nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒11‒04
eighteen papers chosen by
Peren Arin
Massey University

  1. A New Framework for Analyzing and Managing Macrofinancial Risks of an Economy By Dale F. Gray; Robert C. Merton; Zvi Bodie
  2. Pension systems and the allocation of macroeconomic risk By Bovenberg,Lans; Uhlig,Harald
  3. Differential Time and Money Pricing as a Mechanism for In-kind Redistribution By Jeremy Clark; Bonggeun Kim
  4. Paying Vs. Waiting in the Pursuit of Specific Egalitarianism By Jeremy Clark; Bonggeun Kim
  5. Puzzling tax attitudes and labels By Löfgren, Åsa; Nordblom, Katarina
  6. A Common Pool Theory of Deficit Bias Correction By Krogstrup, Signe; Wyplosz, Charles
  7. Tariff-Tax Reforms and Market Access By Kreickemeier, Udo; Raimondos-Møller, Pascalis
  8. Optimal accumulation in an endogenous growth setting with human capital By Frédéric, DOCQUIER; Oliver, Paddison; Pierre PESTIEAU
  9. Tax cuts and employment: Evidence from Finnish linked employer-employee data By HANNU PIEKKOLA
  10. Progressive Estate Taxation By Emmanuel Farhi; Ivan Werning
  11. Lobbying, Corruption and Political Influence By Campos, Nauro F; Giovannoni, Francesco
  12. Demographic Change, Social Security Systems, and Savings By David E. Bloom; David Canning; Rick Mansfield; Michael Moore
  13. Public Sector Motivation and Development Failures By Macchiavello, Rocco
  14. Misreporting, retroactive audit and redistribution. By Sandrine Spaeter; Marc Willinger
  15. The fiscal framework and urban infrastructure finance in China By Ming Su; Quanhou Zhao
  16. Professor Qualities and Student Achievement By Florian Hoffmann; Philip Oreopoulos
  17. Cash-on-Hand and Competing Models of Intertemporal Behavior: New Evidence from the Labor Market By David Card; Raj Chetty; Andrea Weber
  18. Mixed Oligopoly Equilibria When Firms' Objectives Are Endogenous By De Donder, Philippe; Roemer, John E

  1. By: Dale F. Gray; Robert C. Merton; Zvi Bodie
    Abstract: The high cost of international economic and financial crises highlights the need for a comprehensive framework to assess the robustness of national economic and financial systems. This paper proposes a new comprehensive approach to measure, analyze, and manage macroeconomic risk based on the theory and practice of modern contingent claims analysis (CCA). We illustrate how to use the CCA approach to model and measure sectoral and national risk exposures, and analyze policies to offset their potentially harmful effects. This new framework provides economic balance sheets for inter-linked sectors and a risk accounting framework for an economy. CCA provides a natural framework for analysis of mismatches between an entity's assets and liabilities, such as currency and maturity mismatches on balance sheets. Policies or actions that reduce these mismatches will help reduce risk and vulnerability. It also provides a new framework for sovereign capital structure analysis. It is useful for assessing vulnerability, policy analysis, risk management, investment analysis, and design of risk control strategies. Both public and private sector participants can benefit from pursuing ways to facilitate more efficient macro risk accounting, improve price and volatility discovery, and expand international risk intermediation activities.
    JEL: E5 E6 G2 H0
    Date: 2006–10
  2. By: Bovenberg,Lans; Uhlig,Harald (Tilburg University, Center for Economic Research)
    Abstract: This paper explores the optimal risk sharing arrangement between generations in an overlapping generations model with endogenous growth. We allow for nonseparable preferences, paying particular attention to the risk aversion of the old as well as overall "life-cycle" risk aversion. We provide a fairly tractable model, which can serve as a starting point to explore these issues in models with a larger number of periods of life, and show how it can be solved. We provide a general risk sharing condition, and discuss its implications. We explore the properties of the model quantitatively. Among the key findings are the following. First and for reasonable parameters, the old typically bear a larger burden of the risk in productivity surprises, if old-age risk-aversion is smaller than life risk aversion, and vice versa. Thus, it is not necessarily the case that the young ensure smooth consumption of the old. Second, consumption of the young and the old always move in the same direction, even for population growth shocks. This result is in contrast to the result of a fully-funded decentralized system without risk-sharing between generations. Third, persistent increases in longevity will lead to lower total consumption of the old (and thus certainly lower per-period consumption of the old) as well as the young as well as higher work effort of the young. The additional resources are instead used to increase growth and future output, resulting in higher consumption of future generations.
    Keywords: social optimum;pensions systems;risk sharing;overlapping
    JEL: E21 E61 E62 O40 H21 H55
    Date: 2006
  3. By: Jeremy Clark (University of Canterbury); Bonggeun Kim
    Abstract: We propose a mechanism to implement the distributional goal of "specific egalitarianism", or that allocation of a good be independent of income, but increasing in relative strength of preference or need. Governments could offer the good at multiple "outlets" that charge different money and time prices. Individuals would self-select between outlets based on time opportunity cost. We show conditions under which differential pricing achieves specific egalitarianism more efficiently than uniform public provision funded from income tax, with or without optional private purchase. Differential pricing becomes more efficient than uniform provision as 1) the relative importance of the good rises, 2) the elasticity of substitution between goods falls, 3) variation in preferences increases and 4) income inequality rises or the proportion of the poor falls.
    Keywords: In-kind provision; specific egalitarianism; differential pricing
    JEL: D30 D45 H31 I18
    Date: 2006–02–25
  4. By: Jeremy Clark (University of Canterbury); Bonggeun Kim
    Abstract: We propose an allocation mechanism for publicly providing a private good such that the final allocation is simultaneously independent of income and increasing in strength of preference or need. The "pay or wait" mechanism consists of offering the good for sale at two outlets. The 'queuing' outlet would charge a low money price per unit, but high waiting timer per unit. The 'pricing' outlet would charge a relatively high money price with rapid service. High wage individuals will opt for the pricing outlet, and low wage individuals the queuing outlet. If the policy maker stocks the outlets in proportion to the distribution of high and low wage earners in the population, consumers of both wages will purchase the same amount on average, while those who value the good more relative to other goods will receive more of it. These outcomes are at risk if the good can be privately resold, but may be preserved if the policy maker can create transactions costs associated with resale.
    Keywords: In-kind provision; redistribution; specific egalitarianism
    JEL: D30 D45 H31 I18
    Date: 2006–03–10
  5. By: Löfgren, Åsa (Department of Economics, School of Business, Economics and Law, Göteborg University); Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: We find that through labeling one can significantly affect attitudes towards a tax. The gasoline tax meets a stronger reluctance than virtually the same tax when it is called the CO2 tax on gasoline. <p>
    Keywords: Gasoline tax; CO2 tax on gasoline; attitude; framing
    JEL: H23 Q58
    Date: 2006–10–18
  6. By: Krogstrup, Signe; Wyplosz, Charles
    Abstract: The budget deficit bias is modeled as the result of a domestic common pool problem and of an international externality. Along with Piguvian taxes, a number of policy measures are examined and welfare-ranked: deficit ceilings, golden rules and delegation. In general, the combination of delegation and an optimally-set deficit ceiling deliver the social optimum, even if the deficit ceiling is not credible.
    Keywords: common pool; deficit bias; fiscal institutions; fiscal restraints; fiscal rules; stability pact
    JEL: E61 E62 H6
    Date: 2006–10
  7. By: Kreickemeier, Udo; Raimondos-Møller, Pascalis
    Abstract: Reducing tariffs and increasing consumption taxes is a standard IMF advice to countries that want to open up their economy without hurting government finances. Indeed, theoretical analysis of such a tariff-tax reform shows an unambiguous increase in welfare and government revenues. The present paper examines whether the country that implements such a reform ends up opening up its markets to international trade, i.e. whether its market access improves. It is shown that this is not necessarily so. We also show that, comparing to the reform of only tariffs, the tariff-tax reform is a less efficient proposal to follow both as far as it concerns market access and welfare.
    Keywords: consumption tax reform; market access; tariff reform
    JEL: F13 H20
    Date: 2006–10
  8. By: Frédéric, DOCQUIER (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Oliver, Paddison; Pierre PESTIEAU (UNIVERSITE CATHOLIQUE DE LOUVAIN, Center for Operations Research and Econometrics (CORE))
    Abstract: This paper considers a three-overlapping-generations model of endogeneous growth wherein human capital is the engine of growth. It first contrasts the ‘laissez-faire’ and the optimal solutions. Three possible accumulation regimes are distinguished. Then it discusses a standard set of tax-transfer instruments that allow for decentralization of the social optimum. Within the limits of our model, the rationale for the standard pattern of intergenerational transfers (the working-aged financing the education of the young and the pension of the old) is seriously questioned. On pure efficiency grounds, the case for generous public pensions is rather weak.
    Keywords: Endogenous growth, human capital, intergenerational transfers
    JEL: D90 H21 H52
    Date: 2006–05–15
    Abstract: We analyse taxes and employment in a system of firm-level labour demand and industry-level regional labour supply, using linked employer-employee data from Finland in 1990- 2003. We show that virtually all of the wage tax burden is borne by employers since wages fully adjust. Labour demand also responds with short lags within a year or two to cuts in taxes and labour costs. A unit decrease in wage tax rate (2.2% lower taxes) leads to an average long-run employment improvement of 0.8%, while an equivalent cut in social security payments has effects that are nearly twice as low. Tax cuts thus explain a substantial part of the recent improvement in employment since the deep recession of the early 1990s (besides the release of firms’ liquidity constraints). Nearly half of the tax revenue loss due to wage tax cuts is paid back in the form of higher employment and lower unemployment costs. Tax cuts with emphasis on low-wage, low-productivity firms may appear undesirable, as tax cuts cure employment of low- skilled workers especially in skill-intensive firms.
    Keywords: taxation on labour, labour demand, regional labour supply, wage bargaining, wage elasticity
    JEL: J31 J59 C24
    Date: 2006–10–26
  10. By: Emmanuel Farhi; Ivan Werning
    Abstract: For an economy with altruistic parents facing productivity shocks, the optimal estate taxation is progressive: fortunate parents should face lower net returns on their inheritances. This progressivity reflects optimal mean reversion in consumption, which ensures that a long-run steady state exists with bounded inequality - avoiding immiseration.
    JEL: E6
    Date: 2006–10
  11. By: Campos, Nauro F; Giovannoni, Francesco
    Abstract: Conventional wisdom suggests that lobbying is the preferred mean for exerting political influence in rich countries and corruption the preferred one in poor countries. Analyses of their joint effects are understandably rare. This paper provides a theoretical framework that focus on the relationship between lobbying and corruption (that is, it investigates under what conditions they are complements or substitutes). The paper also offers novel econometric evidence on lobbying, corruption and influence using data for about 4000 firms in 25 transition countries. Our results show that (a) lobbying and corruption are substitutes, if anything; (b) firm size, age, ownership, per capita GDP and political stability are important determinants of lobby membership; and (c) lobbying seems to be a much more effective instrument for political influence than corruption, even in poorer, less developed countries.
    Keywords: corruption; institutions; lobbying; transition
    JEL: D72 E23 H26 O17 P16
    Date: 2006–10
  12. By: David E. Bloom; David Canning; Rick Mansfield; Michael Moore
    Abstract: In theory, improvements in healthy life expectancy should generate increases in the average age of retirement, with little effect on savings rates. In many countries, however, retirement incentives in social security programs prevent retirement ages from keeping pace with changes in life expectancy, leading to an increased need for life-cycle savings. Analyzing a cross-country panel of macroeconomic data, we find that increased longevity raises aggregate savings rates in countries with universal pension coverage and retirement incentives, though the effect disappears in countries with pay-as-you-go systems and high replacement rates.
    JEL: E1 J2
    Date: 2006–10
  13. By: Macchiavello, Rocco
    Abstract: This paper provides a theoretical analysis of the relationship between public sector motivation and development. In the model the public sector produces a public good and workers are heterogeneous in terms of public sector motivation (PSM). Wages in the private sector are increasing in the quality of the public good. In this context, public sector wage premia (PSWP) have two opposite effects: low PSWP help screen workers with PSM into the public sector, while high PSWP help motivate workers to be honest. Raising PSWP may not improve the quality of governance and multiple equilibria might arise. The model highlights that the relative importance of workers selection and provision of "on the job" incentives in the public sector varies in systematic ways with wages in the private sector. I provide anecdotal and original empirical evidence consistent with the theoretical predictions and discuss some policy implications for public sector reforms in developing countries.
    Keywords: corruption; developing countries; multiple equilibria; public sector motivation
    JEL: D73 H10 O11 P49
    Date: 2006–10
  14. By: Sandrine Spaeter; Marc Willinger
    Abstract: In this paper, we investigate an audit policy that allows a regulator to control past declarations of an agent who is caught to fraud in the current period or to adopt an action that is not desirable for Society. Coupled with redistribution effects due to the production of a public good, we show that retroactivity has not always the desired effect on the level of evasion or the level of effort, once the agent has decided to deviate from a given objective. Nevertheless, we derive conditions under which retroactivity lessens fraudulent behaviors, in quantity and in value. As a related result, authorities should communicate about how they use the individual contributions but information should not be completely transparent in order to fight efficiently against deviation. Redistribution and retroactivity may have opposite effects on the behavior of the agent when combined together.
    Keywords: moral hazard, retroactive audit, redistribution, public good, fraud.
    JEL: D82 H23 H30 Q25
    Date: 2006
  15. By: Ming Su; Quanhou Zhao
    Abstract: China has experienced more than 25 years of extraordinary economic growth. Underlying this growth has been a decentralized fiscal system, in which provinces and large cities are given the freedom to make infrastructure investments to stimulate local development, and are allowed to retain a large part of the fiscal revenues that are generated from economic activity. Although successful as a growth strategy, this policy created two problems for national fiscal management. First, it significantly reduced the central government ' s share of fiscal revenues, which fell from 34.8 percent in 1980 to 22 percent in 1992. Second, it widened economic and fiscal disparities between the rapidly growing urban coastal region and the rest of the country. Rapid growth in subnational debt (which rose 23-fold in a decade) and subnational nonperforming loans (estimated by the authors to range between US$100 billion and US$150 billion) has placed pressure on China ' s financial system. Traditionally, China has favored bank lending as a source of finance because the banking system has provided a vehicle for central political control over local debt. But as China ' s financial system matures, creditworthiness standards must become more important. The authors recommend greater use of the revenue streams from infrastructure assets as a financing source, and gradual relaxation of central political control over subnational debt. One step in this direction would permit leading cities to issue municipal bonds based on objective financial standards.
    Keywords: Banks & Banking Reform,Urban Economics,Public & Municipal Finance,Municipal Financial Management,Intergovernmental Fiscal Relations and Local Finance Management
    Date: 2006–11–01
  16. By: Florian Hoffmann; Philip Oreopoulos
    Abstract: This paper uses a new administrative dataset of students at a large university matched to courses and instructors to analyze the importance of teacher quality at the postsecondary level. Instructors are matched to both objective and subjective characteristics of teacher quality to estimate the impact of rank, salary, and perceived effectiveness on grade, dropout and subject interest outcomes. Student fixed effects, time of day and week controls, and the fact that first year students have little information about instructors when choosing courses helps minimize selection biases. We also estimate each instructor's value added and the variance of these effects to determine the extent to which any teacher difference matters to short-term academic outcomes. The findings suggest that subjective teacher evaluations perform well in reflecting an instructor's influence on students while objective characteristics such as rank and salary do not. Whether an instructor teaches full-time or part-time, does research, has tenure, or is highly paid has no influence on a college student's grade, likelihood of dropping a course or taking more subsequent courses in the same subject. However, replacing one instructor with another ranked one standard deviation higher in perceived effectiveness increases average grades by 0.5 percentage points, decreases the likelihood of dropping a class by 1.3 percentage points and increases in the number of same-subject courses taken in second and third year by about 4 percent. The overall importance of instructor differences at the university level is smaller than that implied in earlier research at the elementary and secondary school level, but important outliers exist.
    JEL: H52 I2
    Date: 2006–10
  17. By: David Card; Raj Chetty; Andrea Weber
    Abstract: This paper presents new tests of the permanent income hypothesis and other widely used models of household behavior using data from the labor market. We estimate the "excess sensitivity" of job search behavior to cash-on-hand using sharp discontinuities in eligibility for severance pay and extended unemployment insurance (UI) benefits in Austria. Analyzing data for over one-half million job losers, we obtain three empirical results: (1) a lump-sum severance payment equal to two months of earnings reduces the job-finding rate by 8-12% on average; (2) an extension of the potential duration of UI benefits from 20 weeks to 30 weeks similarly lowers job-finding rates in the first 20 weeks of search by 5-9%; and (3) increases in the duration of search induced by the two programs have little or no effect on subsequent job match quality. Using a search theoretic model, we show that estimates of the relative effect of severance pay and extended benefits can be used to calibrate and test a wide set of intertemporal models. Our estimates of this ratio are inconsistent with the predictions of a standard permanent income model, as well as naive "rule of thumb" behavior. The representative job searcher in our data is 70% of the way between the permanent income benchmark and credit-constrained behavior in terms of sensitivity to cash-on-hand.
    JEL: D91 E6 H5 J6
    Date: 2006–10
  18. By: De Donder, Philippe; Roemer, John E
    Abstract: We study a vertically differentiated market where two firms simultaneously choose the quality and price of the good they sell and where consumers also care for the average quality of the goods supplied. Firms are composed of two factions whose objectives differ: one is maximizing profit while the other maximizes revenues. The equilibrium concept we model, called Firm Unanimity Nash Equilibrium (FUNE), corresponds to Nash equilibria between firms when there is efficient bargaining between the two factions inside both firms. One conceptual advantage of FUNE is that oligopolistic equilibria exist in pure strategies, even though the strategy space (price, quality) is multi-dimensional. We first show that such equilibria are inefficient, with both firms underproviding quality. We then assume that the government takes a participation in one firm, which introduces a third faction, bent on welfare maximization, in that firm. We study the characteristics of equilibria as a function of the extent of government's participation. Our main results are twofold. First, government's participation in the firm providing the low quality good decreases efficiency while participation in the firm providing the high quality good increases efficiency. Second, the optimal degree of government's participation in the high-quality firm increases with how much consumers care for average equality.
    Keywords: factions; mixed oligopoly; party-unanimity Nash equilibrium; vertical differentiation
    JEL: D21 D43 D62 H82
    Date: 2006–10

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