nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒11‒12
thirteen papers chosen by
Peren Arin
Massey University

  1. Restoring Fiscal Sustainability in the Euro Area: Raise Taxes or Curb Spending? By Boris Cournède; Frédéric Gonand
  2. Cooperative Behavior and Social Interaction By Jack Ochs; John Duffy
  3. Giving Little by Little By Jack Ochs; John Duffy; Lise Vesterlund
  4. Political orientation of government and stock market returns By Bialkowski, Jedrzej; Gottschalk, Katrin; Wisniewski, Tomasz
  5. Stock market volatiltity around national elections By Bialkowski, Jedrzej; Gottschalk, Katrin; Wisniewski, Tomasz
  6. The Control of Land Rent in the Fortified Farming Town By John Hartwick
  7. Efficiency inducing taxation for polluting oligopolists: the irrelevance of privatization By Claude, Denis; Tidball, Mabel
  8. Social discount rates for the European Union: an overview By Michael SPACKMAN
  9. Subject Pool Effects in a Corruption Experiment: A Comparison of Indonesian Public Servants and Indonesian Students By Vivi Alatas; Lisa Cameron; Ananish Chaudhuri; Nisvan Erkal; Lata Gangadharan
  10. The Rich in Argentina over the Twentieth Century: 1932-2004 By Facundo, Alvaredo
  11. El Paso Property Tax Abatement Ineffectiveness By Fullerton, Thomas; Aragones-Zamudio, Victor
  12. Externalities, Social Pressures, and Political Parties By Amihai Glazer
  13. Inflation and the underground economy By Ahiabu, Stephen

  1. By: Boris Cournède; Frédéric Gonand
    Abstract: With population ageing, fiscal consolidation has become of paramount importance for euro area countries. Consolidation can be pursued in various ways, with different effects on potential growth, which itself will be dragged down by ageing. A dynamic general equilibrium model with overlapping generations and a public finance block (including a pay-as-you-go pension regime, a health care system, non ageingrelated public spending and a stock of debt to be repaid) is used to compare the macroeconomic impact of four scenarios: a) increasing taxes to finance unchanged pensions and repay public debt, b) lowering future pension replacement rates and repaying public debt through a lower ratio of non ageing-related outlays to GDP, c) raising the retirement age by 1.25 years per decade and increasing taxes only to pay off debt, and d) increasing the retirement age by 1.25 years per decade and paying off debt through a lower ratio of non ageing-related expenditure to GDP. This last scenario is the one where growth is strongest: with gradual increases in the retirement age and spending restraint, average GDP growth in the 2010s would be 0.34 percentage point stronger than in a scenario where fiscal consolidation is achieved exclusively through tax hikes. The appropriate conclusion from the model is not that public spending is bad per se, but that cuts to lower-priority spending items can deliver surprisingly large income gains compared with the alternative of raising taxes. <P>Rétablir la soutenabilité des finances publiques dans la zone euro : Augmenter les impôts ou maïtriser les dépenses ? <BR>Le vieillissement démographique renforce la nécessité d'un redressement des finances publiques dans la zone euro. Ce redressement peut emprunter plusieurs voies dont les effets sur la croissance potentielle sont variables, et dans un contexte où le vieillissement lui-même pèse sur l'activité à long terme. Un modèle d'équilibre général dynamique avec générations imbriquées, intégrant une modélisation des finances publiques avec un régime de retraites par répartition, un système d'assurance-maladie, des dépenses publiques non liées à l'âge et un stock de dette publique à rembourser, permet d'étudier l'impact macroéconomique de quatre scénarios de consolidation: a) hausse généralisée des prélèvements obligatoires pour financer l'accélération des dépenses sociales et rembourser la dette, b) baisse des taux de remplacement pour les futurs retraités et maîtrise des dépenses publiques non liées à l'âge pour rembourser la dette, c) augmentation de l'âge moyen de départ à la retraite de 1.25 année par décade et augmentation des impôts limitée au remboursement de la dette, d) augmentation de l'âge de départ à la retraite de 1.25 année par décade et remboursement de la dette par maîtrise des dépenses publiques. C'est ce dernier scénario qui aboutit au taux de croissance le plus élevé: une augmentation graduelle de l'âge de la retraite et une maîtrise des dépenses non liées à l'âge permettrait de relever le taux moyen de croissance potentielle pendant la décennie 2010 de 1/3 de point de PIB dans la zone euro, par rapport à une consolidation procédant par hausses générales d'impôts. La conclusion de cet exercice ne consiste pas à prétendre que les dépenses publiques seraient mauvaises en soi pour l'économie, mais qu'une baisse des dépenses dans des secteurs non prioritaires permettrait de dégager des gains significatifs en matière de croissance par comparaison à un recours massif aux prélèvements obligatoires.
    Keywords: public debt, dette publique, ageing, dépenses publiques, public expenditure, vieillissement, zone Euro, fiscal consolidation, fiscal sustainability, consolidation fiscale, euro area, potential growth, croissance potentielle, soutenabilité des finances publiques, general equilibrium, équilibre général
    JEL: D58 E27 E60 H55 H63 J11
    Date: 2006–10–30
  2. By: Jack Ochs; John Duffy
    Date: 2006–01
  3. By: Jack Ochs; John Duffy; Lise Vesterlund
    Date: 2006–01
  4. By: Bialkowski, Jedrzej; Gottschalk, Katrin; Wisniewski, Tomasz
    Abstract: Prior research documented that U.S. stock prices tend to grow faster during Democratic administrations than during Republican administrations. This letter examines whether stock returns in other countries also depend on the political orientation of the incumbents. An analysis of 24 stock markets and 173 different governments reveals that there are no statistically significant differences in returns between left-wing and right-wing executives. Consequently, international investment strategies based on the political orientation of countries' leadership are likely to be futile.
    Keywords: Stock market returns; Politics; Presidential puzzle
    JEL: G14 G11 G15
    Date: 2006–07
  5. By: Bialkowski, Jedrzej; Gottschalk, Katrin; Wisniewski, Tomasz
    Abstract: This paper investigates a sample of 27 OECD countries to test whether national elections induce higher stock market volatility. It is found that the country-specific component of index return variance can easily double during the week around an Election Day, which shows that investors are surprised by the election outcome. Several factors, such as a narrow margin of victory, lack of compulsory voting laws, change in the political orientation of the government, or the failure to form a coalition with a majority of seats in parliament significantly contribute to the magnitude of the election shock. Our findings have important implications for the optimal strategies of risk-averse stock market investors and participants of the option markets.
    Keywords: Political risk; National elections; Stock market volatility
    JEL: G12 G14 G11
    Date: 2006–01
  6. By: John Hartwick (Queen's University)
    Abstract: We consider costly administration at the center of a farming community surrounding a fortified village. Land rent taxation is high cost mode of financing central administration in a tax incidence sense. Participatory administration by the governed is a lower cost alternative. We speculate why the low cost option has been out-competed by its higher cost alternative throughout history. We also take up constraints on predation on farmers by a landlord at the center.
    Keywords: administrative structure, public goods, welfare cost
    JEL: H41 H11
    Date: 2006–10
  7. By: Claude, Denis; Tidball, Mabel
    Abstract: This paper examines the optimal environmental policy in a mixed oligopoly when pollution accumulates over time. Specifically, we assume quantity competition between several private firms and one partially privatized firm. The optimal emission tax is shown to be independent of the weight the privatized firm puts on social welfare. The optimal tax rule, the accumulated stock of pollution, firms' production paths and profit streams are identical irrespective of the public firm's ownership status.
    Keywords: Mixed Oligopoly; Pollution Control; Markovian Taxation.
    JEL: L51 Q58 L33
    Date: 2006–07–10
  8. By: Michael SPACKMAN
    Abstract: Time discounting in the public sector remains a source of confusion and some academic controversy. The very concept of a â€social†discount rate, not revealed by the market, is rejected by mainstream financial economics. Elsewhere the setting of public sector discount rates equal to the commercial return on private investment continues to have wide appeal. Both these approaches are flawed. More widely favoured by experts in the field today is a rate derived as the sum of pure time preference for marginal utility and a factor reflecting the decline in marginal utility of income as per capita income increases. However controversy continues about pure time preference, especially in the absence of any empirical data on people’s social (as opposed to individual) preferences. There is empirical evidence from several sources on the income elasticity of marginal utility, but it is very thin, although informed opinion, for developed economies, generally lies today on the range of -1 to -2. The discount rate is also often seen by ministers and officials as an instrument to promote their own national or departmental policy objectives. Further problems arise from confusions between discounting, the government cost of capital, and the rate of return for a public body trading in competitive markets. Within the EU there is much to be said for each Member State establishing its own standard government discount rate for general use, which might in most cases be in the region of 4% to 5% in real terms. However the application of discounting to the very long term is at best contentious. And discounting should not be allowed to divert attention from other, often much more important appraisal assumptions
    Keywords: Social discount rates, EU Structural Funds
    JEL: D61 D70 D90 H50
    Date: 2006–10
  9. By: Vivi Alatas; Lisa Cameron; Ananish Chaudhuri; Nisvan Erkal; Lata Gangadharan
    Abstract: We report results from a corruption experiment with Indonesian public servants and Indonesian students. Our results suggest that although both subject pools show a high level of concern with the extent of corruption in Indonesia, the Indonesian public servant subjects have a significantly lower tolerance of corruption than the Indonesian students. We find no evidence that this is due to a selection effect. The reasons given by the public servants for either engaging in or not engaging in corruption suggest that the differences in behavior across the subject pools are driven by their different real life experiences. For example, when abstaining from corruption public servants more often cite the need to reduce the social costs of corruption as a reason for their actions, and when engaging in corruption they cite low government salaries or a belief that corruption is a necessary evil in the current environment. In contrast, students give more simplistic moral reasons. We conclude by arguing that experiments such as the one considered in this paper can be used to measure forward-looking attitudinal change in society and that results obtained from different subject pools can complement each other in the determination of such attitudinal changes.
    Keywords: Corruption, Experiments, Subject Pool Effects
    JEL: C91 D73 O12 K42
    Date: 2006
  10. By: Facundo, Alvaredo
    Abstract: This paper presents series on top shares of income in Argentina from 1932 to 2004 based on personal income tax return statistics. Our results suggest that income concentration was higher during the 1930s and the first half of the 1940s than it is today. The recovery of the economy after the Great Depression, favored but the international trade conditions during and after the Second World War, and the visible effects of the peronist policy between 1945 and 1955 generated an inverted U shape in the dynamics of top shares. The peronist redistributive policy, successful and visible, seemed to have proved limited when compared with the central economies. Since then, and after a new upward movement between 1955 and 1959, top shares seem to have described the U-shape pattern found in the developed English-speaking economies. The levels of concentration in 1953 were very similar to those found in 1997.
    Keywords: income inequality taxation
    JEL: O1 D3 H3
    Date: 2006–11–01
  11. By: Fullerton, Thomas; Aragones-Zamudio, Victor
    Abstract: Similar to many communities throughout the United States, the City of El Paso, Texas utilizes property tax abatements as a means for inducing companies to invest in the local economy. Abatements in El Paso were first introduced in 1988. Although many studies have examined the effectiveness of municipal abatement policies, most of those efforts rely on survey questionnaires or cross-sctional data. This study employs a time series data set to examine whether municipal authorities have achieved the objectives of the abatement program in El Paso.
    Keywords: Municipal property tax abatements; metropolitan development; applied econometrics
    JEL: R11 H25
    Date: 2006
  12. By: Amihai Glazer (Department of Economics, University of California-Irvine)
    Abstract: Members of political parties talk to each other often, and may thereby influence each other. For example, a liberal in a party of moderates may moderate his views. At the same time, the moderates in the party may become more sympathetic to liberal views. Voters in a district may favor such effects if they care about the ideology of officeholders in other districts. They may therefore prefer a candidate who affiliates with a party over an independent with the same position.
    Date: 2006–10
  13. By: Ahiabu, Stephen
    Abstract: This paper studies the optimal rate of seigniorage in an economy characterized by decentralized trade and a tax-evading underground sector. The economy has buyers, some of whom visit the formal market, while others visit the underground market. I find that the optimal rate of inflation depends on which of the two sectors, formal or underground, is more crowded/congested with buyers. If the underground sector is more crowded, the optimal inflation rate is as high as 42% per annum for Peru. That is, I offer a possible motivation for the high rates of inflation observed in that country from the mid 1970s up to the mid 1990s. If the formal sector is more crowded, optimal inflation falls to about 1.4%, which is close to the rate in 2005. Friedman rule is not optimal.
    Keywords: Inflation; Market Congestion; Ramsey Equilibrium; Underground Economy
    JEL: E6 E26 H21
    Date: 2006–10

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