Hurricane Katrina By Howard Kunreuther; Mark Pauly
  13. Why Does Ethnic Diversity Undermine Public Goods Provision? An Experimental Approach By James Habyarimana; Macartan Humphreys; Daniel N. Posner; Jeremy Weinstein
  14. Are traffic tickets countercyclical? By Thomas A. Garrett; Gary A. Wagner
  15. Using School Scholarships to Estimate the Effect of Government Subsidized Private Education on Academic Achievement in Chile By Priyanka Anand; Alejandra Mizala; Andrea Repetto
  16. Should Sixth Grade be in Elementary or Middle School? An Analysis of Grade Configuration and Student Behavior By Philip J. Cook; Robert MacCoun; Clara Muschkin; Jacob Vigdor
  17. Capitalization of the quality of local public schools: what do home buyers value? By Theodore M. Crone
  18. Property Rights, Trade, and the Quality of Life: A Cross-Sectional Analysis Using Alternative Measures By Nathan J. Ashby

  1. By: Volker Grossmann (University of Fribourg, CESifo and IZA Bonn); Panu Poutvaara (University of Helsinki, CESifo and IZA Bonn)
    Abstract: Altruistic parents may transfer resources to their offspring by providing education, and by leaving bequests. We show that in the presence of wage taxation, a small bequest tax may improve efficiency in an overlapping-generations framework with only intended bequests, by enhancing incentives of parents to invest in their children’s education. This result holds even if the wage tax rate is held constant when introducing bequest taxation. We also calculate an optimal mix of wage and bequest taxes with alternative parameter combinations. In all cases, the optimal wage tax rate is clearly higher than the optimal bequest tax rate, but the latter is generally positive when the required government revenue in the economy is sufficiently high.
    Keywords: bequest taxation, bequests, education, Pareto improvement
    JEL: H21 H31 D64 I21
    Date: 2006–08
  2. By: António Afonso
    Abstract: In order to assess the existence of expansionary fiscal consolidations in Europe, panel data models for private consumption are estimated for the EU15 countries, using annual data over the period 1970–2005. Three alternative approaches to determine fiscal episodes are used, and the level of government indebtedness is also taken into account. The results show some evidence in favour of the existence of expansionary fiscal consolidations, for a few budgetary spending items (general government final consumption, social transfers, and taxes), depending on the specification and on the time span used. On the other hand, the possibility of asymmetric effects of fiscal episodes does not seem to be corroborated by the results.
    Keywords: fiscal policy; expansionary fiscal consolidations; non-Keynesian effects; panel data models; European Union.
    JEL: C23 E21 E62
  3. By: Gurgel, Angelo; Metcalf, Gilbert; Reilly, John
    Abstract: In prior research, Babiker, Metcalf, and Reilly (2003) computed capital and labor tax rates to augment GTAP 4 data that did not comprehensively cover taxes. Recently, we updated these tax rates to 2001 to match the GTAP 6 base year. We realize there was an attempt to improve representation of taxes in GTAP 6, but as admitted by GTAP this was as yet incomplete. For those who might require a more complete tax accounting we have followed an approach that has the benefit of, at least in the aggregate, reconciliation with widely available tax receipt data. This note compares the tax rates derived for the OECD countries using this approach to those provided by the method GTAP uses. Those who are interested in economic impacts of fiscal measures--such as assuring revenue neutrality by raising tax rates in the face of a policy that reduces economic activity--may want to consider amending the tax data in GTAP. Alternatively, it may be useful to discuss the differences we note to as part of on-going efforts to improve data reported in GTAP. Table 1 provides tax rates based on our methodology as well as from GTAP 6, aggregated to be approximately comparable. More disaggregated GTAP 6 tax rates are provided in Tables 2-3. GTAP6 reports taxes on factor income (rTF) as well as income taxes (rTO) whereas BMR combine income and factor taxes into a composite factor tax. We construct an accumulated factor tax (ACC) from the GTAP6 tax data which we believe is directly comparable to the BMR tax rates by the formula: ACC = 1 - (1 - rTO)(1 - rTF)
    Date: 2006
  4. By: Todd M. Nesbit (Department of Economics, West Virginia University)
    Abstract: As tax rates have risen through time, voter dislike of increased taxation has strengthened, leaving some states in a budget crunch. If policy-makers are to keep pace with the growing demand for public services, they must find ways to export tax burdens outside of the district. Taking advantage of cross-border shopping and tourism are two such ways to export tax burdens. This paper attempts to measure the revenue impacts of cross-border shopping and tourist purchases of wine and liquor in West Virginia. I find that cross-border shopping and tourism exert significant impacts on tax revenues from wine and liquor sales.
    Date: 2005
  5. By: Blanco, Fernando; Herrera, Santiago
    Abstract: The authors describe the main trends of Brazil ' s fiscal policy during the past decade and analyze (1) the ability to raise the primary surplus in response to external shocks, (2) the pro-cyclical nature of fiscal policy, and (3) the long-run impact of government expenditure composition and taxation. They analyze the use of the primary balance as a policy tool within the Drudi-Prati model, wherein the government uses the primary balance to reveal its commitment to service its debt. The authors verify that both the debt ratio and the primary balance are determinants of spreads and credit ratings in Brazil. But the relationship is nonlinear: the impact of the primary balance on spreads is amplified as the debt ratio increases. Using an Autoregressive Distributed Lag (ARDL) approach, the authors analyze the relationship between the primary balance and economic activity, finding a positive correlation in the long run. However, in the short run fiscal expansions are associated with primary balance reductions and vice-versa during output contractions, confirming the procyclical nature of fiscal policy in the short run. The authors use two approaches, ARDL and a cointegrating value at risk (VAR), to analyze the interaction between public expenditure composition and taxation on growth. Similar results are obtained: large elasticities of output with respect to capital stocks, a significant negative impact of taxation on long-run GDP, and a negative impact of increasing government consumption and transfer payments on GDP. These results shed light on the contribution of fiscal policy to disappointing growth performance in Brazil during the past decade.
    Keywords: Economic Stabilization,Public Sector Expenditure Analysis & Management,Economic Theory & Research,Fiscal Adjustment,Banks & Banking Reform
    Date: 2006–09–01
  6. By: Eytan Sheshinski
    Date: 2006–09–11
  7. By: Todd M. Nesbit (Department of Economics, West Virginia University)
    Abstract: Following Barzel (1976), product quality increases in response to unit taxation but remains unchanged by ad valorem taxation. While many tax theorists agree this argument is theoretically sound, empirical support of Barzel’s theory is limited to the cigarette market. This paper tests and confirms his theory in the gasoline market, a market in which Barzel failed to find supporting evidence in his original article. Using a direct test proposed by Sobel and Garrett (1997) and improved data, I find the market shares of premium and mid-grade gasoline rise in response to per-unit taxation but are unaffected by ad valorem taxation.
    Date: 2005
  8. By: Nuno Venes
    Abstract: In this paper, we analyse the role of political and institutional variables on the cyclical patterns of central government expenditure and revenue. Working with a sample of 38 OECD and Latin-American countries in 1960-2003, we find that higher levels of income inequality are associated with stronger expenditure procyclicality, and that better institutions do not seem to mitigate this effect. IMF interventions are, in general, statistically insignificant in explaining the cyclical behaviour of expenditure, as well as the degree of development of financial systems. On the revenue side, income inequality leads to less procyclical policies. In general, political and institutional variables explain the cyclicality of government expenditure better than that of revenue.
    Keywords: Fiscal policy; cyclicality; political and institutional determinants; OECD; Latin America
    JEL: E62 H61
  9. By: Andrew B. Bernard; J. Bradford Jensen; Peter K. Schott
    Abstract: This paper examines how prices set by multinational firms vary across arm's-length and related-party customers. Comparing prices within firms, products, destination countries, modes of transport and month, we find that the prices U.S. exporters set for their arm's-length customers are substantially larger than the prices recorded for related-parties. This price wedge is smaller for commodities than for differentiated goods, is increasing in firm size and firm export share, and is greater for goods sent to countries with lower corporate tax rates and higher tariffs. We also find that changes in exchange rates have differential effects on arm's-length and related-party prices; an appreciation of the dollar reduces the difference between the prices.
    JEL: F14 F23 H25 H26 H32
    Date: 2006–08
  10. By: Joseph M. Ostroy; Joon Song
    Abstract: Lindahl equilibrium is an application of price-taking behavior to achieve efficiency in the allocation of public goods. Such an equilibrium requires individuals to be strategically naive, i.e., Lindahl equilibrium is not incentive compatible. Correlated equilibrium is defined precisely to take account of strategic behavior and incentive compatibility. Using the duality theory of linear programming, we show that these two seemingly disparate notions can be combined to give a public goods, Lindahl pricing characterization of efficient correlated equilibria. We also show that monopoly theory can be used to characterize inefficient correlated equilibria.
    Date: 2006–09–07
  11. By: Jennifer Hunt (McGill University, NBER, CEPR, DIW Berlin and IZA Bonn)
    Abstract: Using cross-country and Peruvian data, I show that victims of misfortune, particularly crime victims, are much more likely than non-victims to bribe public officials. Misfortune increases victims’ demand for public services, raising bribery indirectly, and also increases victims’ propensity to bribe certain officials conditional on using them, possibly because victims are desperate, vulnerable, or demanding services particularly prone to corruption. The effect is strongest for bribery of the police, where the increase in bribery comes principally through increased use of the police. For the judiciary the effect is also strong, and for some misfortunes is composed equally of an increase in use and an increase in bribery conditional on use. The expense and disutility of bribing thus compound the misery brought by misfortune.
    Keywords: corruption, bribery, development
    JEL: H1 K4 O1
    Date: 2006–08
  12. By: Howard Kunreuther; Mark Pauly
    Abstract: This paper explores options for programs to be put in place prior to a disaster to avoid large and often poorly-managed expenditures following a catastrophe and to provide appropriate protection against the risk of those large losses which do occur. The lack of interest in insurance protection and mitigation by property owners and by public sector agencies prior to a disaster often creates major problems following a catastrophic event for victims and the government. Property owners who suffer severe damage may not have the financial resources easily at hand to rebuild their property and hence will demand relief. The government is then likely to respond with costly but poorly targeted disaster assistance. To avoid these large and often uneven ex post expenditures, we consider the option of mandatory comprehensive private disaster insurance with risk based rates. It may be more efficient to have an ex ante public program to ensure coverage of catastrophic losses and to subsidize low income residents who cannot afford coverage rather than the current largely ex post public disaster relief program.
    JEL: G22 H23
    Date: 2006–08
  13. By: James Habyarimana (Georgetown University and IZA Bonn); Macartan Humphreys (Columbia University); Daniel N. Posner (University of California, Los Angeles); Jeremy Weinstein (Stanford University)
    Abstract: A large and growing literature links high levels of ethnic diversity to low levels of public goods provision. Yet while the empirical connection between ethnic heterogeneity and the underprovision of public goods is widely accepted, there is little consensus on the specific mechanisms through which this relationship operates. To gain analytic leverage on the question of why ethnicity matters, we identify three families of mechanisms – what we term preference, technology, and strategy mechanisms. Our empirical strategy is to identify and run a series of experimental games that permit us to examine these mechanisms in isolation and then to compare the importance of ethnicity in each. Results from experimental games conducted with a random sample of 300 subjects in Kampala’s slums reveal that successful collective action among homogenous ethnic communities in urban Uganda is attributable to the existence of norms and institutions that facilitate the sanctioning of non-contributors. We find no evidence for a commonality of tastes within ethnic groups, for greater degrees of altruism toward co-ethnics, or for an impact of shared ethnicity on the productivity of teams.
    Keywords: ethnic diversity, collective action, public goods, field experiments
    JEL: D71 H41 J15 O10 Z13
    Date: 2006–08
  14. By: Thomas A. Garrett; Gary A. Wagner
    Abstract: There is anecdotal evidence that local governments use traffic tickets to generate revenue. Using panel data for North Carolina counties, we examine whether changes in local government revenue influence the number of traffic tickets issued. We find strong evidence of an asymmetric response by local governments. Specifically, positive changes in revenue have no effect on traffic tickets, but negative revenue changes increase the number of traffic tickets issued. A one percentage point decrease in revenue yields a 0.38 percentage point increase in traffic tickets. We calculate that traffic ticket revenue supplements a low percentage of local revenue losses.
    Keywords: Local government
    Date: 2006
  15. By: Priyanka Anand; Alejandra Mizala; Andrea Repetto
    Abstract: This paper estimates the impact of private education on low-income students in Chile. We attempt to reduce selection bias by using reduced-tuition paying, low-income students in private schools as the treatment group, based on our finding that these students were, to some extent, randomly selected out of the public school control group. Propensity score matching is then used to calculate the difference in academic achievement of students in the treatment group versus their counterpart in the control group. Our results reveal that students in private voucher schools with tuition score slightly higher than students in public schools. The difference in standardized test scores is approximately 8 points, a test score gain of almost 0.15 standard deviations.
    Date: 2006
  16. By: Philip J. Cook; Robert MacCoun; Clara Muschkin; Jacob Vigdor
    Abstract: Using administrative data on public school students in North Carolina, we find that sixth grade students attending middle schools are much more likely to be cited for discipline problems than those attending elementary school. That difference remains after adjusting for the socioeconomic and demographic characteristics of the students and their schools. Furthermore, the higher infraction rates recorded by sixth graders who are placed in middle school persist at least through ninth grade. A plausible explanation is that sixth graders are at an especially impressionable age; in middle school, the exposure to older peers and the relative freedom from supervision have deleterious consequences.
    JEL: H52
    Date: 2006–08
  17. By: Theodore M. Crone
    Abstract: The expansion of state-mandated tests in the 1990s and the testing requirements of the No Child Left Behind Act have supplied researchers with an abundance of data on test scores that can be used as measures of school quality. This paper uses the state-mandated test scores for 5th grade and 11th grade in Montgomery County, Pennsylvania, to examine three issues about the capitalization of school quality into house prices: (1) At what level do prospective home buyers evaluate the quality of local public education—at the district level or the level of the neighborhood school? (2) After accounting for student achievement as reflected in test scores, are other aspects of the local public school system, such as class size or expenditures, capitalized into the value of a house? (3) Are the positive results we get for the capitalization of school quality into house prices due simply to the correlation between high test scores and other desirable neighborhood characteristics? The results of our investigation suggest that to home buyers some test-score averages are significantly better indicators of the quality of the local public school system than others. In particular, home buyers seem to evaluate the quality of public education at the district level rather than at the level of the local school. Class size at the high-school level has some independent effect on house prices, but not class size at the elementary school level. And once we account for student achievement, expenditures per pupil have no further effect on house prices. Finally, restricting our sample to similar neighborhoods along school district boundaries confirms our earlier results for high school test scores but not for elementary school scores.
    Keywords: Education ; School choice
    Date: 2006
  18. By: Nathan J. Ashby (Department of Economics, West Virginia University)
    Abstract: The effect that the components of the Economic Freedom of the World Index (Gwartney, Lawson, and Block, 2004) have on alternative measurements of well being is investigated. The objective is to observe the effect of trade policies and property rights on the quality of life using the Human Development Index (UNDP, 1995) and the Index of Human Progress (Emes and Hahn, 2001). Positive results are found with regard to the effect of property rights, free trade, and limited regulation on the quality of life. The results for property rights are robust.
    JEL: H10 F10 P00 O34
    Date: 2005

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