nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒10‒28
fifty-one papers chosen by
Peren Arin
Massey University

  1. The Stabilizing Role of Government Size By Rafael Domenech; Javier Andres; Antonio Fatas
  2. How Far Are We From the Slippery Slope? The Laffer Curve Revisited By Trabandt, Mathias; Uhlig, Harald
  3. The Economic Importance of Fiscal Rules By Artis, Michael J; Onorante, Luca
  4. Fiscal Policy and the Term Structure: Evidence from the Case of Italy in the EMS and the EMU Periods By Favero, Carlo A; Giglio, Stefano W
  5. Political Budget Cycles and Fiscal Decentralization By Gonzalez, Paula; Hindriks, Jean J.G.; Lockwood, Ben; Porteiro, Nicolas
  6. Decentralization and the Productive Efficiency of Government: Evidence from Swiss Cantons By Barankay, Iwan; Lockwood, Ben
  7. Women Prefer Larger Governments: Growth, Structural Transformation and Government Size By Cavalcanti, Tiago; Tavares, José
  8. Foreign Aid and Fiscal Policy By Faini, Riccardo
  9. Is Partial Tax Harmonization Desirable? By Conconi, Paola; Perroni, Carlo; Riezman, Raymond
  10. Tax Rate Variability and Public Spending as Sources of Inderterminacy By Lloyd-Braga, Teresa; Modesto, Leonor; Seegmuller, Thomas
  11. Flat Tax Reforms in the US: A Boon for the Income Poor By Díaz-Giménez, Javier; Pijoan-Mas, Josep
  12. Mr Ricardo's Great Adventure: Estimating Fiscal Multipliers in a Truly Intertemporal Model By Bayoumi, Tamim; Sgherri, Silvia
  13. Ex Interim Voting in Public Good Provision By Sven Fischer; Andreas Nicklisch
  14. Exports, Foreign Direct Investment and the Costs of Coporate Taxation By Keuschnigg, Christian
  15. How Progessive is the US Federal Tax System? An Historical and International Perspective By Piketty, Thomas; Saez, Emmanuel
  16. Evaluation of a Tax Reform: A Model with Measurement Error By Rob Euwals
  17. From Deficits to Debt and Back: Political Incentives under Numerical Fiscal Rules By Buti, Marco; Martins, Joao Nogueira; Turrini, Alessandro Antonio
  18. Taxation and Internal Migration: Evidence from the Swiss Census Using Community-Level Variation in Income Tax Rates By Thomas Liebig; Patrick A. Puhani; Alfonso Sousa-Poza
  19. Fiscal Policy in Europe: The Past and Future of EMU Rules from the Perspective of Musgrave and Buchanan By Buti, Marco; Sapir, André
  20. Monetary Conservatism and Fiscal Policy By Adam, Klaus; Billi, Roberto M
  22. Separation of Powers and the Budget Process By Grossman, Gene; Helpman, Elhanan
  23. Control Rights in Public-Private Partnerships By Francesconi, Marco; Muthoo, Aabhinay
  24. Racial Segregation and Public School Expenditure By La Ferrara, Eliana; Mele, Angelo
  25. To Segregate or to Integrate: Education Politics and Democracy By de la Croix, David; Doepke, Matthias
  26. Voluntary Contributions to a Public Good: Non-neutrality Results / contributions volontaires, biens publics By Ngo Van Long; Koji Shimomura
  27. Assessing the Effects of Local Taxation Using Microgeographic Data By Duranton, Gilles; Gobillon, Laurent; Overman, Henry G.
  28. Reform Redux: Measurement, Determinants and Reversals By Campos, Nauro F; Horváth, Roman
  29. From Beveridge to Turner: Demography, Distribution and the Future of Pensions in the UK By John Hills
  30. Income Inequality and Progressive Income Taxation in China and India, 1986-2015 By Piketty, Thomas; Qian, Nancy
  31. How Corruption Hits People When They Are Down By Hunt, Jennifer
  32. Anti-evasion auditing policy in thepresence of common income shocks By Miguel Sanchez
  33. Investments into Education - Doing as the Parents Did By Kirchsteiger, Georg; Sebald, Alexander
  34. On Public Opinion Polls and Voters' Turnout By Klor, Esteban F; Winter, Eyal
  35. Second-best tax policy in a growing economy with externalities. By Steve Cassou; Arantza Gorostiaga; María José Gutiérrez; Stephen Hamilton
  36. The Parental Leave Benefit Reform in Germany: Costs and Labour Market Outcomes of Moving towards the Scandinavian Model By C. Katharina Spiess; Katharina Wrohlich
  37. Public Investment in Transportation Infrastructures and Industry Performance in Portugal By Alfredo M. Pereira; Jorge M. Andraz
  38. Merged Municipalities, Higher Debt: On Free-riding and the Common Pool Problem in Politics By Jordahl, Henrik; Liang, Che-Yuan
  39. Public Infrastructures and Regional Asymmetries in Spain By Alfredo M. Pereira; Oriol Roca Sagales
  40. Participation and Schooling in a Public System of Higher Education By Kelchtermans, Stijn; Verboven, Frank
  41. The Build-up of Cooperative Behavior among Non-cooperative Agents By Hassan Benchekroun; Ngo Van Long
  42. Income and Wealth Concentration in Spain in a Historical and Fiscal Perspective By Alvaredo, Facundo; Saez, Emmanuel
  43. Postponing Retirement: the Political Push of Aging By Galasso, Vincenzo
  44. Pension Investments in Employer Stock By William E. Even; David A. Macpherson
  45. The social discount rate in cost benefit analysis: the British experience and lessons to be learned By Erhun KULA
  46. The Income of the Swedish Baby Boomers By Lennart Flood; Anders Klevmarken; Andreea Mitrut
  47. Shortening the Potential Duration of Unemployment Benefits Does Not Affect the Quality of Post-Unemployment Jobs: Evidence from a Natural Experiment By van Ours, Jan C; Vodopivec, Milan
  48. Social discount rates for the European Union By David J. EVANS
  49. Public Markets Tailored for the Cartel- Favoritism in Procurement Auctions By Ariane Lambert Mogiliansky; Grigory Kosenok
  50. Crises, What Crises? By Campos, Nauro F; Hsiao, Cheng; Nugent, Jeffrey B
  51. Health Insurance, Expectations, and Job Turnover By Randall P. Ellis; Ching-to Albert Ma

  1. By: Rafael Domenech (Institute of International Economics, University of Valencia); Javier Andres (Institute of International Economics, University of Valencia); Antonio Fatas (INSEAD)
    Abstract: This paper presents an analysis of how alternative models of the business cycle can replicate the stylized fact that large governments are associated with less volatile economies. Our analysis shows that adding nominal rigidities and costs of capital adjustment to an otherwise standard RBC model can generate a negative correlation between government size and the volatility of output. However, in the model, we find that the stabilizing effect is only due to a composition effect and it is not present when we look at the volatility of private output. Given that empirically we also observe a negative correlation between government size and the volatility of consumption, we modify the model by introducing rule-of-thumb consumers. In this modified version of our initial model we observe that consumption volatility is also reduced when government size increases in similar way to the observed pattern in OECD economies over the last 45 years.
    Keywords: Government size, output volatility, automatic stabilizers.
    JEL: E32 E52 E63
    Date: 2006–10
  2. By: Trabandt, Mathias; Uhlig, Harald
    Abstract: The goal of this paper is to examine the shape of the Laffer curve quantitatively in a simple neoclassical growth model calibrated to the US as well as to the EU-15 economy. We show that the US and the EU-15 area are located on the left side of their labor and capital tax Laffer curves, but the EU-15 economy being much closer to the slippery slopes than the US. Our results indicate that since 1975 the EU-15 area has moved considerably closer to the peaks of their Laffer curves. We find that the slope of the Laffer curve in the EU-15 economy is much flatter than in the US which documents a much higher degree of distortions in the EU-15 area. A dynamic scoring analysis shows that more than one half of a labor tax cut and more than four fifth of a capital tax cut are self-financing in the EU-15 economy.
    Keywords: Laffer curve; US and EU-15 economy
    JEL: E0 E60 H0
    Date: 2006–05
  3. By: Artis, Michael J; Onorante, Luca
    Abstract: The paper provides an assessment of the effect of the recent revision of the Stability and Growth Pact (SGP) on the European economies. A set of structural VARs, one for each Eurozone country, is estimated. The estimated models are then used to assess the possible effect of alternative sets of fiscal rules, with particular attention to the SGP in its old and reformed versions. The results suggest that fiscal policy has had in the past a limited smoothing effect on the cycle and therefore the cost of the old rules in the “corrective” arm of the Pact was also limited. As for the reform of the Pact the analysis is overall supportive of the new country-specific Medium term Objectives. The modified rules of the excessive deficit procedure are likely to give governments only a limited extra leeway to reduce the variability of the cycle.
    Keywords: European Monetary Union; fiscal-monetary interactions; Stability and Growth Pact
    JEL: E61 E62 E63
    Date: 2006–05
  4. By: Favero, Carlo A; Giglio, Stefano W
    Abstract: We study the relationship between the term structure of interest rates and fiscal policy by considering the Italian case. Empirical analysis has been so far rather inconclusive on this important topic. We abscribe such evidence to three problems: identification, regime-switching and maturity effects. All these aspects are particularly relevant to the Italian case. We propose a parsimonious model with three factors to represent the whole yield curve, and we consider yield differentials between Italian and German Government bonds. To take into account the possibility of regime-switching, we explicitly include a hidden two-state Markov chain that represents market expectations. The model is estimated using Bayesian econometric techniques. We find that government debt and its evolution significantly influence the yield of government bonds, that such effects are maturity dependent and regime-dependent. Hence when investigating the effect of fiscal policy on the term-structure it is of crucial importance to allow for multiple regimes in the estimation.
    Keywords: Bayesian estimation; fiscal policy; regime switching; term structure
    JEL: E0 G0
    Date: 2006–08
  5. By: Gonzalez, Paula; Hindriks, Jean J.G.; Lockwood, Ben; Porteiro, Nicolas
    Abstract: In this paper, we study a model a la Rogoff (1990) where politicians distort fiscal policy to signal their competency, but where fiscal policy can be centralized or decentralized. Our main focus is on how the equilibrium probability that fiscal policy is distorted in any region (the political budget cycle, PBC) differs across fiscal regimes. With centralization, there are generally two effects that change the incentive for pooling behavior and thus the probability of a PBC. One is the possibility of selective distortion: the incumbent can be re-elected with the support of just a majority of regions. The other is a cost distribution effect, which is present unless the random cost of producing the public goods is perfectly correlated across regions. Both these effects work in the same direction, with the general result that overall, the PBC probability is larger under centralization (decentralization) when the rents to office are low (high). Voter welfare under the two regimes is also compared: voters tend to be better off when the PBC probability is lower, so voters may either gain or lose from centralization. Our results are robust to a number of changes in the specification of the model.
    Keywords: fiscal decentralization; local public goods; political budget cycle
    JEL: D72 E32 E62 H41
    Date: 2006–04
  6. By: Barankay, Iwan; Lockwood, Ben
    Abstract: Advocates of fiscal decentralization argue that amongst other benefits, it can increase the efficiency of delivery of government services. This paper is one of the first to evaluate this claim empirically by looking at the association between education expenditure decentralization and the productive efficiency of schools using a data-set of Swiss cantons. We first provide careful evidence that expenditure decentralization is a powerful proxy for legal local autonomy. Further panel regressions of Swiss cantons provide robust evidence that more decentralization is associated with higher educational attainment. We also show that these gains lead to no adverse effects across education types but that male students benefited more from educational decentralization closing, for the Swiss case, the gender education gap.
    Keywords: decentralization; local public goods; productive efficiency
    JEL: H40 H52 H70 I20
    Date: 2006–04
  7. By: Cavalcanti, Tiago; Tavares, José
    Abstract: The increase in income per capita is accompanied, in virtually all countries, by two changes in the structure of the economy, namely an increase in the share of government spending in GDP and an increase in female labour force participation. This paper suggests that these two changes are causally related. We develop a growth model where the structure of the economy is endogenous so that participation in market activities and government size are causally related. Economic growth and rising incomes are accompanied by a greater incentive for women to engage in labour market activities as the opportunity cost of staying at home increases. We hypothesize that government spending decreases the cost of performing household chores such as, but not limited to, child rearing and child care so that couples decide to engage further in the labour market and chose a higher tax rate to finance more government spending. Using a wide cross-section of data for developed and developing countries, we show that higher participation by women in the labour market are indeed positively associated with larger governments. Furthermore, we investigate the causal link between the two variables using as instrumental variables a unique and novel dataset on the relative price of home appliances across OECD countries and over time. We find strong evidence of a causal link between participation in the labour market and government size: a 10 percent rise in participation in the labour market leads to a 7 to 8 percent rise in government size. This effect is robust to the country sample, time period, and a set of controls in the spirit of Rodrik (1998). The inclusion of an endogenous choice of government spending allows a considerable extension of the model in Galor and Weil (2000) so fertility can either rise or fall and phenomena like the baby boom and baby bust in Greenwood at el. (2002) can be addressed. In addition, the paper has important implications for the analysis of the secular as well as cross-country determinants of government size.
    Keywords: government size; growth; structural transformation
    JEL: E62 J1 O1
    Date: 2006–05
  8. By: Faini, Riccardo
    Abstract: Foreign aid has been on a downward trend since at least the early eighties. Despite the commitments of donor governments, the GDP share of foreign aid for DAC countries has fallen to slightly more than 0,2% in the early part of this decade. The purpose of this paper is to explore the macro determinants of the amount of foreign aid. Surprisingly enough, not much attention has been devoted in the literature to this issue. Most of the research has focussed either on the effectiveness of aid (“does aid promote growth and help alleviating poverty”?) or to the cross country allocation of a given amount of foreign aid (“is foreign aid motivated by donor’s political and commercial interests or by recipients’ needs?”). In both cases, the total aid budget is taken as given and its determinants remain therefore unexplored. Our main finding is that the size of the budget aid is a function of the donor country’s fiscal situation, even after controlling for the government’s political orientation, the cyclical position of the donor economy, and its income per capita level. In light of these results, we argue that advocates of foreign aid should strongly lobby in favour of fiscal discipline. The alternative strategy of pushing for a more lenient budgetary treatment of foreign aid may be loaded with risks, and even turn to be counterproductive, particularly if the list of “virtuous” exceptions becomes exceedingly long. This is exactly what seems to have happened with the revision of the Stability and Growth pact.
    Keywords: fiscal policy; foreign aid
    JEL: E62 F35
    Date: 2006–06
  9. By: Conconi, Paola; Perroni, Carlo; Riezman, Raymond
    Abstract: We consider a setting in which capital taxation is characterized by two distortions working in opposite directions. On one hand, governments engage in tax competition and are tempted to lower capital tax rates. On the other hand, they are unable to commit to future policies and, once capital has been installed, have incentives to increase taxes. In this setting, there exists a tax that optimally trades off the two distortions. We compare three possible tax harmonization scenarios: no tax harmonization (all countries set taxes unilaterally), global tax harmonization (all countries coordinate their capital taxes), and partial tax harmonization (only a subset of all countries coordinate capital taxes). We show that, if capital is sufficiently mobile, partial tax harmonization benefits all countries compared to both global and no harmonization. Our analysis provides a rationale for the proposed creation of an Enhanced Cooperation Agreement on capital taxes within the European Union.
    Keywords: commitment; partial coordination; tax competition
    JEL: C73 F21 H21
    Date: 2006–07
  10. By: Lloyd-Braga, Teresa; Modesto, Leonor; Seegmuller, Thomas
    Abstract: We consider a constant returns to scale, one sector economy with segmented asset markets, encompassing both the Woodford (1986) and overlapping generations models. We analyze the role of public spending, financed by (labour or capital) income and consumption taxation, on the emergence of indeterminacy. We find that what is relevant for indeterminacy is the variability of the distortion introduced by government intervention. We further discuss the results in terms of the level of the tax rate, its variability with respect to the tax base and the degree of externalities in preferences due to the existence of a public good. We show that the degree of public spending externalities affects the combinations between the tax rate and its variability under which indeterminacy occurs. Moreover, in contrast to previous results, we find that consumption taxes can lead to local indeterminacy when asset markets are segmented.
    Keywords: indeterminacy; public spending; segmented asset markets; taxation
    JEL: E32 E63 H23
    Date: 2006–08
  11. By: Díaz-Giménez, Javier; Pijoan-Mas, Josep
    Abstract: In this article we quantify the aggregate, distributional and welfare consequences of two revenue neutral flat-tax reforms using a model economy that replicates the U.S. distributions of earnings, income and wealth in very much detail. We find that the less progressive reform brings about a 2.4% increase in steady state output and a more unequal distribution of after-tax income. In contrast, the more progressive reform brings about a -2.6% reduction in steady state output and a distribution of after-tax income that is more egalitarian. We also find that in the less progressive flat-tax economy aggregate welfare falls by -0.17% of consumption, and in the more progressive flat-tax economy it increases by 0.45% of consumption. In both flat-tax reforms the income poor pay less income taxes and obtain sizeable welfare gains.
    Keywords: earnings distribution; efficiency; flat-tax reforms; income distribution; inequality; wealth distribution
    JEL: D31 E62 H23
    Date: 2006–09
  12. By: Bayoumi, Tamim; Sgherri, Silvia
    Abstract: We estimate tax multipliers in a "Blanchard-Yaari" consumption model where Ricardian equivalence is broken because the private sector discounts the future at a faster rate than the real rate of interest. The model fits U.S. data since 1955 extremely well-entailing a discount wedge of around 20 percent a year and fiscal multipliers of 0.15-0.4-depending on the permanence of the change in taxes/transfers, and is much superior to one that assumes some consumers are fully Ricardian and others follow simple rules of thumb. The implied high private sector rate of discount has wide implications for policymakers.
    Keywords: discount rates; fiscal multipliers; fiscal policy; Ricardian equivalence
    JEL: E21 E63
    Date: 2006–09
  13. By: Sven Fischer; Andreas Nicklisch
    Abstract: We report the results of an experimental study that compares voting mechanisms in the provision of public goods. Subjects can freely decide how much they want to contribute. Whether the public good is finally provided is decided by a referendum under full information about all contributions. If provision is rejected, contributions are reduced by a fee and reimbursed. We compare unanimity with majority voting and both to the baseline of cheap talk. Contributions are highest under unanimity. Yet, results concerning overall efficiency are mixed. When provision occurs, only unanimity enhances efficiency. Overall, however, unanimity leads to too many rejections.
    Keywords: competition, collusion, auction, bidding, public procurement
    JEL: C72 C91 H41
    Date: 2006–10
  14. By: Keuschnigg, Christian
    Abstract: Depending on the definition of the tax base, the statutory corporate tax rate implies rather different measures of effective average and marginal tax rates. This paper develops a model of a monopolistically competitive industry with extensive and intensive business investment and shows how these margins respond to changes in average and marginal corporate tax rates. Intensive investment refers to the size of a firm's capital stock. Extensive investment refers to the firm's production location and reflects the trade-off between exports and foreign direct investment as alternative modes of foreign market access. The paper derives comparative static effects of the corporate tax and shows how the cost of public funds depends on the elasticities of the extensive and intensive investment responses.
    Keywords: corporate taxation; costs of public funds; exports; foreign direct investment
    JEL: D21 F23 H25 L11 L22
    Date: 2006–08
  15. By: Piketty, Thomas; Saez, Emmanuel
    Abstract: This paper provides estimates of federal tax rates by income groups in the United States since 1960, with special emphasis on very top income groups. We include individual and corporate income taxes, payroll taxes, and estate and gift taxes. The progressivity of the U.S. federal tax system at the top of the income distribution has declined dramatically since the 1960s. This dramatic drop in progressivity is due primarily to a drop in corporate taxes and in estate and gift taxes combined with a sharp change in the composition of top incomes away from capital income and toward labour income. The sharp drop in statutory top marginal individual income tax rates has contributed only moderately to the decline in tax progressivity. International comparisons confirm that is it critical to take into account other taxes than the individual income tax to properly assess the extent of overall tax progressivity, both for time trends and for cross-country comparisons. The pattern for the United Kingdom is similar to the US pattern. France had less progressive taxes than the US or UK in 1970 but has experienced an increase in tax progressivity and has now a more progressive tax system than the US or the UK.
    Keywords: income tax progressivity
    JEL: H2
    Date: 2006–07
  16. By: Rob Euwals (CPB Netherlands Bureau for Economic Policy Analysis, CEPR and IZA Bonn)
    Abstract: Parts of the Dutch tax reform 2001 are directed towards fiscal partners in a household and aim at lowering the marginal tax burden of the partner with the lowest (potential) labour income. An important goal of the reform is to increase the employment rate of these partners, which are in majority women. The Dutch Labour Force Survey 1992-2003 shows that the growth of the employment rate of married women after 2001 was larger than for a comparable group of single women. A statistical analysis using a model that accounts for measurement error shows that the growth of the employment rates of women without young children is in line with the predicted effect of the tax reform.
    Keywords: tax reform, employment, evaluation
    JEL: C20 H31 J22
    Date: 2006–09
  17. By: Buti, Marco; Martins, Joao Nogueira; Turrini, Alessandro Antonio
    Abstract: Under numerical fiscal rules, such as those underpinning EMU, governments have strong temptations to use accounting tricks to meet the fiscal constraints. Given these political incentives, fiscal variables that in the past were regarded as a mere residual acquire a strategic role. This is the case of the so-called stock-flow adjustment (SFA) which reconciles deficit and debt developments. We develop a simple theoretical model where deficits and two distinct SFA components (one that could be used to reduce the deficit figures and the other to impact debt figures instead) are determined as a result of a constrained optimization by fiscal authorities. Econometric evidence provides results consistent with the model findings. The SFA component related to the purpose to hide deficits rises with the recorded deficit, while the sales of financial assets designed to keep the debt under control rise with debt and deficit. Such practices have greatly contributed to the loss of credibility of EMU’s fiscal rules. If properly implemented, the reformed Pact, which stresses durable adjustment and long-run sustainability, should help curb such perverse incentives.
    Keywords: fiscal gimmicks; government accounting; Stability and Growth Pact; stock-flow adjustment
    JEL: E61 H62 H87
    Date: 2006–08
  18. By: Thomas Liebig (OECD); Patrick A. Puhani (Leibniz University of Hannover, SIAW, University of St. Gallen and IZA Bonn); Alfonso Sousa-Poza (University of St. Gallen)
    Abstract: We investigate the relationship between income tax rate variation and internal migration for the unique case of Switzerland, whose system of determining tax rates primarily at the community level results in enough variation to permit analysis of their influence on migration. Specifically, using Swiss census data, we analyze migratory responses to tax rate variations for various groups defined by age, education, and nationality/residence permit. The results suggest that young Swiss college graduates are most sensitive to tax rate differences, but the estimated effects are not large enough to offset the revenue-increasing effect of a rise in tax rate. The migratory responses of foreigners and other age-education groups are even smaller, and reverse causation seems negligible.
    Keywords: mobility, immigration, foreigners, visa status, residence permit, taxation, Switzerland
    JEL: J61 H73
    Date: 2006–10
  19. By: Buti, Marco; Sapir, André
    Abstract: During the ‘Golden Age’ that lasted until the mid-1970s, Europe witnessed a "public finance" phase, when the three sides of Musgrave’s triangle - allocative efficiency, redistribution and cyclical stabilisation - seemed to reinforce one another. EMU's fiscal rules - embodied in the Maastricht Treaty and the Stability and Growth Pact - can be regarded as the attempt by European governments to overcome the subsequent "public choice" phase à la Buchanan which was characterised by increasing budget deficits and trade offs between allocative efficiency and redistribution. The original Stability Pact delivered only partly. A rigorous enforcement of the reformed Pact will depend on two conditions: the renewed ownership of the rules by key players and the relative weight of the perceived negative externalities of fiscal misbehaviour versus the political costs of attempting to limit the partner countries’ room for manoeuvre.
    Keywords: EMU; fiscal policy; Stability Pact
    JEL: E6 H3 H6
    Date: 2006–09
  20. By: Adam, Klaus; Billi, Roberto M
    Abstract: Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment robustly generates too much inflation. A conservative monetary authority thus remains desirable. Exclusive focus on inflation by the central bank recoups large part - in some cases all - of the steady state welfare losses associated with lack of monetary and fiscal commitment. An inflation conservative central bank tends to improve also the conduct of stabilization policy.
    Keywords: conservative monetary policy; discretionary policy; sequential non-cooperative policy games; time consistent policy
    JEL: E52 E62 E63
    Date: 2006–07
  21. By: Liebig, Thomas; Puhani, Patrick A.; Sousa-Poza, Alfonso
    Abstract: We investigate the relationship between income tax rate variation and internal migration for the unique case of Switzerland, whose system of determining tax rates primarily at the community level results in enough variation to permit analysis of their influence on migration. Specifically, using Swiss census data, we analyze migratory responses to tax rate variations for various groups defined by age, education, and nationality/residence permit. The results suggest that young Swiss college graduates are most sensitive to tax rate differences, but the estimated effects are not large enough to offset the revenueincreasing effect of a rise in tax rate. The migratory responses of foreigners and other age-education groups are even smaller, and reverse causation seems negligible.
    Keywords: Mobility, Immigration, Foreigners, Visa Status, Residence Permit, Taxation, Switzerland
    JEL: J61 H73
    Date: 2006–10
  22. By: Grossman, Gene; Helpman, Elhanan
    Abstract: We study budget formation in a model featuring separation of powers. In our model, the legislature designs a budget bill that can include a cap on total spending and earmarked allocations to designated public projects. Each project provides random benefits to one of many interest groups. The legislature can delegate spending decisions to the executive, who can observe the productivity of all projects before choosing which to fund. However, the ruling coalition in the legislature and the executive serve different constituencies, so their interests are not perfectly aligned. We consider settings that differ in terms of the breadth and overlap in the constituencies of the two branches, and associate these with the political systems and circumstances under which they most naturally arise. Earmarks are more likely to occur when the executive serves broad interests, while a binding budget cap arises when the executive's constituency is more narrow than that of the powerful legislators.
    Keywords: comparative political economics; fiscal policy; government spending; pork-barrel politics
    JEL: D78 H41 H61
    Date: 2006–07
  23. By: Francesconi, Marco; Muthoo, Aabhinay
    Abstract: This paper develops a theory of the allocation of authority between two parties that produce impure public goods. We show that the optimal allocation depends on technological factors, the parties' valuations of the goods produced, and the degree of impurity of these goods. When the degree of impurity is large, control rights should be given to the main investor, irrespective of preference considerations. There are some situations in which this allocation is optimal even if the degree of impurity is very low as long as one party's investment is more important than the other party's. If the parties' investments are of similar importance and the degree of impurity is large, shared authority is optimal with a greater share going to the low-valuation party. If the importance of the parties' investments is similar but the degree of impurity is neither large nor small, the low-valuation party should receive sole authority. We apply our results to a number of situations, including schools and child custody.
    Keywords: allocation of authority; contractual incompleteness; impure public goods; investment incentives
    JEL: D02 D23 H41 L31
    Date: 2006–06
  24. By: La Ferrara, Eliana; Mele, Angelo
    Abstract: This paper explores the effect of racial segregation on public school expenditure in US metropolitan areas and school districts. Our starting point is the literature that relates public good provision to the degree of racial fragmentation in the community. We argue that looking at fragmentation alone may be misleading and that the geographic distribution of different racial groups needs to be taken into account. Greater segregation is associated with more homogeneity in some subareas and more heterogeneity in others, and this matters if decisions on spending are taken at aggregation levels lower than the MSA. For given fragmentation, the extent of segregation conveys information on households’ possibility to sort into relatively more or less homogeneous jurisdictions. We account for the potential endogeneity of racial segregation and find that the latter has a positive impact on average public school expenditure both at the MSA and at the district level. At the same time, increased segregation leads to more inequality in spending across districts of the same MSA, thus worsening the relative position of poorer districts.
    Keywords: public school expenditure; racial fragmentation; segregation
    JEL: H41 H73 J15
    Date: 2006–07
  25. By: de la Croix, David; Doepke, Matthias
    Abstract: The governments of nearly all countries are major providers of primary and secondary education to its citizens. In some countries, however, public schools coexist with private schools, while in others the government is the sole provider of education. In this study, we ask why different societies make different choices regarding the mix of private and public schooling. We develop a theory which integrates private education and fertility decisions with voting on public schooling expenditures. In a given political environment, high income inequality leads to more private education, as rich people opt out of the public system. Comparing across political systems, we find that concentration of political power can lead to multiple equilibria in the determination of public education spending.
    Keywords: democracy; private education; probabilistic voting; public education
    JEL: D72 H42 I21 O10
    Date: 2006–08
  26. By: Ngo Van Long; Koji Shimomura
    Abstract: We show that the famous neutrality result in the theory of public good contributions (Warr, Kemp, Bergstrom, Blume and Varian) depends crucially on the assumption that agents do not take into account the effect of their public good contribution decisions on the relative price of the private goods. Thus, the scope of applicability of their result is not as large as one might at first think. Our non-neutrality results hold even if all countries are identical in technology, preferences, and endowments. <P>Nous démontrons que le théorème sur l’invariance du stock total d’un bien public par rapport à la distribution de revenus n’est valable que si les contributeurs ignorent l’impact de leurs contributions sur le prix relatif des biens privés. Par conséquent, le résultat de Warr, Kemp, Bergstrom, Blume et Varian n’a qu’une sphère d’application limitée. Nos résultats sur le manque de neutralité sont valables même si les préférences, les technologies, et les dotations de ressources de tous les pays sont identiques.
    Keywords: public goods, voluntary contributions,
    JEL: C73 H41 D60
    Date: 2006–10–01
  27. By: Duranton, Gilles; Gobillon, Laurent; Overman, Henry G.
    Abstract: We study the impact of local taxation on the location and growth of firms. Our empirical methodology pairs establishments across jurisdictional boundaries to estimate the impact of taxation. Our approach improves on existing work as it corrects for unobserved establishment heterogeneity, for unobserved time-varying site specific effects, and for the endogeneity of local taxation. Applied to data for English manufacturing establishments we find that local taxation has a negative impact on employment growth, but no effect on entry.
    Keywords: borders; local taxation; regression discontinuity; spatial differencing
    JEL: H22 H71 R38
    Date: 2006–09
  28. By: Campos, Nauro F; Horváth, Roman
    Abstract: We construct objective measures of privatization, internal and external liberalization reform efforts, across countries over time, and investigate their determinants, reversals and macroeconomic impacts. We find that GDP growth determines external liberalization and privatization, concentration of political power drives internal liberalization, and democracy underpins all three. We find that FDI inflows reduce the probability of privatization reversals, labour strikes increase that of internal liberalization reversals, and OECD growth increase that of external liberalization reversals. We replicate previous studies and find that the macroeconomic effects of reform (when measured objectively) tend to be larger and more precisely estimated.
    Keywords: political economy; privatization; reform; transition
    JEL: D72 E23 H26 O17
    Date: 2006–05
  29. By: John Hills
    Abstract: This article outlines the recommendations of the UK Pensions Commission, and the data and analysis on which they were based, including projections of demographic change, trends in private pension saving, and evolution of the state pension system. The Commission concluded that without reform, structural problems with UK pensions would lead to increasingly inadequate and inequitable provision in 15-20 years time. It recommended reforms which would lead to a more generous, more universal and less means-tested state system than would otherwise evolve, and the establishment of a low cost National Pension Savings Scheme, into which employees without good employer provision would automatically be enrolled. The proposals, which have now largely been adopted by the UK government, imply eventual increases both in state spending on pensions as a share of national income and in State Pension Age, but accompanied by measures to facilitate later and more flexible retirement.
    Keywords: Demographic change, Pensions, Retirement incomes, Social security
    JEL: H55
    Date: 2006–06
  30. By: Piketty, Thomas; Qian, Nancy
    Abstract: This paper evaluates the prospects for income tax reform in China during the coming decade (with a comparison to India), and argues that such reforms should rank high on the policy agenda in these two countries. Due to high average income growth and sharply rising top income shares during the 1990s and early 2000s, progressive income taxation is about to raise non-trivial tax revenues in China and India and to become an important political object. According to our projections, the income tax should raise at least 4% of Chinese GDP in 2010 (versus less than 1% in 2000 and 0,1% in 1990), in spite of the 20% nominal rise in the exemption threshold that took effect in 2004. The fact that progressive income taxation is becoming an important policy tool has important consequences for China’s ability to finance social spending and to keep under control the rise in income inequality associated to globalization and growth. Due to faster income growth and to a higher fraction of wage earners in the labor force, the prospects for income tax development look better in China than in India. This potential is however limited by the fact that Chinese top wage-earners are under-taxed relatively to top non-wage income earners.
    Keywords: income distribution; income taxation
    JEL: E25
    Date: 2006–05
  31. By: Hunt, Jennifer
    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: bribery; corruption; governance
    JEL: H1 K4 O1
    Date: 2006–09
  32. By: Miguel Sanchez
    Abstract: When fairly homogeneous taxpayers are affected by common incomeshocks, a tax agency's optimal auditing strategy consists of auditing alow-income declarer with a probability that (weakly) increases with theother taxpayers' declarations. Such policy generates a coordination gameamong taxpayers, who then face both strategic uncertainty - about theequilibrium that will be selected.and fundamental uncertainty - about thetype of agency they face. Thus the situation can be realistically modelledas a global game that yields a unique and usually interior equilibriumwhich is consistent with empirical evidence.Results are also applicable to other areas like regulation or welfarebenefit allocation.
    Keywords: Keywords: Tax Evasion, Coordination/Global Games,Expectations, Asymmetric Information
    JEL: H26 D82 D84 C72
    Date: 2006–02
  33. By: Kirchsteiger, Georg; Sebald, Alexander
    Abstract: Empirical evidence suggests that parents with higher levels of education generally also attach a higher importance to the education of their children. This implies an intergenerational chain transmitting the attitude towards the formation of human capital from one generation to the next. We incorporate this intergenerational chain into an OLG-model with endogenous human capital formation. In absence of any state intervention such an economy might be characterized by multiple steady states. A temporary public investment into human capital formation is then needed for a transition from a steady state with low human capital levels to one with a higher human capital level. Furthermore, it can be shown that even the best steady state is suboptimal when the human capital is privately provided. This inefficiency can be overcome by a permanent public subsidy for education.
    Keywords: education subsidy; human capital formation; indirect reciprocity
    JEL: H23 H52 I2
    Date: 2006–05
  34. By: Klor, Esteban F; Winter, Eyal
    Abstract: This paper studies the effects that the revelation of information on the electorate's preferences has on voters' turnout decisions. The experimental data show that closeness in the division of preferences induces a significant increase in turnout. Moreover, for closely divided electorates (and only for these electorates) the provision of information significantly raises the participation of subjects supporting the slightly larger team relative to the smaller team. This behaviour contradicts the qualitative predictions of the unique quasi-symmetric Nash equilibrium of the theoretical model. We show that the heterogeneous effect of information on the participation of subjects in different teams is driven by the subjects' (incorrect) beliefs of casting a pivotal vote. Simply put, subjects overestimate the probability of casting a pivotal vote when they belong to the team with a slight majority, and choose the strategy that maximizes their utility based on their inflated probability assessment. Empirical evidence on gubernatorial elections in the U.S. between 1990 and 2005 is consistent with our main experimental result. Namely, we observe that the difference in the actual vote tally between the party leading according to the polls and the other party is larger than the one predicted by the polls only in closely divided electorates. We provide a behavioural model that explains the main findings of our experimental and empirical analyses.
    Keywords: experimental economics; public opinion polls; voter turnout
    JEL: C72 C92 D72 H41
    Date: 2006–05
  35. By: Steve Cassou (Kansas State University); Arantza Gorostiaga (Universidad del País Vasco / The University of the Basque Country); María José Gutiérrez (Universidad del País Vasco / The University of the Basque Country); Stephen Hamilton (CAL POLY STATE UNIVERSITY, SAN LUIS OBISPO)
    Abstract: This paper investigates the exploitation of environmental resources in a growing economy within a second-best …scal policy framework. Agents derive utility from two types of consumption goods –one which relies on an environmental input and one which does not –as well as from leisure and from environmental amenity values. Property rights for the environmental resource are potentially incomplete. We connect second best policy to essential components of utility by considering the elasticity of substitution among each of the four utility arguments. The results illustrate potentially important relationships between environmental amentity values and leisure. When amenity values are complementary with leisure, for instance when environmental amenities are used for recreation, taxes on extractive goods generally increase over time. On the other hand, optimal taxes on extractive goods generally decrease over time when leisure and environmental amenity values are substitutes. Unders some parameterizations, complex dynamics leading to nonmonotonic time paths for the state variables can emerge.
    Keywords: Growth and the environment; Elasticity of substitution; Second-best policy
    JEL: H23 O41 Q28
    Date: 2006–10–16
  36. By: C. Katharina Spiess (DIW Berlin and FU Berlin); Katharina Wrohlich (DIW Berlin and IZA Bonn)
    Abstract: Germany is known to have one of the lowest fertility rates among Western European countries and also relatively low employment rates of mothers with young children. Although these trends have been observed during the last decades, the German public has only recently begun discussing these issues. In order to reverse these trends, the German government recently passed a reform of the parental leave benefit system in line with the Scandinavian model. The core piece of the reform is the replacement of the existing meanstested parental leave benefit by a wage-dependent benefit for the period of one year. In this paper we simulate fiscal costs and expected labour market outcomes of this reform. Based on a micro-simulation model for Germany we calculate first-round effects, which assume no behavioural changes and second-round effects, where we take labour supply changes into account. Our results show that on average all income groups, couples and single households, benefit from the reform. The calculation of overall costs of the reform shows that the additional costs are moderate. As far as the labour market behaviour of parents is concerned, we find no significant changes of labour market outcomes in the first year after birth. However, in the second year, mothers increase their working hours and labour market participation significantly. Our results suggest that the reform will achieve one of its aims, namely the increase in the labour market participation of mothers with young children.
    Keywords: female labour supply, parental leave, micro simulation study
    JEL: J22 H31 I38
    Date: 2006–10
  37. By: Alfredo M. Pereira (Department of Economics, College of William and Mary); Jorge M. Andraz (Faculdade de Economia, Universidade do Algarve)
    Abstract: The objective of this paper is to evaluate the effects at the industry level of public investment in transportation infrastructures in Portugal. The empirical results are based on VAR/ECM models for the Portuguese economy and for eighteen industries covering the whole spectrum of economic activity in the country. These models consider private-sector output, employment and investment as well as public investment. Empirical results at the aggregate level indicate that public investment has a positive effect on both private inputs as well as on private output and that it affects labor productivity positively. These aggregate results, however, hide a wide variety of industry-level effects. In absolute terms, the industries that benefit the most from public investment are Construction, Trade, Transportation, Finance, Real Estate, and Services. In turn, relative to their size, the industries that benefit the most are Mining, Non-Metal Products, Metal Products, Construction, Restaurants, Transportation, and Finance, and, therefore, public investment tends to shift the industry mix toward these industries. Accordingly, our empirical results suggest that although public investment has been a powerful instrument to enhance the long-term economic performance in Portugal it does so in a way that is rather unbalanced across industries.
    Keywords: infrastructure, industry performance, Portugal
    JEL: C32 E62 H54
    Date: 2006–10–08
  38. By: Jordahl, Henrik (Research Institute of Industrial Economics); Liang, Che-Yuan (Uppsala University)
    Abstract: We use the 1952 Swedish municipal amalgamation reform to study free-riding and the common pool problem in politics. We expect municipalities that were affected by the reform to increase their debt in anticipation of a merger, and this effect to be larger if they were merged with many other populous municipalities (i.e. facing a large common pool). We use ordinary least squares and matching on the complete cross section of rural municipalities for the period 1947-1951, fixed effects when exploiting the panel features, as well as a geographical instrumental variables strategy. We find an average treatment effect close to the amount that the average merged municipality increased its debt with during this period, which corresponds to 2.8 percent of average income or 63 percent of the average increase in income. However, we do not find larger increases in municipalities that were part of a larger common pool.
    Keywords: Common pool; municipal amalgamation; local governments
    JEL: D72 H73 H74 H77 R53
    Date: 2006–10–19
  39. By: Alfredo M. Pereira (Department of Economics, College of William and Mary); Oriol Roca Sagales (Departament d'Economia Aplicada, Universitat Autonoma de Barcelona)
    Abstract: The objective of this paper is to investigate the effects of public infrastructures on regional economic performance in Spain. The empirical results are based on VAR models relating output, employment, private capital, and public infrastructures. We estimate models at the aggregate level and for each of the seventeen autonomous regions that make up Spain. In the regional models, both public infrastructures in the region and public infrastructures elsewhere are considered, thereby taking into consideration the possible existence of regional spillovers of the effects of public infrastructures. Indeed, our empirical results show that regional spillovers are very important in the case of output and private capital but not in terms of employment, reflecting a low degree of mobility in the Spanish labor markets. More importantly, empirical results suggest that although public infrastructures have been a powerful instrument to promote long-term growth, they have done so in a way that is rather unbalanced across regions. This means that aggregate convergence in Spain to EU standards of living has been achieve at the cost of increased domestic asymmetries.
    Keywords: public infrastructures, regional spillovers, regional asymmetries, Spain
    JEL: C32 H54 R53
    Date: 2006–10–08
  40. By: Kelchtermans, Stijn; Verboven, Frank
    Abstract: We analyze the determinants of participation (whether to study) and schooling (where and what to study) in a public system of higher education, based on a unique dataset of all eligible high school pupils in an essentially closed region (Flanders). We find that pupils perceive the available institutions and programs as close substitutes, implying an ambiguous role for travel costs: they hardly affect the participation decisions, but have a strong impact on the schooling decisions. In addition, high school background plays an important role in both the participation and schooling decisions. To illustrate how our empirical results can inform the debate on reforming public systems, we assess the effects of tuition fee increases. Uniform cost-based tuition fee increases achieve most of the welfare gains; the additional gains from fee differentiation are relatively unimportant. These welfare gains are quite large if one makes conservative assumptions on the social cost of public funds, and there is a substantial redistribution from students to outsiders.
    Keywords: higher education; participation; policy reform; schooling
    JEL: I2 I23
    Date: 2006–05
  41. By: Hassan Benchekroun; Ngo Van Long
    Abstract: We develop a theoretical model in which each individual is, in some ultimate sense, motivated by purely egoistic satisfaction derived from the goods accruing to him, but there is an implicit social contract such that each performs duties for the others in a way that enhances the satisfaction of all. We introduce a state variable that acts as a proxy for social capital of trustworthiness and that we call the stock of cooperation. We show that noncooperative agents might condition their action on this state variable. Agents build-up the society's stock of cooperation and gradually overcome the free riding problem in a game of private contribution to a public good. We assume that there are neither penalties in the sense of trigger strategies, nor guilt and that each individual is rational. <P>Nous développons un modèle théorique dans lequel les individus sont motivés par la satisfaction égoïste que leur procure l’accumulation de biens, mais où le contrat social incite chaque individu à travailler pour les autres afin d’accroître le bien-être collectif. Nous introduisons une variable d’état représentant le stock de capital social, ou « stock de coopération ». Nous démontrons que cette variable peut influencer les actions des agents non-coopératifs. Les agents accumulent le stock de coopération de la société et réussisent à règler de manière progressive le problème du passager clandestin pour un jeu de contributions privées dans un bien public. Nous supposons qu’il n’existe pas de stratégies de pénalité, de sentiment de culpabilité chez les individus et que chaque agent est rationnel.
    Keywords: behavior rule, public goods, stock of cooperation, trust, biens public, confiance, règle de conduite, stock de coopération
    JEL: C73 H41 D60
    Date: 2006–10–01
  42. By: Alvaredo, Facundo; Saez, Emmanuel
    Abstract: This paper presents series on top shares of income and wealth in Spain over the 20th century using personal income and wealth tax return statistics, as well as employment income statistics. Top income shares are highest in the 1930s in spite of substantial individual income tax evasion biasing down our estimates. This suggests that income inequality was much higher in the pre-civil war period than it is today. Employment income concentration was moderate in the 1960s and 1970s and dropped sharply from 1975 to 1977 during the transition to democracy. Top income shares have increased significantly since the mid-1990s due to an increase in wage income concentration and a surge in realized capital gains. Financial wealth concentration has also increased in the 1990s but real estate prices have increased sharply as well. As real estate wealth is less concentrated than financial wealth, on net, top wealth shares have declined slightly during the period 1982-2002. The wealth tax exemption of stocks for owners-managers since 1994 has gradually eroded by almost 40% the taxable wealth at the top, creating a very serious loophole in the wealth tax as well as large efficiency costs.
    Keywords: income; wealth inequality
    JEL: D3 H3
    Date: 2006–09
  43. By: Galasso, Vincenzo
    Abstract: Conventional economic wisdom suggests because of the aging process, social security systems will have to be retrenched. In particular, retirement age will have to be largely increased. Yet, is this policy measure feasible in OECD countries? Since the answer belongs mainly to the realm of politics, I evaluate the political feasibility of postponing retirement under aging in France, Italy, the UK, and the US. Simulations for the year 2050 steady state demographic, economic and political scenario suggest that retirement age will be postponed in all countries, while the social security contribution rate will rise in all countries, but Italy. The political support for increasing the retirement age stems mainly from the negative income effect induced by aging, which reduces the profitability of the existing social security system, and thus the individuals net social security wealth.
    Keywords: aging; political equilibria; postponing retirement
    JEL: D72 H5 H53
    Date: 2006–08
  44. By: William E. Even (Miami University and IZA Bonn); David A. Macpherson (Florida State University and IZA Bonn)
    Abstract: This study examines the consequences of a pension fund investing in the stock of the sponsoring firm. Using a merger of data on pension asset holdings from IRS Form 5500 filings and financial data on the company’s stock from CRSP, two broad questions are addressed: First, what factors influence the extent of a pension fund’s investments in the employer’s stock? Second, when a pension invests in the employer’s stock, how much is lost as a result of poor diversification? The empirical results suggest that investments in employer stock are responsive to non-diversification costs, tax consequences, and employee ability to diversify the risk. There is also evidence that employers and employees weight these factors differentially in their decision of how much employer stock to include in the pension. Using actual return data on pension plans, we also find that concentrated investments in employer stock substantially reduce risk-adjusted return performance.
    Keywords: defined contribution pension, employer stock
    JEL: J30 G20
    Date: 2006–10
  45. By: Erhun KULA
    Abstract: Application of the social discount rate to public sector projects is one of the most crucial parameters in cost benefit analysis. Because of its importance some countries have a formal discount rate and method of discounting policies. The United Kingdom was one of the earliest to adopt a policy on discounting which started in 1967 and it is still evolving. This paper looks at the evolution of the British discounting policy with a number of constructive critical remarks focussing on the magnitude of the current rate as well as the method of discounting. It concludes that present 3.5% figure is rather low and discounting by using the declining rate is almost totally ineffective to care for future generations as compared with an alternative modified discounting which treats all generations in the same manner
    Keywords: Cost-Benefit Analysis, Discounting, Future Generations
    JEL: D61 D70 D90 H50 O12
    Date: 2006–10
  46. By: Lennart Flood (Göteborg Univers and IZA Bonn); Anders Klevmarken (Uppsala University and IZA Bonn); Andreea Mitrut (Andreea Mitrut)
    Abstract: This paper studies the income of Swedish households belonging to the baby boom generation, i.e. those born in the 1940-50. An international comparison as well as an historical presentation of income patterns is given. However, the main purpose is to generate the future income of the baby boom generation as they get older. A major result is that the income standard of the young-old will become much higher than that of the very old. If our simulations bear the stamp of realism, they suggest that we will see new and large poverty in Sweden among the very old in the future. The pension system contributes to this result. The “front loaded” design gives with its reduced wage indexation a higher income immediately after retirement but a much lower income at older age. From this perspective it is unfortunate that so much attention is given to the discussion of replacement rates. The replacement rate, although interesting in itself, completely misses the long run effect and just provides a comparison of incomes shortly after with incomes before retirement. If we instead focus on the relative income of older pensioners, the results become quite different. Our results challenge the conception of a sustainable pension system. If the relative income of older pensioner’s drops and at the same time expenditures for health and care increase, one might wonder how the old in our society will make both ends meet. If pensions become too small to meet “minimum standards,” the requirement of financial sustainability of the pension system results in an increasing financial burden on other parts of the general social protection system.
    Keywords: pension system, micro simulation, replacement rate
    JEL: H24 H31 H55
    Date: 2006–10
  47. By: van Ours, Jan C; Vodopivec, Milan
    Abstract: This paper investigates how the potential duration of unemployment benefits affects the quality of post-unemployment jobs. It takes advantage of a natural experiment introduced by a change in Slovenia’s unemployment insurance law that substantially reduced the potential benefit duration. Although this reduction strongly increased job finding rates, the quality of the post-unemployment jobs remained unaffected: the paper finds that the law change had no effect on either the type of the contract (temporary vs. permanent), the duration of the post-unemployment jobs, or the wage earned in this job.
    Keywords: job separation rates; post-unemployment wages; potential benefit duration; unemployment insurance
    JEL: C41 H55 J64 J65
    Date: 2006–07
  48. By: David J. EVANS
    Abstract: In relation to social project appraisal in EU countries, governments should try to agree on a single generally preferred method of discounting. Consistency of approach should result in the application of similar discount rates by countries. Before 2003, the use of different methods resulted in the application of widely divergent rates; for example, 8% in France, 3% in Germany and 6% in Britain. New appraisal guidance by the British Treasury in 2003 saw the official UK rate, now based solely on social time preference, reduced to just 3.5%. In 2005, France followed suit reducing its rate from 8% to 4%. This paper argues for a standard benchmark European discount rate of around 3%-4% based on social time preference (STPR).This rate is somewhat lower than the 5% rate suggested in the 2002 EC guide to cost-benefit analysis and, as such, its application should result in a more generous allocation of budget funds to longer-term projects. For estimation purposes, the most troublesome component of the STPR formula is the elasticity of marginal utility of consumption (e).This paper reviews recent evidence on e and argues for the application of more thoughtful approaches in order to establish a reliable interval estimate for EU countries
    Keywords: Cost-benefit analysis, social discount rate, European Union
    JEL: D61 H43
    Date: 2006–10
  49. By: Ariane Lambert Mogiliansky (Paris-Jourdan Sciences Economiques); Grigory Kosenok (NES)
    Abstract: In this paper, we investigate interaction between two firms engaged in a repeated procurement relationship modelled as a multiple criteria auction, and an auctioneer (a government employee) who has discretion in devising the selection criteria. A first result is that, in a one-shot context, favoritism turns the asymmetric information (private cost) procurement auction into a symmetric information auction (in bribes) for a common value prize. In a repeated setting we show that favoritism increases the gains from collusion and contributes to solving basic implementation problems for a cartel of bidders that operates in a stochastically changing environment. A most simple allocation rule where firms take turn in winning independently of stochastic government preferences and firms’ costs is optimal. In each period the selection criteria is fine-tailored to the in-turn winner: the "environment” adapts to the cartel. This result holds true when the expected punishment is a fixed cost. When the cost varies with the magnitude of the distortion of the selection criteria (compared with the true government’s preferences), favoritism only partially shades the cartel from the environment. Nevertheless, even in this case favoritism greatly simplifies matters for the cartel. We thus find that favoritism generally facilitates collusion at a high cost for society. Some policy implications of the analysis are suggested.
    Keywords: auction, collusion, favoritism, procurement
    JEL: D44 D73 H57
    Date: 2006–05
  50. By: Campos, Nauro F; Hsiao, Cheng; Nugent, Jeffrey B
    Abstract: Recent research convincingly shows that crises beget reform. Although the consensus is that economic crises foster macroeconomic stabilization, it is silent on which types of crises cause which types of reform. Is it economic or political crises that are the most important drivers of structural reforms? To answer this question we put forward evidence on trade and labour market liberalization from panel data on more than 100 developed and developing countries from 1950 to 2000. We find important differences in the effects of the two types of crises on the two reforms across regions and even from one measure of crisis to another. Yet, in general, we consistently find that political considerations (political crises as well as political institutions) are more important determinants of these reforms than economic crises. This finding is robust to the inclusion of interdependencies between the two types of crises, feedbacks between the two types of reform, the use of alternative measures of political and economic crises and whether or not the data are pooled across all countries or only across regions.
    Keywords: economic crisis; economic reform; labour market reform; political crisis; trade liberalisation
    JEL: E32 H11 K20 O40
    Date: 2006–08
  51. By: Randall P. Ellis (Department of Economics, Boston University); Ching-to Albert Ma (Department of Economics, Boston University)
    Abstract: This paper attempts to improve our understanding of why many small private employers in the US choose not to offer health insurance to their employees. We develop a theory model, simulate its predictions, and assesses whether the model helps explain empirical patterns of firm decisions to offer insurance. Our theory model provides an explanation for why many small firms do not offer health insurance to their employees even when it may seem attractive to firms, employees and insurers to do so. Small firms have relatively large between-firm variability in expected employee health care costs, and job turnover rates for young and old employees go down differentially when firms offer health insurance. This heterogeneity and differential change in turnover rates mean that expected health costs will increase once health insurance is offered. State regulations on annual rates of premium change, or insurer reluctance to publicly increase premiums rapidly mean that coverage is only offered to small firms at high premiums, those above initial expected costs. The resulting separating equilibrium is one in which some firms face high initial premiums, choose not to offer health insurance, and tolerate higher turnover rates than if offering insurance at lower premiums were feasible. High administrative costs of offering insurance by small firms exacerbate this dynamic selection problem. We examine the predictions of this model using data from the 1997 Robert Wood Johnson Foundation’s Employer Health Insurance Survey (EHIS), which contains establishment data on employees and their offerings of health insurance. We show that turnover rates are systematically higher for in industries not offering insurance. Consistent with previous studies, the EHIS data confirm that small firms are more heterogeneous in their age distribution, income, other health-related variables than large firms. Rather than interpreting this as causing small firms to choose not to offer insurance, we see this as partial evidence in support of our theoretical model that such heterogeneity is partly the consequence of whether health insurance is offered. We then use MEDSTAT MarketScan data from 1998-99 which has individual health care costs of 890,000 adult employees and their dependents. We develop predictive models of health care spending, and simulate distributions of firm-level expected health costs repeatedly for each firm by merging the MEDSTAT and EHIS samples by age, gender, and industry code. Small firms have a great deal of heterogeneity in expected costs. Even if employees are highly risk averse, many small firms will find it unattractive to offer insurance given with high administrative costs even when large subsidies are provided. Moreover, high turnover rates make it easy for firms to quickly change the expected costs, making it difficult for insurers to commit to constant premiums when offering insurance.
    JEL: D45 H40
    Date: 2005–09

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