nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒10‒14
forty-four papers chosen by
Peren Arin
Massey University

  1. Electoral Rules and Government Spending in Parliamentary Democracies By Torsten Persson; Gerard Roland; Guido Tabellini
  2. Does Competition Affect Giving? By John Duffy; Tatiana Kornienko
  3. Capital Mobility, Agglomeration and Corporate Tax Rates: Is the Race to the Bottom for Real? By Harry Garretsen; Jolanda Peeters
  4. Pareto-Improving Unemployment Policies By Jörg Lingens; Klaus Wälde
  5. Human Capital and Political Business Cycles By Akhmed Akhmedov
  6. An Age Perspective on Economic Well-Being and Social Protection in Nine OECD Countries By Immervoll H; Mantovani D; Orsini K; Sutherland H
  7. Labor Market Shocks and Retirement: Do Government Programs Matter? By Courtney C. Coile; Phillip B. Levine
  8. Privatization with Government Control: Evidence from the Russian Oil Sector By Daniel Berkowitz; Yadviga Semikolenova
  9. Just Kidding, Dear Using Dismissed Divorce Cases to Identify the Effect of Parental Divorce on Student Performance By MarkL. Hoekstra
  10. Corporate Tax Competition and Coordination in the European Union: What do we know? Where do we stand? By Nicodeme, Gaetan
  11. Unit Versus Ad Valorem Taxes : Monopoly In General Equilibrium By Blackorby, Charles; Murty, Sushama
  12. Shadow Economies and Corruption all over the World: What do we really Know? By Friedrich Schneider
  13. Labour supply in presence of taxation financing public services. An experimental approach. By Ortona, Guido; Ottone, Stefania; Ponzano, Ferruccio; Scacciati, Francesco
  14. The standard neo-classical view on tax competition. A diagrammatic survey and some deductions for small open economies By Ricardo Pinheiro Alves
  15. The Effect of Spillovers on the Provision of Local Public Goods By Bloch, Francis; Zenginobuz, Unal
  16. The life cycle of the firm with debt and capital income taxes By Brys,Bert; Bovenberg,A. Lans
  17. Subscription equilibria with public production: Existence and regularity By Villanacci, Antonio; Zenginobuz, Unal
  18. Federal Tax Policy Towards Energy By Gilbert E. Metcalf
  19. Private Provision of Public Goods and Local Interaction By Luca Corazzini, Ugo Gianazza
  20. Taxation, entrepreneurship, and wealth By Marco Cagetti; Mariacristina De Nardi
  21. Inheritance and Saving By David Joulfaian
  22. A Basic Income for Europe's Children? By Levy H; Lietz C; Sutherland H
  23. Testing a Simple Structural Model of Endogenous Growth By Patrick Minford; David Meenagh; Jiang Wang
  24. Optimal Fiscal Feedback on Debt in an Economy with Nominal Rigidities By Tatiana Kirsanova; Simon Wren-Lewis
  25. Beans for Breakfast? How Exportable is the British Workfare model? By Bargain O; Orsini K
  26. Smoking: taxing health and Social Security By Brian S. Armour; M. Melinda Pitts
  27. Fiscal and social impact of a nominal exchange rate devaluation in Djibouti By Casero, Paloma Anos; Seshan, Ganesh
  28. Economic Growth and (Re-)Distributive Policies in a Non-Cooperative World By Günther Rehme
  29. Are Migration Policies that Induce Skilled (Unskilled) Migration Beneficial (Harmful) for the Host Country? By Michael S. Michael
  30. Centralized and Decentralized Management of Local Common Pool Resources in the Developing World: Experimental Evidence from Fishing Communities in Colombia By Maria Alejandra Velez; James J. Murphy; John K. Stranlund
  31. Enforcing ‘Self-Enforcing’ International Environmental Agreements By David M. McEvoy; John K. Stranlund
  32. On Public Opinion Polls and Voters' Turnout By Esteban F. Klory; Eyal Winter
  33. The Control of Politicians in Divided Societies: The Politics of Fear By Gerard Padro i Miquel
  34. On the Production of Homeland Security Under True Uncertainty By John K. Stranlund; Barry C. Field
  35. The Evolution of Income Concentration in Japan, 1886-2002: Evidence from Income Tax Statistics By Chiaki Moriguchi; Emmanuel Saez
  36. Four long-term scenarios for the Dutch government and health-care sector By Frits Bos; Rudy Douven; Esther Mot
  37. The interaction between tolls and capacity investment in serial and parallel transport networks By De Borger Bruno; Dunkerley Fay; Proost Stef
  38. Within and Between Group Variation of Individual Strategies in Common Pool Resources: Evidence from Field Experiments By Maria Alejandra Velez; James J. Murphy; John K. Stranlund
  39. Wealth Inequality: Data and Models By Marco Cagetti; Mariacristina De Nardi
  40. Differential Mortality, Uncertain Medical Expenses, and the Saving of Elderly Singles By Mariacristina De Nardi; Eric French; John Bailey Jones
  41. Judicial Independence, Elections and Minority Interests By Daniel Berkowitz; Chris Bonneau; Karen Clay
  42. The Effects of Status on Voluntary Contribution By Lise Vesterlund; Cagri Kumru
  43. The Relationship between Output and Unemployment with Efficiency Wages By Jim Malley; Hassan Molana
  44. The impact of competition on productive efficiency in European railways By Gertjan Driessen; Mark Lijesen; Machiel Mulder

  1. By: Torsten Persson; Gerard Roland; Guido Tabellini
    Date: 2006–07–31
  2. By: John Duffy; Tatiana Kornienko
    Abstract: We explore whether natural human competitiveness can be exploited to stimulate charitable giving in a controlled laboratory experiment involving three different treatments of a sequential \"dictator game\". Without disclosing the actual amounts given and kept, in each period players are publicly ranked -- by the amount they give away, by the amount they keep for themselves, or spuriously. Our results are generally supportive of the hypothesis that competitive urges can encourage or frustrate charitable behavior, depending on the competitive frame. We find some support for an alternative hypothesis that relative concerns are due to information-gathering rather than competition.
    Date: 2006–07
  3. By: Harry Garretsen; Jolanda Peeters
    Abstract: Based on a data set for 19 OECD countries for the period 1981-2001, we estimate the impact of capital mobility (FDI) on corporate tax rates. So far the literature has been concerned with the related but rather different question as to the sensitivity of FDI to tax rates. Our paper takes an opposite perspective and asks what the impact of capital mobility is on corporate tax rates. In doing so, we explicitly take the role of agglomeration into account. In theory, core countries can afford a higher tax rate compared to peripheral countries. In our estimation strategy, we instrument capital mobility to deal with reverse causality. The main conclusion isthat increased international capital mobility implies a lower corporate tax rate. But we also find that agglomeration matters: core countries have a higher corporate tax rate. If there is a race to the bottom, it seems that it is more real for some countries than others.
    Keywords: new economic geography; corporate income taxation; capital mobility
    JEL: F12 F20 H32
    Date: 2006–09
  4. By: Jörg Lingens; Klaus Wälde
    Abstract: We investigate how continental European unemployment can be reduced without reducing unemployment benefits and without reducing the net income of low-wage earners. Lower unemployment replacement rates reduce unemployment, the net wage and unemployment benefits. A lower tax on labour increases net wages and - for certain benefit-systems - unemployment benefits as well. Combining these two policies allows to reduce unemployment in countries with “net-Bismarck” and Beveridge systems without reducing net income of workers or of the unemployed. Such a policy becomes self-financing under realistic parameter constellations when taxes are reduced only for low-income workers.
    Keywords: inequality, unemployment, taxation, policy reform
    JEL: E60 H23 J38 J51
    Date: 2006
  5. By: Akhmed Akhmedov (CEFIR)
    Abstract: Classical theory considers political business cycle as a result of either opportunistic behavior of government (opportunistic cycle) or aiming policy on certain constituency (partisan cycle). In this paper, we propose an alternative explanation of the phenomenon of political business cycle — experience of government. We propose an illustration that shows that elections infer cycles without any opportunism or ideology of incumbents. We also build a model with endogenous ego-rent. The model explains a channel to increase incentives, when none has commitment — governors need to develop skills to increase their value for public and increase probability to get re-elected. Using fiscal monthly data of Russian regions from 1996 to 2004, we got evidence both of positive effect of experience on performance and opportunistic component of the cycle. We also got evidence of diminishing return on experience.
    Keywords: Elections, opportunistic business cycle, experience, sunk cost, Russian regions.
    JEL: D72 E32 H72 P16
    Date: 2006–10
  6. By: Immervoll H; Mantovani D; Orsini K; Sutherland H (Institute for Social & Economic Research)
    Abstract: This paper quantifies the economic well-being of different age groups and the extent of their reliance on incomes from public and private sources. The aim is to establish how social benefits, and the taxes needed to finance them, affect income levels and disparities across different age groups. Results are compared across nine OECD countries (Finland, France, Germany, Italy, Luxembourg, Norway, Sweden, United Kingdom and United States) using household microdata and microsimulation models to illustrate the influence of market income patterns, household structures and social protection measures on the income distribution among and between different age groups. We use information from the late 1990s to establish a "distributional baseline" that refers to an early phase of the projected increase in dependency ratios and also pre-dates some of the major reforms that are introduced to address these. Results even for this period show that social protection was already largely "old-age" protection, with those aged 65 and over typically receiving almost three times the (net) cash transfers of the average person. In most countries, the incidence of low incomes was nevertheless higher among old-age individuals than for the population as a whole. We argue, however, that the crosscountry evidence suggests some scope for re-balancing social protection spending without necessarily compromising distributional objectives.
    Keywords: inequality; poverty; social protection; ageing; demographics; microsimulation
    JEL: C81 D31 H22 H55
    Date: 2006–09
  7. By: Courtney C. Coile; Phillip B. Levine
    Abstract: This paper examines how unemployment affects retirement and whether the Unemployment Insurance (UI) system and Social Security (SS) system affect how older workers respond to labor market shocks. To do so, we use pooled cross-sectional data from the March Current Population Survey (CPS) as well as March CPS files matched between one year and the next and longitudinal data from the Health and Retirement Survey (HRS). We find that downturns in the labor market increase retirement transitions. The magnitude of this effect is comparable to that associated with moderate changes in financial incentives to retire and to the threat of a health shock to which older workers are exposed. Interestingly, retirements only increase in response to an economic downturn once workers become SS-eligible, suggesting that retirement benefits may help alleviate the income loss associated with a weak labor market. We also estimate the impact of UI generosity on retirement and find little consistent evidence of an effect. This suggests that in some ways SS may serve as a more effective form of unemployment insurance for older workers than UI.
    JEL: H55 J26 J64 J65
    Date: 2006–10
  8. By: Daniel Berkowitz; Yadviga Semikolenova
    Date: 2006–01
  9. By: MarkL. Hoekstra
    Date: 2006–01
  10. By: Nicodeme, Gaetan
    Abstract: This paper reviews the rationales and facts about corporate tax coordination in Europe. Although statutory tax rates have dramatically declined, revenues collected from corporate taxation are fairly stable and there is so far no evidence of a race-to-the-bottom. The ambiguous results from economic tax theory and the institutional setting have constrained strong EU policy action in the area of tax competition. Yet, there are welfare gains to be expected from tax coordination. Following its 2001 Communication, the European Commission is currently working with Member States on the definition of a common consolidated corporate tax base for European Companies.
    Keywords: European Union; corporate taxation; tax competition; tax coordination.
    JEL: H73 H25 H87
    Date: 2006–06
  11. By: Blackorby, Charles (Department of Economics, University of Warwick and GREQAM); Murty, Sushama (Department of Economics, University of Warwick)
    Abstract: We show that if a monopoly sector is imbedded in a general equilibrium framework and profits are taxed at one hundred percent, then unit (specific) taxation and ad valorem taxation are welfare-wise equivalent. This is contrary to all known claims.
    Keywords: Ad valorem taxes ; unit taxes ; monopoly
    JEL: H21
    Date: 2006
  12. By: Friedrich Schneider
    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 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: D78 H11 H20 H26 O17 O50
    Date: 2006
  13. By: Ortona, Guido; Ottone, Stefania; Ponzano, Ferruccio; Scacciati, Francesco
    Abstract: The paper illustrates the results of some experiments aiming to test the effect of taxation on the effort. Differently from previous experiments (Levy-Garboua et al., Sutter and Weck-Hannemann, Swenson), in our research the revenue of taxation is not depleted but employed, more realistically, to finance welfare provisions. The result is no more a reduction of effort, as in previous experiments, but a slight increase. This behavior is coherent with a theoretical model suggested by Bird in 2001.
    JEL: D31 H23 H53
    Date: 2006–10
  14. By: Ricardo Pinheiro Alves (Departamento de Gestão e Economia, Universidade da Beira Interior)
    Abstract: This paper presents a diagrammatic survey of the standard neo-classical theory of tax competition for foreign direct investment and tax coordination between countries. It has four aims: to give a detailed view of the main theoretical and empirical results; to extract from it some general deductions for small and less developed open economies; to discuss different angles to improve the existing literature; and to put these in the context of fiscal policy in the European Union. It argues that eventual benefits brought by corporate tax harmonisation in the EU are not sufficient to compensate the risk of doing harm to small and relatively poor economies. Further research on equity issues is therefore needed before proceeding to harmonisation.
    Keywords: Foreign Direct Investment; Tax competition; Tax coordination; Small countries
    JEL: F21 H25 H73
    Date: 2005
  15. By: Bloch, Francis; Zenginobuz, Unal
    Abstract: This paper analyzes the provision of local public goods with positive spillovers across jurisdictions. If spillovers are symmetric, the noncooperative game played by jurisdictions admits a unique equilibrium, and an increase in spillovers reduces the total provision of public goods. Smaller jurisdictions always reduce their contribution, but larger jurisdictions can increase their contribution. When spillovers are asymmetric, equilibrium is unique if spillovers are low, while multiple equilibria exist for high spillover values. In the case of two jurisdictions, an increase in the flow of spillovers to one jurisdiction benefits agents from that jurisdiction but harms agents in the other jurisdiction. Beyond the case of two jurisdictions, the effect of changes in spillovers cannot be signed. An increase in the spillovers flowing to a jurisdiction can actually result in an increase in the supply of public goods by that jurisdiction and harm agents residing in it, while benefiting agents in the other jurisdictions. The results of the paper reveal the complexity of interactions that will plague the design of institutions for multijurisdictional local public good economies with spillovers.
    Keywords: local public goods; positive spillovers; equilibrium
    JEL: H41 H77 H73
    Date: 2004–12–15
  16. By: Brys,Bert; Bovenberg,A. Lans (Tilburg University, Center for Economic Research)
    Abstract: This paper analyses the impact of capital income taxes on financial and investment decisions of corporations. Extending Sinn's (1991) nucleus theory of the firm with debt finance, the model determines the optimal sources of finance (debt, newly issued equity or retained earnings), the optimal use of the investment's earnings (dividends, retentions, interest payments or debt redemption), and the optimal capital accumulation throughout the life cycle of the firm.
    Keywords: tax burden;capital income taxation;firm behaviour
    JEL: H32 G32 D21
    Date: 2006
  17. By: Villanacci, Antonio; Zenginobuz, Unal
    Abstract: We revisit the analysis of subscription equilibria in a full fledged general equilibrium model with public goods. We study the case of a nonprofit, or public, firm that produces the public good using private goods as inputs, which are to be financed by voluntary contributions (subscriptions) of households. We prove existence and generic regularity of subscription equilibria.
    Keywords: general equilibrium; public goods; subscription equilibrium; existence; generic regularity
    JEL: D51 H41
    Date: 2005–05–06
  18. By: Gilbert E. Metcalf
    Abstract: On Aug. 8, 2005, President Bush signed the Energy Policy Act of 2005 (PL 109-58). This was the first major piece of energy legislation enacted since 1992 following five years of Congressional efforts to pass energy legislation. Among other things, the law contains tax incentives worth over $14 billion between 2005 and 2015. These incentives represent both pre-existing initiatives that the law extends as well as new initiatives. In this paper I survey federal tax energy policy focusing both on programs that affect energy supply and demand. I briefly discuss the distributional and incentive impacts of many of these incentives. In particular, I make a rough calculation of the impact of tax incentives for domestic oil production on world oil supply and prices and find that the incentives for domestic production have negligible impact on world supply or prices despite the United States being the third largest oil producing country in the world. Finally, I present results from a model of electricity pricing to assess the impact of the federal tax incentives directed at electricity generation. I find that nuclear power and renewable electricity sources benefit substantially from accelerated depreciation and that the production and investment tax credits make clean coal technologies cost competitive with pulverized coal and wind and biomass cost competitive with natural gas.
    JEL: H20 Q48
    Date: 2006–10
  19. By: Luca Corazzini, Ugo Gianazza (ISLA, Universita' Bocconi, Milano)
    Abstract: The main results of the traditional theory of private provision of public goods under the assumptions of identical individuals and normality of both public good and private consumption are: 1) there exists a unique Nash equilibrium pattern of contributions in which everybody contributes the same amount; 2) this pattern is stable. Under homothetic preferences, we show that these results generally no longer hold in the context of “locally enjoyed” public goods. In particular, there always exists a set of values for the parameter which describes preferences for the public good such that the symmetric Nash equilibrium is unstable and there exists at least one asymmetric Nash equilibrium which is locally stable.
    Keywords: Local Interaction, Public Goods, Nash Equilibria.
    JEL: C62 C72 H41
    Date: 2006–08
  20. By: Marco Cagetti; Mariacristina De Nardi
    Abstract: Entrepreneurship is a key determinant of investment, saving, and wealth inequality. We study the aggregate and distributional effects of several tax reforms in a model that recognizes this key role and that matches the large wealth inequality observed in the U.S. data. The aggregate effects of tax reforms can be particularly large when they affect small and medium-sized businesses, which face the most severe financial constraints, rather than big businesses. The consequences of changes in the estate tax depend heavily on the size of its exemption level. The current effective estate tax system insulates smaller businesses from the negative effects of estate taxation, minimizing the aggregate costs of redistribution. Abolishing the current estate tax would generate a modest increase in wealth inequality and slightly reduce aggregate output. Decreasing the progressivity of the income tax generates large increases in output, at the cost of large increases in wealth concentration.
    Date: 2006
  21. By: David Joulfaian
    Abstract: This paper explores the effects of inheritances on the saving of recipients. Information on inheritances and heirs is obtained from estate tax records of decedents which are linked to the income tax records of beneficiaries. The observed pattern of wealth mobility within two years of the receipt of inheritances and multivariate analyses show that wealth increases by less than the full amount of the inheritance received. Similarly, and consistent with previous findings, large inheritances are found to depress labor force participation.
    JEL: E21 H31 J26
    Date: 2006–10
  22. By: Levy H (Institute for Social & Economic Research); Lietz C; Sutherland H (Institute for Social & Economic Research)
    Abstract: This paper explores the prospects for a guaranteed income for every child in the European Union and its potential effects on child poverty, taking as one starting point the ideas set out in Atkinson (2005). It examines the extent to which existing levels of financial support for children through national taxes and benefits fall short of a series of illustrative minimum levels of income corresponding to proportions of median income. It estimates the cost of bringing the amount of support up to these levels for all children as well as the corresponding impacts on income poverty among EU children. From this the cost in each country of providing basic incomes for children is estimated such that potential EU child poverty reduction targets are met. This cost could be met at national level or, alternatively, at EU level and we investigate the effect of financing the guaranteed child income using a European flat tax (Atkinson, 1995). The analysis uses EUROMOD, the European tax-benefit microsimulation model and illustrates the implications of the choices that must be made when designing such a scheme for the extent of redistribution between countries and towards children.
    Keywords: Children, European Union, Microsimulation
    JEL: H23 I32 I38
    Date: 2006–09
  23. By: Patrick Minford; David Meenagh; Jiang Wang
    Abstract: The efect of taxation on growth is embodied in a model of a small open economy with endogenous growth. The structural model is estimated on post-war panel data for 76 countries and the bootstrap is used to produce the model’s sampling variation. Panel data regressions of growth on taxation do not reject this model but do reject a model with no tax effects.
    Keywords: endogenous growth, taxation, business regulation, bootstrap, model validation.
    JEL: H25 O11 O41 O50
    Date: 2006–09
  24. By: Tatiana Kirsanova; Simon Wren-Lewis
    Abstract: We examine the impact of different degrees of fiscal feedback on debt in an economy with nominal rigidities where monetary policy is optimal. We look at the extent to which different degrees of fiscal feedback enhances or detracts from the ability of the monetary authorities to stabilise output and inflation. Using an objective function derived from utility, we find the optimal level of fiscal feedback to be small. There is a clear discontinuity in the behaviour of monetary policy and welfare either side of this optimal level. As the extent of fiscal feedback increases, optimal monetary policy becomes less active because fiscal feedback tends to deflate inflationary shocks. However this fiscal stabilisation is less efficient than monetary policy, and so welfare declines. In contrast, if fiscal feedback falls below some critical value, either the model becomes indeterminate, or optimal monetary policy becomes strongly passive, and this passive monetary policy leads to a sharp deterioration in welfare.
    Keywords: Fiscal Policy, Feedback Rules, Debt, Macroeconomic Stabilisation
    JEL: E52 E61 E63 F41
    Date: 2006–09
  25. By: Bargain O; Orsini K
    Abstract: Social assistance and inactivity traps have long been considered as one of the main causes of the poor employment performance of EU countries. The success of New Labour in the UK has triggered a growing interests in instruments capable of combining the promotion of responsibility and self-sufficiency with solidarity with less skilled workers. Making-work-pay (MWP) policies, consisting of transfers to households with low earning capacity, have quickly emerged as the most politically acceptable instruments in tax-benefit reforms of many Anglo Saxon countries. This paper explores the impact of introducing the British Working Families' Tax Credit in three EU countries with rather different labor market and welfare institutions: Finland, France and Germany. Simulating the reform reveals that, while first round effects on income distribution is considerable, the interaction of the new instrument with the structural characteristics of the economy and the population may lead to counterproductive second round effects (i.e. changes in economic behavior). The implementation of the reform, in this case, could only be justified if the social inclusion (i.e. transition into activity) of some specific household types (singles and single mothers) is valued more than a rise in the employment per se.
    Keywords: tax-benefit systems, in-work benefits, microsimulation, poverty
    JEL: H31 H53 I32 I38
    Date: 2006–04
  26. By: Brian S. Armour; M. Melinda Pitts
    Abstract: While the health risks associated with smoking are well known, the impact on income distributions is not. This paper extends the literature by examining the distributional effects of a behavioral choice, in this case smoking, on net marginal Social Security tax rates (NMSSTR). The results show that smokers, as a result of shorter life expectancies, incur a higher NMSSTR than nonsmokers. In addition, as low-earnings workers have a higher smoking prevalence than high-earnings workers, smoking works to widen the income distribution. This higher tax rate could have implications for both labor supply behavior and Social Security system funding.
    Date: 2006
  27. By: Casero, Paloma Anos; Seshan, Ganesh
    Abstract: Limited fiscal space limits Djibouti ' s ability to meet the Millennium Development Goals and improve the living conditions of its population. Djibouti ' s fiscal structure is unique in that almost 70 percent of government revenue is denominated in foreign currency (import taxes, foreign aid grants, and military revenue) while over 50 percent of government expenditure is denominated in local currency (wages, salaries, and social transfers). Djibouti ' s economic structure is also unusual in that merchandise exports of local origin are insignificant, and the country relies heavily on imported goods (food, medicines, consumer and capital goods). A currency devaluation, by reducing real wages, could potentially generate additional fiscal space that would help meet Djibouti ' s fundamental development goals. Using macroeconomic and household level data, the authors quantify the impact of a devaluation of the nominal exchange rate on fiscal savings, real public sector wages, real income, and poverty under various hypothetical scenarios of exchange-rate pass-through and magnitude of devaluation. They find that a currency devaluation could generate fiscal savings in the short-term, but it would have an adverse effect on poverty and income distribution. A 30 percent nominal exchange rate devaluation could generate fiscal savings amounting between 3 and 7 percent of GDP. At the same time, a 30 percent nominal devaluation could cause nearly a fifth of the poorest households to fall below the extreme poverty line and pull the same fraction of upper middle-income households below the national poverty line. The authors also find that currency devaluation could generate net fiscal savings even after accounting for the additional social transfers needed to compensate the poor for their real income loss. However, the absence of formal social safety nets limits the government ' s readiness to provide well-targeted and timely social transfers to the poor.
    Keywords: Economic Theory & Research,Economic Stabilization,Rural Poverty Reduction,Fiscal & Monetary Policy,Macroeconomic Management
    Date: 2006–10–01
  28. By: Günther Rehme (Institut für Volkswirtschaftslehre (Department of Economics), Technische Universität Darmstadt (Darmstadt University of Technology))
    Abstract: Many models show that redistribution is bad for growth. This paper argues that in a non-cooperative world optimizing, redistributing (’left-wing’) governments mimic non-redistributing (’right-wing’) policies for fear of capital loss if capital markets become highly integrated and the countries are technologically similar. ’Left-right’ competition leads to more redistribution and lower GDP growth than ’left-left’ competition. Efficiency differences allow for higher GDP growth and more redistribution than one’s opponent. Irrespective of efficiency differences, however, ’left-wing’ governments have higher GDP growth when competing with other ’left-wing’ governments. The results may explain why one observes a positive correlation between redistribution and growth across countries, and why capital inflows and current account deficits may be good for relatively high growth.
    Keywords: Growth, Distribution, Tax Competition, Capital Mobility
    JEL: O4 H21 D33 C72 F21
    Date: 2006–07
  29. By: Michael S. Michael
    Abstract: This paper investigates the welfare consequences of immigration policies in a model with two types of labour, skilled and unskilled, and international capital mobility. The paper examines the effect of government policies – which change the immigration cost and causes immigration of one type of labour – on the welfare of natives when the other type of labour and/or capital are also mobile. It is shown that in the absence of capital mobility, if skilled and unskilled labour are highly complementary in production (as attested by many empirical studies), then a decrease in the immigration cost of the net fiscal contributor skilled labour decreases the welfare of natives.
    Keywords: migration policies, skilled and unskilled labour, capital mobility, welfare
    JEL: F22 H24
    Date: 2006
  30. By: Maria Alejandra Velez (Department of Resource Economics, University of Massachusetts Amherst); James J. Murphy (Department of Resource Economics, University of Massachusetts Amherst); John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: This paper uses experimental data to test for a complementary relationship between formal regulations imposed on a community to conserve a local natural resource and nonbinding verbal agreements to do the same. Our experiments were conducted in the field in three regions of Colombia. Each group of five subjects played 10 rounds of an open access common pool resource game, and 10 additional rounds under one of five institutions— communication alone, two external regulations that differed by the level of enforcement, and communication combined with each of the two regulations. Our results suggest that the hypothesis of a complementary relationship between communication and external regulation is supported for some combinations of regions and regulations, but cannot be supported in general. We therefore conclude that the determination of whether formal regulations and informal communication are complementary must be made on a community-by-community basis.
    Keywords: common pool resources, experiments, institutions, communication, regulation
    JEL: C93 H41 Q20 Q28
    Date: 2006–09
  31. By: David M. McEvoy (Department of Resource Economics, University of Massachusetts Amherst); John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: Theoretical analyses of international environmental agreements (IEAs) have typically employed the concept of self-enforcing agreements to predict the number of parties to such an agreement. The term self-enforcing, however, is a bit misleading. The concept refers to the stability of cooperative agreements, not to enforcing these agreements once they are in place. Most analyses of IEAs simply ignore the issue of enforcing compliance by parties to the terms of an agreement. In this paper we analyze an IEA game in which parties to an agreement finance an independent enforcement body with the power to monitor the parties’ compliance to the terms of the IEA and impose penalties in cases of noncompliance. This approach is broadly consistent with the enforcement mechanism of the Kyoto Protocol under the Marrakesh Accords. We find that costly enforcement limits the circumstances under which international cooperation to protect the environment is worthwhile, but when IEAs do form they will involve greater participation than IEAs that do not require costly enforcement. Consequently, costly enforcement of IEAs is associated with higher international environmental quality. Moreover, under certain conditions, aggregate welfare is higher when IEAs require costly enforcement. These conclusions are accentuated when monitoring for compliance to IEAs is inaccurate.
    Keywords: International environmental agreements, self-enforcing agreements, compliance, enforcement
    JEL: Q5 H41 C72 F53
    Date: 2006–09
  32. By: Esteban F. Klory; Eyal Winter
    Date: 2006–10–07
  33. By: Gerard Padro i Miquel
    Abstract: Autocrats in many developing countries have extracted enormous personal rents from power. In addition, they have imposed inefficient policies including pervasive patronage spending. I present a model in which the presence of ethnic identities and the absence of institutionalized succession processes allow the ruler to elicit support from a sizeable share of the population despite large reductions in welfare. The fear of falling under an equally inefficient and venal ruler that favors another group is enough to discipline supporters. The model predicts extensive use of patronage, ethnic bias in taxation and spending patterns and unveils a new mechanism through which economic frictions translate into increased rent extraction by the leader. These predictions are consistent with the experiences of bad governance, ethnic bias, wasteful policies and kleptocracy in post-colonial Africa.
    JEL: D72 H2 O17 O55
    Date: 2006–10
  34. By: John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst); Barry C. Field (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: Homeland security against possible terrorist attacks involves making decisions under true uncertainty. Not only are we ignorant of the form, place, and time of potential terrorist attacks, we are also largely ignorant of the likelihood of these attacks. In this paper, we conceptualize homeland security under true uncertainty as society’s immunity to unacceptable losses. We illustrate and analyze the consequences of this notion of security with a simple model of allocating a fixed budget for homeland security to defending the pathways through which a terrorist may launch an attack and to mitigating the damage from an attack that evades this defense. In this problem, immunity is the range of uncertainty about the likelihood of an attack within which the actual expected loss will not exceed some critical value. We analyze the allocation of a fixed homeland security budget to defensive and mitigative efforts to maximize immunity to alternative levels of expected loss. We show that the production of homeland security involves a fundamental trade-off between immunity and acceptable loss; that is, for fixed resources that are optimally allocated to defense and mitigation, increasing immunity requires accepting higher expected losses, and reducing acceptable expected losses requires lower immunity. Greater investments in homeland security allow society to increase its immunity to a particular expected loss, reduce the expected losses to which we are immune while holding the degree of immunity constant, or some combination of increased immunity to a lower critical expected loss.
    Keywords: Homeland Security, Terrorism, True Uncertainty
    JEL: D02 D81 H56
    Date: 2006–09
  35. By: Chiaki Moriguchi; Emmanuel Saez
    Abstract: This paper studies the evolution of income concentration in Japan from 1886 to 2002 by constructing long-run series of top income shares and top wage income shares, using income tax statistics. We find that (1) income concentration was extremely high throughout the pre-WWII period during which the nation underwent rapid industrialization; (2) a drastic de-concentration of income at the top took place in 1938-1945; (3) income concentration has remained low throughout the post-WWII period despite the high economic growth; and (4) top income composition in Japan has shifted dramatically from capital income to employment income over the course of the 20th century. We attribute the precipitous fall in income concentration during WWII primarily to the collapse of capital income due to wartime regulations and inflation. We argue that the change in the institutional structure under the occupational reforms made the one-time income de-concentration difficult to reverse. In contrast to the sharp increase in wage income inequality observed in the United States since 1970, the top wage income shares in Japan have remained remarkably stable over the recent decades. We show that the change in technology or tax policies alone cannot account for the comparative experience of Japan and the United States. Instead we suggest that institutional factors such as corporate governance and union structure are important determinants of wage income inequality.
    JEL: H24 N15
    Date: 2006–10
  36. By: Frits Bos; Rudy Douven; Esther Mot
    Abstract: This study presents four long-term scenarios for the government and the health-care sector in the Netherlands. In the two scenarios that stress the importance of collective provisions, (<I>Regional Communities</I> and <I>Strong Europe</I>), the share of government production (public administration, defense and subsidised education) will increase from 10.5% of GDP in 2001 to about 12% in 2040. In the other two scenarios, (<I>Transatlantic Market</I> and <I>Global Economy</I>), the government sector will decrease in size to 8% of GDP in 2040. <P> Due to higher growth rates of GDP per capita, the growth of government services per capita is only marginally smaller than in the more collective scenarios. Health care expenditures as a percentage of GDP will increase in all scenarios from 8.7% in 2001 to between 13.3% and 14.6% in 2040. In all scenarios, ageing and progress in medical technology are major driving factors of the growth in health expenditures.
    Keywords: Long run; scenarios; government services; public administration; defence; education; health care; productivity; ageing; Baumol’s cost disease model; government finance
    JEL: H5
    Date: 2004–11
  37. By: De Borger Bruno (University of Antwerp); Dunkerley Fay (K.U.Leuven-Center for Economic Studies); Proost Stef (K.U.Leuven-Center for Economic Studies; UCL - CORE)
    Abstract: The purpose of this paper is to compare the interaction between pricing and capacity decisions on simple serial and parallel transport networks. When individual links of the network are operated by different regional or national authorities, toll and capacity competition is likely to result. Moreover, the problem is potentially complicated by the presence of both local and transit demand on each link of the network. We bring together and extend the recent literature on the topic and, using both theory and numerical simulation techniques, provide a careful comparison of toll and capacity interaction on serial and parallel network structures. First, we show that there is more tax exporting in serial transport corridors than on competing parallel road networks. Second, the inability to toll transit has quite dramatic negative welfare effects on parallel networks. On the contrary, in serial transport corridors it may actually be undesirable to allow the tolling of transit at all. Third, if the links are exclusively used by transit transport, toll and capacity decisions are independent in serial networks. This does not generally hold in the presence of local transport. Moreover, it contrasts with a parallel setting where regional authorities compete for transit; in that case, regional investment in capacity leads to lower Nash equilibrium tolls.
    Keywords: congestion pricing, transport investment, transit traffic
    JEL: H23 H71 R41 R48
    Date: 2006–07
  38. By: Maria Alejandra Velez (Department of Resource Economics, University of Massachusetts Amherst); James J. Murphy (Department of Resource Economics, University of Massachusetts Amherst); John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: With data from framed common pool resource experiments conducted with artisanal fishing communities in Colombia, we estimate a hierarchical linear model to investigate within-group and between-group variation in individual harvest strategies across several institutions. Our results suggest that communication serves to effectively coordinate individual strategies within groups, but that these coordinated strategies vary considerably across groups. In contrast, weakly enforced regulatory restrictions on individual harvests (as well as unregulated open access) produce significant variation in the individual strategies within groups, but these strategies are roughly replicated across groups so that there is little between-group variation.
    Keywords: common pool resources, field experiments, communication, regulation, hierarchical linear models
    JEL: C93 H41 Q20 Q28
    Date: 2006–09
  39. By: Marco Cagetti; Mariacristina De Nardi
    Abstract: In the United States wealth is highly concentrated and very unequally distributed: the richest 1% hold one third of the total wealth in the economy. Understanding the determinants of wealth inequality is a challenge for many economic models. We summarize some key facts about the wealth distribution and what economic models have been able to explain so far.
    JEL: D3 D58 D64 E2 E20 E23 H0 H31
    Date: 2006–10
  40. By: Mariacristina De Nardi; Eric French; John Bailey Jones
    Abstract: People have heterogenous life expectancies: women live longer than men, rich people live longer than poor people, and healthy people live longer than sick people. People are also subject to heterogenous out-of-pocket medical expense risk. We construct a rich structural model of saving behavior for retired single households that accounts for this heterogeneity, and we estimate the model using AHEAD data and the method of simulated moments. We find that the risk of living long and facing high medical expenses goes a long way toward explaining the elderly's savings decisions. Specifically, medical expenses that rise quickly with both age and permanent income can explain why the elderly singles, and especially the richest ones, run down their assets so slowly. We also find that social insurance has a big impact on the elderly's savings.
    JEL: D1 D31 E2 H31 H51 I1
    Date: 2006–10
  41. By: Daniel Berkowitz; Chris Bonneau; Karen Clay
    Date: 2006–01
  42. By: Lise Vesterlund; Cagri Kumru
    Date: 2005–01
  43. By: Jim Malley; Hassan Molana
    Abstract: We construct a stylised model of the supply side with goods and labour market imperfections to show that an economy can rationally operate at an inefficient, or ‘low-effort’, state in which the relationship between output and unemployment is positive. We examine data from the G7 countries over 1960-2001 and find that only German data strongly favour a persistent negative relationship between the level of output and rate of unemployment. The consequence of this is that circumstances exist in which market imperfections could pose serious obstacles to the smooth working of expansionary and/or stabilization policies and a positive demand shock might have adverse effects on employment.
    Keywords: Efficiency wages, effort supply, Kalman filter, monopolistic competition, Okun’s law.
    JEL: E62 J41 H3
    Date: 2006–09
  44. By: Gertjan Driessen; Mark Lijesen; Machiel Mulder
    Abstract: This paper empirically explores the relationship between competition design and productive efficiency in the railway industry. We use Data Envelopment Analysis (DEA) to construct efficiency scores, and explain these scores, using variables reflecting institutional factors and competition design. Our results suggest that competitive tendering improves productive efficiency, which is in line with economic intuition as well as with expectations on the design of competition. We also find that free entry lowers productive efficiency. A possible explanation for this result is that free entry may disable railway operators to reap economies of density. Our final result is that more autonomy of management lowers productive efficiency. Most of the incumbent railway companies are state owned and do not face any competitive pressure. As a consequence, increased independence without sufficient competition and adequate regulation may deteriorate incentives for productive efficiency.
    Keywords: Rail transport; Efficiency; competition design
    JEL: D24 H42 L22 L25 L33 L92
    Date: 2006–09

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.