nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒09‒23
24 papers chosen by
Peren Arin
Massey University

  1. Macroeconomic Effects of Fiscal Policies: Empirical Evidence from Bangladesh, China, Indonesia and the Philippines By Geoffrey Ducanes; Marie Anne Cagas; Duo Qin; Pilipinas Quising; Mohammad Abdur Razzaque
  2. Voting over Taxes: The Case of Tax Evasion By Traxler, Christian
  3. Expansionary fiscal consolidations in Europe - new evidence By António Afonso
  4. Capital Income Tax Coordination and the Income Tax Mix By Huizinga, Harry; Nielsen, Søren Bo
  5. Money or Joy By Alstadsæter, Annette; Kolm, Anne-Sofie; Larsen, Birthe
  6. Shadow Economies and Corruption all over the World: What do we really know? By Friedrich G. Schneider
  7. The Cyclical Behaviour of Fiscal Surpluses in The OECD Countries – A Panel Study By Michal Mackiewicz
  8. Early Retirement and Social Security: A Long Term Perspective By J. Ignacio Conde-Ruiz; Vincenzo Galasso; Paola Profeta
  9. Making The Stability Pact More Flexible: Does It Lead to Procyclical Fiscal Policies? By Michal Mackiewicz
  10. Capital gains taxation and house price fluctuations By Fuest, Clemens; Huber, Bernd; Nielsen, Søren Bo
  11. Centralized vs. De-centralized Multinationals and Taxes By Nielsen, Søren Bo; Raimondos-Møller, Pascalis; Schjelderup, Guttorm
  12. Macroeconomic Implications of Early Retirement in the Public Sector: The Case of Brazil By Gerhard Glomm; Juergen Jung; Chung Tran
  13. Aging and the interaction between education, retirement and the working life By Dirk-jan Omtzigt
  14. Matching Contributions and the Voluntary Provision of a Pure Public Good: Experimental Evidence By Ronald J. Baker II; James M. Walker; Arlington W. Williams
  15. Institution Formation in Public Goods Games By Michael Kosfeld; Akira Okada; Arno Riedl
  16. The contribution of government transfer programs to inequality.A net-benefit approach. By Alvaro Forteza; Ianina Rossi
  17. Effects of taxes financing decisions and firm value in Nigeria By Adelegan, Olatundun
  18. Optimal Tax Credits in the Context of the German System of Apprenticeship Training and Social Security By Kai-Joseph Fleischhauer
  19. The Effect of Rewards and Sanctions in Provision of Public Goods By Martin Sefton; Robert Shupp; James M. Walker
  20. When Does One Bad Apple Spoil the Barrel? An Evolutionary Analysis of Collective Action By David P. Myatt; Chris Wallace
  21. When An Evolutionary Analysis of the Volunteer`s Dilemma By David P. Myatt; Chris Wallace
  22. Let's Talk about Bidding! - Coordination Mechanisms in Procurement Auctions By Werner Güth; Jeannette Brosig; Torsten Weiland
  23. Financing Agricultural Development: The Political Economy of Public Spending on Agriculture in Sub-Saharan Africa By Palaniswamy, Nethra; Birner, Regina
  24. Information Exchange, Market Transparency and Dynamic Oligopoly By Overgaard, Per Baltzer; Møllgaard, Peter

  1. By: Geoffrey Ducanes (University of the Philippines); Marie Anne Cagas (Asian Development Bank and University of the Philippines); Duo Qin (Queen Mary, University of London and Asian Development Bank); Pilipinas Quising (Asian Development Bank); Mohammad Abdur Razzaque (University of Dhaka, Bangladesh)
    Abstract: This paper studies macroeconomic effects of fiscal policies in four Asian countries – Bangladesh, China, Indonesia, and the Philippines – by means of structural macroeconometric model simulations. It is found that short-term fiscal multipliers from an untargeted increase in government expenditure are positive but much less than those from an increased expenditure targeted to capital spending. The multiplier effects from fiscal expansion via a tax rate reduction are found to be typically much less than through higher spending. The effectiveness of automatic stabilizers in general, and more specifically whether expenditure or tax-side stabilizer is more effective, differs across countries.
    Keywords: Fiscal policy, Growth, Public finance, Deficit
    JEL: E62 E17 C53 P52
    Date: 2006–09
  2. By: Traxler, Christian
    Abstract: This paper studies majority voting on taxes when tax evasion is possible. We characterize the voting equilibrium where the agent with median taxed income is pivotal. Since the ranking of true incomes does not necessarily correspond to the ranking of taxed incomes, the decisive voter can differ from the median income receiver. In this case, we find unconventional patterns of redistribution, e.g. from the middle class to the poor and the rich. Furthermore, we show that majority voting can lead to an inefficiently low level of taxation despite a right-skewed income distribution. Hence, the classical over-provision result might turn around, once tax evasion is taken into account.
    Keywords: Majority Voting; Tax Evasion; Welfare Analysis; Redistribution
    JEL: H26 H72 D6
    Date: 2006–09
  3. By: António Afonso (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    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. JEL Classification: C23, E21, E62.
    Keywords: fiscal policy, expansionary fiscal consolidations, non-Keynesian effects, panel data models, European Union.
    Date: 2006–09
  4. By: Huizinga, Harry (Department of Economics, Copenhagen Business School); Nielsen, Søren Bo (Department of Economics, Copenhagen Business School)
    Abstract: Europe has seen several proposals for tax coordination only in the area of capital income taxation, leaving countries free to adjust their labor taxes. The expectation is that higher capital income tax revenues would cause countries to reduce their labor taxes. This paper shows that such changes in the mix of capital and labor taxes brought on by capital income tax coordination can potentially be welfare reducing. This reflects that in a non-cooperative equilibrium capital income taxes may be more distorting from an international perspective than are labor income taxes. Simulations with a simple model calibrated to EU public finance data suggest that countries indeed lower their labor taxes in response to higher coordinated capital income taxes. The overall welfare effects of capital income tax coordination, however, are estimated to remain positive.
    Keywords: None;
    JEL: F20 H87
    Date: 2005–10–14
  5. By: Alstadsæter, Annette (Department of Economics, Copenhagen Business School); Kolm, Anne-Sofie (Department of Economics, Copenhagen Business School); Larsen, Birthe (Department of Economics, Copenhagen Business School)
    Abstract: This paper examines the effect of taxes on the individuals' choices of educational direction, and thus on the economy.s skill composition. A proportional labour tax induces too many workers with high innate ability to choose an educational type associated with high consumption value and low effort. This increases the skill mismatch and aggregate unemployment in the economy. The government can correct for this distortion by use of differentiated tuition fees or tax rates.
    Keywords: Unemployment; matching; education; optimal taxation; tuition fees
    JEL: H21 H24 J64 J68
    Date: 2005–11–28
  6. By: Friedrich G. Schneider (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: Estimations of the size and development of the shadow economy for 145 countries, including developing, transition and highly developed OECD economies over the period 1999 to 2003 are presented. The average size of the shadow economy (as a percent of "official" GDP) in 2002/03 in 96 developing countries is 38.7%, in 25 transition countries 40.1%, in 21 OECD countries 16.3% and in 3 Communist countries 22.3%. An increased burden of taxation and social security contributions, combined with a labor market regulation are the driving forces of the shadow economy. Furthermore, the results show that the shadow economy reduces corruption in high income countries, but increases corruption in low income countries. Finally, the various estimation methods are discussed and critically evaluated.
    Keywords: shadow economy of 145 countries; tax burden; tax moral; quality of state institutions; regulation; DYMIMIC and other estimation methods
    JEL: O17 O5 D78 H2 H11 H26
    Date: 2006–09
  7. By: Michal Mackiewicz (Institute of Economics, University of Lodz)
    Abstract: The main objective of this paper is to examine differences in the cyclical behaviour of fiscal policy in the OECD countries empirically using a new method developed to compare directly the explanatory power of two groups of theories that try to explain why some countries run pro-cyclical fiscal policies. The analysis shows that stronger anticyclical fiscal policies are typically run by countries with better institutions, lower deficits, and a lower stock of public debt. However, the index of regulatory quality performs best in explaining the variance of output elasticity of budget surpluses, which contradicts the conventional view that financial constraints are the main reason behind fiscal procyclicality.
    Keywords: procyclical fiscal policy, stabilization policy, panel estimation
    JEL: E60 E63
    Date: 2006–01
  8. By: J. Ignacio Conde-Ruiz (Spanish Prime Minister's Economic Bureau and FEDEA); Vincenzo Galasso (IGIER, Università Bocconi, CSEF and CEPR); Paola Profeta (Università Bocconi)
    Abstract: We provide a long term perspective on the individual retirement behavior and on the future of retirement. In a Markovian political economic theoretical framework, in which incentives to retire early are embedded, we derive a political equilibrium with positive social security contribution rates and early retirement. While aging has opposite economic and political effects on social security contributions, it may lead to postponing retirement -- by reducing the generosity of pension benefits -- unless the political effect leads to a large increase in contribution and hence higher benefits. Economic slowdowns, captured by a reduction in wage income in youth, will also induce workers to postpone retirement and to vote for less social security
    Keywords: pensions, income effect, tax burden, politico-economic Markovian equilibrium
    JEL: H53 H55 D72
    Date: 2006–09–01
  9. By: Michal Mackiewicz (Institute of Economics, University of Lodz)
    Abstract: One of the often discussed negative aspects of the Stability and Growth Pact is the rigidity of its deficit rule. Several reform proposals aim currently at alleviating the rule in order to allow the automatic stabilizers to operate freely. However, such a reform is likely to cause even further deterioration of fiscal balances in the member countries. The empirical evidence presented in this paper shows that, in the past, increasing the structural deficit had a strong negative impact on a degree of anti-cyclical fiscal stabilization. This suggests that the reform of the Pact, through higher structural deficits, can decrease rather then increase the scope of anti-cyclical fiscal actions in the EMU member countries.
    Keywords: fiscal policy, stabilization policy, fiscal rules
    JEL: E60 E63
    Date: 2005–03
  10. By: Fuest, Clemens (Department of Economics, Copenhagen Business School); Huber, Bernd (Department of Economics, Copenhagen Business School); Nielsen, Søren Bo (Department of Economics, Copenhagen Business School)
    Abstract: Recent years have seen large swings in house prices in many countries. Motivated by housing price variations, proposals for taxing capital gains on housing have repeatedly been put forth. The idea seems to be that such taxes would curb the redistribution occurring between those owning houses and those trying to get into the market for owner-occupied housing. Our paper shows that at least in simple settings, a tax on real capital gains on housing will only lead to even bigger price swings and will not be able to redistribute between people appearing on either side of the housing market.
    Keywords: capital gains tax; housing market; price fluctuations
    JEL: H23 H24 R31
    Date: 2006–09–12
  11. By: Nielsen, Søren Bo (Department of Economics, Copenhagen Business School); Raimondos-Møller, Pascalis (Department of Economics, Copenhagen Business School); Schjelderup, Guttorm (Department of Economics, Copenhagen Business School)
    Abstract: The paper examines how country tax differences affect a multinational enterprise's choice to centralize or de-centralize its decision structure. Within a simple model that emphasizes the multiple conflicting roles of transfer prices in MNEs – here, as a strategic pre-commitment device and a tax manipulation instrument –, we show that (de-)centralized decisions are more profitable when tax differentials are (small) large.
    Keywords: Centralized vs. de-centralized decisions; taxes; MNEs
    JEL: F23 H25 L23
    Date: 2005–09–13
  12. By: Gerhard Glomm (Indiana University Bloomington); Juergen Jung (Indiana University Bloomington); Chung Tran (Indiana University Bloomington)
    Abstract: In Brazil generous public sector pensions have induced civil servants to retire on average at age 55. In this paper we use an OLG model to assess the effects of such policy induced early retirement on capital accumulation and long-run income levels. We calibrate the model to data from Brazil and then conduct policy experiments changing the generosity of (early) public sector pensions. We find that the current generosity of public sector pensions which induces civil servants to retire 10 years prematurely (at age 55 rather than at age 65) is often associated with decreases in steady state output (GDP) of over 2 percent and welfare losses in the private sector of more than 1 percent of consumption.
    Keywords: Early Retirement, Pension Reform, Capital Accumulation
    JEL: H55
    Date: 2006–09
  13. By: Dirk-jan Omtzigt
    Abstract: Population aging and the burden it imposes on state finances is one of the major economic challenges governments around the world face. Responses are formulated in terms of either increasing employment (for example by raising the retirement age) or increasing productivity (investment in education). This paper brings together these two responses in a unified framework and shows how the individual`s education and retirement decisions are affected by population aging - caused either by a fall in the population growth rate, or an increase in life expectancy - and the budget balancing mechanism of the public pension systems. We discuss how a budget balancing mechanism can be informed by fairness considerations and we show that early retirement can be the result of the application of Musgrave`s rule in response to a fall in fertility.
    Keywords: Aging, Fairness, Education, Retirement
    JEL: H55 I38 J22 J24 J26
    Date: 2006
  14. By: Ronald J. Baker II (Millersville University of Pennsylvania); James M. Walker (Indiana University Bloomington); Arlington W. Williams (Indiana University Bloomington)
    Abstract: Laboratory experiments are used to study the voluntary provision of a pure public good in the presence of an anonymous external donor. The external funds are used in two different settings, lump-sum matching and one-to-one matching, to examine how allocations to the public good are affected. The experimental results reveal that allocations to the public good under lumpsum matching are significantly higher, and have significantly lower within-group dispersion, relative to one-to-one matching and a baseline setting without external matching funds.
    Keywords: public goods, free riding, laboratory experiments
    JEL: H41 C72 C92
    Date: 2006–08
  15. By: Michael Kosfeld (University of Zurich and IZA Bonn); Akira Okada (Hitotsubashi University); Arno Riedl (Maastricht University, CESifo and IZA Bonn)
    Abstract: Centralized sanctioning institutions are of utmost importance for overcoming free-riding tendencies and enforcing outcomes that maximize group welfare in social dilemma situations. However, little is known about how such institutions come into existence. In this paper we investigate, both theoretically and experimentally, the endogenous formation of institutions in a public goods game. Our theoretical analysis shows that players may form sanctioning institutions in equilibrium, including those where institutions govern only a subset of players. The experiment confirms that institutions are formed frequently as well as that institution formation has a positive impact on cooperation rates and group welfare. However, the data clearly reveal that players are unwilling to implement institutions in which some players have the opportunity to free ride. In sum, our results show that individuals are willing and able to create sanctioning institutions, but that the institution formation process is guided by behavioral principles not taken into account by standard theory.
    Keywords: public goods, institutions, sanctions, cooperation
    JEL: C72 C92 D72
    Date: 2006–09
  16. By: Alvaro Forteza (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República); Ianina Rossi (Departamento de Economía, Facultad de Ciencias Sociales, Universidad de la República)
    Abstract: The contribution of government transfer programs to inequality is often assessed by analyzing to what extent the benefits paid go to lower income families. Several analysts have found that some key government transfers actually go mostly to middle and high income families and thus contribute to greater inequality. We argue in this paper that the impact of these programs on inequality should be evaluated considering the benefits received net of the taxes paid by households to finance the programs, since higher income households receive higher benefits but they also pay higher taxes. We illustrate this approach by estimating the impact of four government programs on inequality in Uruguay and show that the conclusions are different depending on whether we use gross or net benefits in the estimation.
    Keywords: Transfers, inequality, redistribution
    JEL: D31 H55 I38
    Date: 2006–06
  17. By: Adelegan, Olatundun
    Abstract: The study sets out to measure how the taxation of dividend and debt affects firm value. Tax hypothesis predicts that firm value is negatively related to dividends and positively related to debt. The study covered 1197 firm-year observations of manufacturing firms in Nigeria from 1984 to 2000. To achieve the objective, the study estimated the model on the average values for each firm and tested for industry effects using the ordinary least square (OLS) method. We found the opposite of tax hypotheses predictions from the regression results. We hypothesized that the relationship between dividends, debt and firm value will be affected by the size of the firm. We therefore partitioned the firms into two on the basis of size measured as market capitalization. We estimated separate equations for each sub-sample and found positive relationship between dividend and firm value and negative relationship between debt and firm value in both small-sized firms and big firms’ sub-sample. The study concludes that dividend and debt convey information about profitability of firms. This information about firms’ profitability obscures any tax effect of financing decisions. However, we found that earnings and investment are key determinants of firm value in Nigeria.
    Date: 2006
  18. By: Kai-Joseph Fleischhauer
    Abstract: There is an ongoing discussion in Germany about the implementation of tax credits in order to reintegrate low-skilled workers into the labor market. This paper aims at analyzing the policy instrument of tax credits in a theoretical model that systematically compares its costs and benefits in the context of the German system of apprenticeship training and social security. Building on recent training literature, a two-period partial-equilibrium model is developed that allows for worker heterogeneity in ability. In our model, the implementation of tax credits in terms of a negative income tax solves a trade-off with respect to overall welfare. While tax credits reduce the number of unemployed workers at the extensive margin, they increase at the same time the opportunity costs of apprenticeship training, which implies that human capital formation is decreased. Furthermore, the model suggests that the reintegration of those workers at the bottom of the ability-distribution into the labor market is not optimal. The additional implementation of minimum wages is counteractive to the reduction of unemployment because firms would thus be prevented from employing workers with very low productivities.
    Keywords: Unemployment of Low-Skilled Workers, Tax Credits, Labor Supply, Human Capital Formation
    JEL: H31 I38 J21 J24 J31 J68
    Date: 2006–09
  19. By: Martin Sefton (University of Nottingham); Robert Shupp (Ball State University); James M. Walker (Indiana University Bloomington)
    Abstract: A growing number of field and experimental studies focus on the institutional arrangements by which individuals are able to solve collective action problems. Important in this research is the role of reciprocity and institutions that facilitate cooperation via opportunities for monitoring, sanctioning, and rewarding others. Sanctions represent a cost to both the participant imposing the sanction and the individual receiving the sanction. Rewards represent a zero sum transfer from participants giving to those receiving rewards. We contrast reward and sanction institutions in regard to their impact on cooperation and efficiency in the context of a public goods experiment.
    Date: 2006–07
  20. By: David P. Myatt; Chris Wallace
    Abstract: This paper studies n-player collective-action games in which a public good is produced if and only if m or more volunteers contribute to it. Quantal-response strategy revisions allow play to move between equilibria in which a team of m players successfully provide, and an equilibrium in which the collective action fails. A full characterisation of long-run play reveals the determinants of success. These include the correlation between players` costs of provision and their valuations for the good. The addition of an extra "bad apple" player can "spoil the barrel" by destabilising successful teams. A contemporary application is the team-based provision of open-source software. The analysis reveals the features of successful open-source projects, and suggests a rationale for limiting the pool of possible contributors.
    Keywords: Collective Action, Evolution, Teams, Equilibrium Selection, Concordance, Open-Source Software
    JEL: C72 C73 H41
    Date: 2006
  21. By: David P. Myatt; Chris Wallace
    Abstract: The volunteer`s dilemma is an asymmetric n-player binary-action game in which a public good is provided if and only if at least one player volunteers, and consequently bears some private cost. So long as the value generated for every player exceeds this private cost there are n pure-strategy Nash equilibria in each of which a single player volunteers. Quantal-response strategy revisions allow play to move between the different equilibria. A complete characterisation of long-run play as strategy revisions approximate best replies provides an equilibrium selection device. The volunteer need not be the lowest-cost player: relatively high-cost, but nonetheless "stable" players may instead provide the public good. The cost of provision is (weakly) reduced when higher values are associated with lower costs.
    Keywords: Volunteer`s Dilemma, Public Goods, Evolution, Equilibrium Selection, Concordance
    JEL: C72 C73 H41
    Date: 2006
  22. By: Werner Güth; Jeannette Brosig; Torsten Weiland
    Abstract: Collusive agreements are often observed in procurement auctions. They are probably more easily achieved when competitors’ costs are easily estimated. If, however, the individual costs of bidders are private information, effective ring formation is difficult to realize. We compare experimentally different coordination mechanisms in a first-price procurement auction in how they promote the prospects of collusive arrangements. One mechanism allows bidders to coordinate by means of unrestricted pre-play communication. The second one enables bidders to restrict their bidding range and the last one gives them the opportunity to implement mutual shareholding. According to our results firstprice procurement is quite collusion-proof when allowing for the latter two coordination mechanisms whereas, on average, pre-play communication increases bidders’ profits.
    Keywords: competition, collusion, auction, bidding, public procurement
    JEL: C72 H57 K42
    Date: 2006–09
  23. By: Palaniswamy, Nethra; Birner, Regina
    Abstract: Acknowledging that the agricultural sector can play an important role as an engine of pro-poor growth in Sub-Saharan Africa, the purpose of this paper is to identify the factors that influence the “political will” of governments to support this sector. The concept of “political resources” from the political science literature is used to guide the analysis, as it combines the insights from state-centered and society-centered approaches to explain agricultural policies. Drawing on panel data covering 14 Sub-Saharan African countries over the period 1980-2001, we present empirical evidence showing that political factors play an important role in determining government’s commitment to supporting agricultural development. We use a measure of democracy that varies both across countries and within countries over time. Estimates are presented for separate samples of democracies and non-democracies, and for a pooled sample of all countries and years irrespective of the democratic status. Our results suggest that the rural poor do exercise electoral leverage in democracies; larger rural population shares are associated with higher spending on agriculture in democracies but not in authoritarian regimes. We also find evidence consistent with the theoretical prior that larger farmers tend to be better organized in interest groups. Specifically, we find that the share of traditional agricultural exports such as coffee and cocoa in the total value of exports, which may be an indicator for the ability of farmers’ to organize themselves as interest groups, induces greater spending on agriculture. This result holds true for both democracies and nondemocracies.
    JEL: H3 H5 O13 Q18
    Date: 2006
  24. By: Overgaard, Per Baltzer (Department of Economics, Copenhagen Business School); Møllgaard, Peter (Department of Economics, Copenhagen Business School)
    Abstract: In the economics literature, various views on the likely (efficiency) effects of information exchange, communication between firms and market transparency present themselves. Often these views on information flows are highly conflicting. On the one hand, it is argued that increased information dissemination improves firm planning to the benefit of society (including customers) and/or allows potential customers to make the right decisions given their preferences. On the other hand, the literature also suggests that increased information dissemination can have significant coordinating or collusive potential to the benefit of firms but at the expense of society at large (mainly, potential customers). In this chapter, we try to make sense of these views, with the aim of presenting some simple lessons for antitrust practice. In addition, the chapter presents some cases, from both sides of the Atlantic, where informational issues have played a significant role.
    Keywords: None
    JEL: H00
    Date: 2006–09–13

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