nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒11‒18
forty papers chosen by
Peren Arin
Massey University

  1. Preferential Tax Regimes with Asymmetric Countries By Sam Bucovetsky; Andreas Haufler
  2. Optimal Income Taxation with a Risky Asset – The Triple Income Tax By Dirk Schindler
  3. Sustainability of Austrian Public Debt: A Political Economy Perspective By Gottfried Haber; Reinhard Neck
  4. Trade Spillovers of Fiscal Policy in the European Union: A Panel Analysis By Roel Beetsma; Massimo Giuliodori; Franc Klaassen
  5. Size and soft budget constraints By Ernesto Crivelli; Klaas Staal
  6. Taxes and Employment Subsidies in Optimal Redistribution Programs By Beaudry, Paul; Blackorby, Charles
  7. ACE vs. CBIT: Which is Better for Investment and Welfare? By Doina Maria Radulescu; Michael Stimmelmayr
  8. Fiscal institutions, fiscal policy and sovereign risk premia By Hallerberg, Mark; Wolff, Guntram B.
  9. Taxation and Capital Structure Choice – Evidence from a Panel of German Multinationals By Thiess Buettner; Michael Overesch; Ulrich Schreiber; Georg Wamser
  10. The Effect of Direct Democracy on Income Redistribution: Evidence for Switzerland By Lars P. Feld; Justina A.V. Fischer; Gebhard Kirchgässner
  11. Party Alternation, Divided Government, and Fiscal Performance within U.S. States By Peter Calcagno; Monica Escaleras
  12. Sustainable Social Spending in a Greying Economy with Stagnant Public Services: Baumol’s Cost Disease Revisited By Frederick van der Ploeg
  13. The Impact of Thin-Capitalization Rules on Multinationals’ Financing and Investment Decisions By Thiess Buettner; Michael Overesch; Ulrich Schreiber; Georg Wamser
  14. The Optimal Income Taxation of Couples By Henrik Jacobsen Kleven; Claus Thustrup Kreiner; Emmanuel Saez
  15. Taxing Human Capital Efficiently: The Double Dividend of Taxing Non-qualified Labour more Heavily than Qualified Labour By Wolfram F. Richter
  16. Fiscal Policy in the 1920s and 1930s. How much different it is from the post war period's policies By Matti Virén
  17. Optimum Commodity Taxation in Pooling Equilibria By Eytan Sheshinski
  18. Public-private Partnerships and Government Spending Limits By Eric Maskin; Jean Tirole
  19. Traffic Fatalities and Public Sector Corruption By Nejat Anbarci; Monica Escaleras; Charles Register
  20. Voluntary Emission Reductions, Social Rewards, and Environmental Policy By Michael Rauscher
  21. Are Public Subsidies to Higher Education Regressive ? By William R. Johnson
  22. Inflation Implications of Rising Government Debt By Chryssi Giannitsarou; Andrew Scott
  23. Why do firms hold so much cash? A tax-based explanation By C. Fritz Foley; Jay C. Hartzell; Sheridan Titman; Garry Twite
  24. Political Competitiveness By Casey B. Mulligan; Kevin K. Tsui
  25. Labor Supply and the Demand for Child Care: An Intertemporal Approach By Junichi Minagawa; Thorsten Upmann
  26. Public Sector Corruption and Natural Disasters: A Potentially Deadly Interaction By Monica Escaleras; Nejat Anbarci; Charles Register
  27. Alcohol Taxation and Regulation in the European Union By Sijbren Cnossen
  28. Collective (In)Action and Corruption: Access to Improved Water and Sanitation By Nejat Anbarci; Monica Escaleras; Charles Register
  29. Who’s Afraid of Foreign Aid? The Donors’ Perspective By Alberto Chong; Mark Gradstein
  30. What Motivates Common Pool Resource Users? Experimental Evidence from the Field By Maria Alejandra Vélez; John K. Stranlund; James J. Murphy
  31. Coordination of Pension Provision in a Divided Europe: The Role of Citizens' Preferences By Bas van Groezen; Hannah Kiiver; Brigitte Unger
  32. Making Work Pay for the Elderly Unemployed : Evaluating Alternative Policy Reforms for Germany By Peter Haan; Viktor Steiner
  33. School Quality and the Black-White Achievement Gap By Eric A. Hanushek; Steven G. Rivkin
  34. Longevity and Aggregate Savings By Eytan Sheshinski
  35. Should We Maximize National Happiness? By Bruno S. Frey; Alois Stutzer
  36. Stale information, shocks and volatility By Reint Gropp; Arjan Kadareja
  37. Trade, Conflicts, and Political Integration: the Regional Interplays By Vincent Vicard
  38. Heterogeneity and Common Pool Resources: Collective Management of Forests in Himachal Pradesh, India By Sirisha C. Naidu
  39. Inequality and the US Import Demand Function By Margarita Katsimi; Thomas Moutos
  40. Is Terrorism Eroding Agglomeration Economies in Central Business Districts? Lessons from the Office Real Estate Market in Downtown Chicago By Alberto Abadie; Sofia Dermisi

  1. By: Sam Bucovetsky; Andreas Haufler
    Abstract: Current policy initiatives taken by the EU and the OECD aim at abolishing preferential corporate tax regimes. This note extends Keen's (2001) analysis of symmetric capital tax competition under preferential (or discriminatory) and non-discriminatory tax regimes to allow for countries of different size. Even though size asymmetries imply a redistribution of tax revenue from the larger to the smaller country, a non-discrimination policy is found to have similar effects as in the symmetric model: it lowers the average rate of capital taxation and thus makes tax competition more aggressive in both the large and the small country.
    Keywords: corporate taxation, preferential tax regimes
    JEL: H25 H73
    Date: 2006
  2. By: Dirk Schindler
    Abstract: We show in a two-period world with endogenous savings and two assets, one of them exhibiting a stochastic return, that an interest-adjusted income tax is optimal. This tax leaves a riskless component of interest income tax free and taxes the excess return with a special tax rate. There is no trade-off between risk allocation and efficiency in intertemporal consumption. Both goals are reached. As the resulting tax system divides income into three parts, the tax can also be called a Triple Income Tax. This distinction and a special tax rate on the excess return are necessary in order to have an optimal risk-shifting effect.
    Keywords: optimal taxation, uncertainty, consumption tax, triple income tax
    JEL: H21
    Date: 2006
  3. By: Gottfried Haber; Reinhard Neck
    Abstract: Sustainablity of Austrian public debt is investigated in the context of political objectives such as stabilizing the business cycle, increasing chances for being re-elected and implementing the ideologies of political parties. Several tests indicate that Austrian fiscal policies were sustainable in the period 1960–1974, while from 1975 on, public debt grew much more rapidly. The development of public debt in Austria seems to be driven not primarily by ideology, but by structural causes and a shift in the budgetary policy paradigm. We find some empirical evidence that governments in Austria dominated by one party run higher deficits than coalition governments. There are no indications of a political business cycle.
    Keywords: fiscal policy, sustainability, time series, political economy
    JEL: E60 H60
    Date: 2006
  4. By: Roel Beetsma; Massimo Giuliodori; Franc Klaassen
    Abstract: We explore the international spillovers from fiscal policy shocks via trade in Europe. A fiscal expansion stimulates domestic activity, which leads to more foreign exports and, hence, higher foreign output. To quantify this, we combine a panel VAR model in government spending, net taxes and GDP with a panel trade model. On average, a public spending increase equal to 1% of GDP implies 2.3% more foreign exports over the first two years. The corresponding figure for an equal-size net tax reduction is 0.6%. Both estimates are statistically significant. As far as the effect on foreign activity is concerned, a 1% of GDP spending increase (net tax reduction) in Germany on average raises GDP of trading partners by 0.23% (0.06%) over the first two years. These figures are likely to form lower bounds for the actual effects and suggest that it may be worthwhile to further investigate the benefits from coordinated fiscal expansions (contractions) in response to European-wide cyclical downturns (upswings).
    Keywords: trade policy
    Date: 2005–10–26
  5. By: Ernesto Crivelli (University of Bonn, Lennéstraße 43, 53113 Bonn, Germany.; Klaas Staal (University of Bonn, Lennéstraße 37, 53113 Bonn, Germany.
    Abstract: There is much evidence against the so-called "too big to fail" hypothesis in the case of bailouts to sub-national governments. We look at a model where districts of different size provide local public goods with positive spillovers. Matching grants of a central government can induce socially-efficient provision, but districts can still exploit the intervening central government by inducing direct financing. We show that the ability of a district to induce a bailout from the central government and district size are negatively correlated.
    Keywords: bailouts, soft-budget constraints, jurisdictional size, public goods, spillovers
    JEL: H4 H7 R1
    Date: 2006–10
  6. By: Beaudry, Paul (University of British Columbia, and NBER.); Blackorby, Charles (University of Warwick and GREQAM)
    Abstract: This paper explores how to optimally set tax and transfers when taxation authorities : (1) are uninformed about individuals’ value of time in both market and non-market activities and (2) can observe both market-income and time allocated to market employment. In contrast to much of the optimal income taxation literature, we show that optimal redistribution in this environment involves distorting market employment upwards for low net-income individuals through phased-out wage-contingent employment subsidies, and distorting employment downward for high net-income individuals through positive and increasing marginal income tax rate. We also show that workfare may also be used as part of an optimal redistribution program.
    Keywords: Taxation ; Redistribution ; Wage Subsidies Screening
    JEL: D82 H21 H23
    Date: 2006
  7. By: Doina Maria Radulescu; Michael Stimmelmayr
    Abstract: This paper analyses the switch to an ACE or to a CBIT type of tax system starting from the present German tax system. We show that in case an ACE type of reform is financed by an increase in the VAT and not in the profit tax, it might be preferred to a CBIT even in the context of an open economy. Moreover, the required exogenous increase in the profit tax rate cannot ensure revenue neutrality on its own due to the negative general equilibrium effects it triggers on the whole economy. For a CBIT, the exogenous reduction in the tax rates on corporate and non-corporate profits leads to better results than when we allow for an endogenous change in the VAT. The best results arise when the CBIT is accompanied by a provision for immediate write-off and a lower profit tax or when the ACE with no additional capital gains taxation on the household side is financed by an increase in the VAT.
    Keywords: income taxation, computable general equilibrium modeling, welfare analysis
    JEL: C68 D58 D92 E62 H25
    Date: 2006
  8. By: Hallerberg, Mark; Wolff, Guntram B.
    Abstract: We investigate the effect of fiscal institutions such as the strength of the finance minister in the budget process and deficits on interest spreads contained in bond yields of the countries now belonging to the Eurozone. Deficits significantly increase risk premia measured by relative swap spreads. The effect of deficits is significantly lower under EMU. This effect partly results from neglecting the role of fiscal institutions. After controlling for institutional changes, fiscal policy remains a significant determinant of risk premia. We find that better institutions are connected with lower risk premia. Furthermore deficits and surpluses matter less for risk premia in countries with better institutions. This reflects the market perception, that better institutions will reduce fiscal dificulties and make the monitoring of annual developments less important. The results are robust to controlling for country fixed effects and different estimation methodologies.
    Keywords: Budget institutions, fiscal rules, sovereign risk premia, EMU, fiscal policy, government bond yields
    JEL: E43 E62 G12 G15 H61 H62
    Date: 2006
  9. By: Thiess Buettner; Michael Overesch; Ulrich Schreiber; Georg Wamser
    Abstract: This paper analyzes the impact of taxes and lending conditions on the financial structure of multinationals' foreign affiliates. The empirical analysis employs a large panel of affiliates of German multinationals in 26 countries in the period from 1996 until 2003. In accordance with the theoretical predictions, the effect of local taxes on leverage is positive for both types of debt. Moreover, while adverse local credit market conditions are found to reduce external borrowing, internal debt is increasing, supporting the view that the two channels of debt finance are substitutes.
    Keywords: corporate income tax, multinationals, capital structure, firm-level data
    JEL: G32 H25 H26
    Date: 2006
  10. By: Lars P. Feld; Justina A.V. Fischer; Gebhard Kirchgässner
    Abstract: There is an intensive dispute in political economics about the impact of institutions on income redistribution. While the main focus is on comparison between different forms of representative democracy, the influence of direct democracy on redistribution has attracted much less attention. According to theoretical arguments and previous empirical results, government policies of income redistribution are expected to be more in line with median voter preferences in direct than in representative democracies. In this paper, we find that institutions of direct democracy are associated with lower public spending and revenue, particularly lower welfare spending and broad-based income and property (wealth) tax revenue. Moreover, we estimate a model which explains the determinants of redistribution using panel data provided by the Swiss Federal Tax Office from 1981 to 1997 and a cross section of (representative) individual data from 1992. While our results indicate that less public funds are used to redistribute income and actual redistribution is lower, inequality is not reduced to a lesser extent in direct than in representative democracies for a given initial income distribution. This finding might well indicate the presence of efficiency gains in redistribution policies.
    Keywords: income redistribution, direct democracy, referenda, initiatives
    JEL: D70 D78 H11 I30
    Date: 2006
  11. By: Peter Calcagno (Department of Economics, College of Charleston); Monica Escaleras (Department of Economics, Florida Atlantic University)
    Abstract: The literature on U.S. state government fiscal performance has examined the role of institutional factors such as budget rules and divided government, but has largely ignored the impact of party alternation. This paper primarily focuses on whether party alternation in the governor’s office affects fiscal performance. Our hypothesis is that frequent party changes create a political environment that impacts fiscal performance. To further assess the impact of party alternation on fiscal performance, we consider our primary hypothesis in conjunction with the degree of division that exists between the governor’s office and the legislature. Using panel data from 37 states between 1971 and 2000 we test the hypothesis that frequent party alternation can be expected to affect fiscal performance and find strong support for the hypothesis.
    Keywords: Fiscal performance, state government, party alternation
    JEL: D72 H72
    Date: 2006–01
  12. By: Frederick van der Ploeg
    Abstract: Baumol’s cost disease states that relatively high productivity growth in manufacturing induces a steady increase in the relative price of human services. If demand for these services is inelastic or manufactured goods are necessities, the budget share of these services inexorably rises over time and labour gradually shifts from manufacturing to services. If the care for children and elderly releases time for households, labour supply and the budget share of human services expand over time. This paper addresses the sustainability of human services such as care and education in a greying economy if they are financed by labour taxes. A productivity growth differential in favour of the market sector pushes up the tax rate and public sector employment if private goods and public services are poor substitutes, labour supply is relatively inelastic and there are not too many pensioners and children. Private affluence and public squalor result if labour supply is very elastic, the dependency ratio is large and the market provides good substitutes for public services. Greying of the population boosts demand for public employment if the market provides poor substitutes for public services, but the provision of public services per dependent may fall due to the erosion of the tax base. Subsequently, we discuss the situation where market and public employment are imperfect substitutes for households, the utility of money is not constant and public sector productivity depends on public sector pay.
    Keywords: Baumol’s cost disease, Wagner’s law, time price, congestion of public services, public squalor, private affluence, tax burden, cost of public funds, differential productivity growth, greying of population, public sector pay
    JEL: E62 H00 J22 J31 J40 O40
    Date: 2006
  13. By: Thiess Buettner; Michael Overesch; Ulrich Schreiber; Georg Wamser
    Abstract: This paper analyzes the role of Thin-Capitalization rules for capital structure choice and investment decisions of multinationals. A theoretical analysis shows that the imposition of such rules tends to affect not only the leverage and the level of investment but also their tax-sensitivity. An empirical investigation of leverage and investment reported for affiliates of German multinationals in 24 countries in the period between 1996 and 2004 offers some support for the theoretical predictions. While Thin-Capitalization rules are found to be effective in restricting debt finance, investment is found to be more sensitive to taxes if debt finance is restricted.
    Keywords: corporate income tax, multinationals, leverage, Thin-Capitalization rules, firm-level data
    JEL: G32 H25 H26
    Date: 2006
  14. By: Henrik Jacobsen Kleven; Claus Thustrup Kreiner; Emmanuel Saez
    Abstract: This paper analyzes the optimal income tax treatment of couples. Each couple is modelled as a single rational economic agent supplying labor along two dimensions: primary and secondary earnings. We consider fully general joint income tax systems. Separate taxation is never optimal if social welfare depends on total couple incomes. In a model where secondary earners make only a binary work decision (work or not work), we demonstrate that the marginal tax rate of the primary earner is lower when the spouse works. As a result, the tax distortion on the secondary earner decreases with the earnings of the primary earner and actually vanishes to zero asymptotically. Such negative jointness is optimal because redistribution from two-earner toward one-earner couples is more valuable when primary earner income is lower. We also consider a model where both spouses display intensive labor supply responses. In that context, we show that, starting from the optimal separable tax schedules, introducing some negative jointness is always desirable. Numerical simulations suggest that, in that model, it is also optimal for the marginal tax rate on one earner to decrease with the earnings of his/her spouse. We argue that many actual redistribution systems, featuring family-based transfers combined with individually-based taxes, generate schedules with negative jointness.
    JEL: H21
    Date: 2006–11
  15. By: Wolfram F. Richter
    Abstract: Assuming decreasing returns to education and the endogenous supply of qualified and non-qualified labour it is shown to be efficient to supplement a consumption tax with positive incentives for education. If the return from education is isoelastic and if the choice is between (i) subsidizing the monetary cost of education and (ii) taxing nonqualified labour income more heavily than qualified labour income while keeping the effective cost of education constant, the latter policy is shown to be second-best efficient. In particular, any tax distortions should be constrained to labour choices while the choice of education should remain undistorted. The result holds for arbitrary utility functions.
    Keywords: endogenous choice of labour and education, efficient taxation, human capital investment, double dividend hypothesis
    JEL: H20 I20 J24
    Date: 2006
  16. By: Matti Virén
    Abstract: This paper deals with the fiscal behaviour of governments in the 1920s and 1930s. The intention is to see whether there were the same features in government behaviour as in the post-World War II era. In particular, attention is paid to asymmetric fiscal policies, ie the question of whether government deficits react differently to income growth and inflation during depressions and booms. The analysis is carried out using data primarily from the League of Nations. The data come from 32 countries and covers the period 1925?1938. Estimation results suggest the in pre-war period deficits were much less sensitive to output and did not show as many asymmetric features as in post-war period. Otherwise, the same regularities apply to the empirical results. In particular, this is true with the disciplinary role of government debt in terms of budget deficits.
    Keywords: Fiscal policy, deficit, asymmetric behaviour
    JEL: E62 H62
    Date: 2006–11–08
  17. By: Eytan Sheshinski
    Abstract: This paper extends the standard model of optimum commodity taxation (Ramsey (1927) and Diamond-Mirrlees (1971)) to a competitive economy in which some markets are inefficient due to asymmetric information. As in most insurance markets, consumers impose varying costs on suppliers but firms cannot associate costs to customers and consequently all are charged equal prices. In a competitive pooling equilibrium, the price of each good is equal to average marginal costs weighted by equilibrium quantities. We derive modified Ramsey-Boiteux Conditions for optimum taxes in such an economy and show that they include general-equilibrium effects which reflect the initial deviations of producer prices from marginal costs, and the response of equilibrium prices to the taxes levied. It is shown that condition on the monotonicity of demand elasticities enables to sign the deviations from the standard formula. The general analysis is applied to the optimum taxation of annuities and life insurance.
    Keywords: asymmetric information, pooling equilibrium, Ramsey-Boiteux Conditions, annuities
    JEL: D43 H21
    Date: 2006
  18. By: Eric Maskin (School of Social Science, Institute for Advanced Study); Jean Tirole (IDEI)
    Date: 2006–07
  19. By: Nejat Anbarci (Department of Economics, Florida International University); Monica Escaleras (Department of Economics, Florida Atlantic University); Charles Register (Department of Economics, Florida Atlantic University)
    Abstract: Traffic accidents result in 1 million deaths annually worldwide, though the burden is disproportionately felt in poorer countries. Typically, fatality rates from disease and accidents fall as countries develop. Traffic deaths, however, regularly increase with income, at least up to a threshold level, before declining. While we confirm this by analyzing 1,356 country-year observations between 1982 and 2000, our purpose is to consider the role played by public sector corruption in determining traffic fatalities. We find that such corruption, independent of income, plays a significant role in the epidemics of traffic fatalities that are common in relatively poor countries.
    Keywords: Traffic fatalities, corruption, vulnerable users
    JEL: O57 I32 H41
    Date: 2006–01
  20. By: Michael Rauscher
    Abstract: Social norms and intrinsic motivations lead to environmentally friendly behaviour even in the absence of environmental policy. This paper looks at the interactions of social norms and environmental regulation in their impact on individual behaviour. People obtain social rewards for voluntary abatement efforts. These social rewards may be crowded out by environmental regulation taking the shape of standards or taxes. Moreover, the paper shows that environmental externalities and externalities related to social norms interact and that an optimal environmental policy should consider both types of externalities. From a general welfare point of view, emission taxes are superior to emission standards, but people responsive to social rewards prefer standards.
    JEL: H30 Q28 Z13
    Date: 2006
  21. By: William R. Johnson
    Abstract: This paper estimates the dollar amount of public higher education subsidies received by U.S. youth and examines the distribution of subsidies and the taxes which finance them across parental and student income levels. Although youths from highincome families obtain more benefit from higher education subsidies, high-income households pay sufficiently more in taxes that the net effect of the spending and associated taxation is distributionally neutral or mildly progressive. These results are robust to alternative assumptions and are consistent with Hansen and Weisbrod’s earlier celebrated findings for California, although not with the conclusions often drawn from those findings.
    Keywords: : higher education, subsidy, progressivity Classification-JH23, I22
    Date: 2005–12
  22. By: Chryssi Giannitsarou; Andrew Scott
    Abstract: The intertemporal budget constraint of the government implies a relationship between a ratio of current liabilities to the primary deficit with future values of inflation, interest rates, GDP and narrow money growth and changes in the primary deficit. This relationship defines a natural measure of fiscal balance and can be used as an accounting identity to examine the channels through which governments achieve fiscal sustainability. We evaluate the ability of this framework to account for the fiscal behaviour of six industrialised nations since 1960. We show how fiscal imbalances are mainly removed through adjustments in the primary deficit (80-100%), with less substantial roles being played by inflation (0-10%) and GDP growth (0-20%). Focusing on the relation between fiscal imbalances and inflation suggests extremely modest interactions. This post WWII evidence suggests that the widely anticipated future increases in fiscal deficits, need not necessarily have a substantial impact on inflation.
    JEL: E31 E62
    Date: 2006–10
  23. By: C. Fritz Foley; Jay C. Hartzell; Sheridan Titman; Garry Twite
    Abstract: U.S. corporations hold significant amounts of cash on their balance sheets, and these cash holdings have been justified in the existing empirical literature by transaction costs and precautionary motives. An additional explanation, considered in this study, is that U.S. multinational firms hold cash in their foreign subsidiaries because of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms that face higher repatriation tax burdens hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. Estimates indicate that a one standard deviation increase in the tax burden from repatriating foreign income is associated with a 7.9% increase in the ratio of cash to net assets. In addition, certain firms, specifically those that are less financially constrained domestically and those that are more technology intensive, exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.
    JEL: F23 F3 G32 G35 H25
    Date: 2006–10
  24. By: Casey B. Mulligan; Kevin K. Tsui
    Abstract: Political competitiveness – which many interpret as the degree of democracy – can be modeled as a monopolistic competition. All regimes are constrained by the threat of "entry," and thereby seek some combination of popular support and political entry barriers. This simple model predicts that many public policies are unrelated to political competitiveness, and that even unchallenged nondemocratic regimes should tax far short of their Laffer curve maximum. Economic sanctions, odious debt repudiation, and other policies designed to punish dictators can have the unintended consequences of increasing oppression and discouraging competition. Since entry barriers are a form of increasing returns, democratic countries (defined according to low entry barriers) are more likely to subdivide and nondemocratic countries are more likely to merge. These and other predictions are consistent with previous empirical findings on comparative public finance, election contests, international conflict, the size of nations, and the Lipset hypothesis. As in the private sector, the number of competitors is not necessarily a good indicator of public sector competitiveness.
    JEL: H11 L12 P16
    Date: 2006–10
  25. By: Junichi Minagawa; Thorsten Upmann
    Abstract: In this paper, we present a model of a one parent–one child household where parental decisions on labor supply, leisure, and the demand for private and public child care are simultaneously endogenized and intertemporally determined. We characterize the path of the optimal decisions and investigate the impact of various public child care fees and of the quality of public child care services on the parent’s time allocation and the child’s performance level. Our results show that different public child care policies may induce substantially diverging effects, and reveal that each policy frequently faces a trade off between an encouragement of labor supply and an enhancement of the child’s performance.
    Keywords: child care fees and services, demand for child care, intertemporal optimization, labor supply, leisure, parental time allocation, private and public child care, public child care policy
    JEL: D91 H24 H42 J13 J22
    Date: 2006
  26. By: Monica Escaleras (Department of Economics, Florida Atlantic University); Nejat Anbarci (Department of Economics, Florida International University); Charles Register (Department of Economics, Florida Atlantic University)
    Abstract: A number of recent studies have, separately, addressed the effects of public sector corruption and natural disasters. In this paper, we intersect these lines of research to assess whether corruption in the public sector plays a role in the havoc wrought by large scale natural disasters, using major earthquakes as the example. We first develop a brief theoretical model of the relation between these two variables and then empirically test the proposition by analyzing 344 major quakes occurring in 42 countries during the 1975 through 2003 period. We use a Negative Binomial estimation strategy that takes into account the endogenous nature of corruption and controls for a number of other factors such as earthquake frequency, magnitude, distance from population centers, and a country’s level of development which have been shown to influence a quake’s destructiveness. The results provide strong evidence that public sector corruption is both positively and significantly related to the death toll a given earthquake takes on a population.
    Keywords: Earthquake fatalities, corruption, institutional variables
    JEL: D31 H41 P16
    Date: 2006–04
  27. By: Sijbren Cnossen
    Abstract: This paper estimates the external costs of harmful alcohol use in the European Union (EU) and confronts them with the alcohol excise duty collections per adult and per litre of pure alcohol in the various Member States. In all but one Member State, drinkers do not appear to pay their way. This reflects the EU’s acquiescence in a formidable alcohol problem. Fifteen per cent of adults ‘drink too much’, while the extent of youth drinking has reached alarming proportions. The external costs should be internalised in price through an appropriate optimal alcohol excise duty, supplemented by regulatory measures aimed at specific problem groups. Further, a coordinated alcohol tax policy seems called for, which would, among others, raise the minimum duties on wine, beer and spirits, preferably in line with their relative alcohol content. A drawback of these measures is that they would reduce the welfare of moderate drinkers.
    Keywords: alcohol taxation, European Union, external costs, social costs
    JEL: H20 H80
    Date: 2006
  28. By: Nejat Anbarci (Department of Economics, Florida International University); Monica Escaleras (Department of Economics, Florida Atlantic University); Charles Register (Department of Economics, Florida Atlantic University)
    Abstract: A country’s levels of collective action in the provision of socially desirable goods and services are primarily determined by its level of development, important natural attributes, and its unique institutional characteristics. In general, one can expect that, given a particular set of natural attributes and institutions, the greater a county’s per capita GDP, the more extensive will be its commitment to the provision of goods and services that require collective action. The primary contention of this paper is that one of the most important aspects of institutions that affect socially desirable collective action is the extent of public sector corruption. More specifically, we first develop a theoretical model which explicitly shows the relations between per capita GDP, corruption, and collective action in the form of the provision of improved drinking water and appropriate sanitation facilities. We test our model by analyzing a sample of 77 countries, annually, between 1982 and 2001, for a total sample of 1,519 observations. Relying on a two-way fixed effects estimation strategy, we find that corruption does in fact lead to lower levels of both access to improved drinking water and appropriate sanitation than a given country’s level of per capita GDP and other institutions alone would predict.
    Keywords: Collective Action, corruption, institutional variables
    JEL: D31 H41 P16
    Date: 2006–01
  29. By: Alberto Chong; Mark Gradstein
    Abstract: With efforts across the industrial countries to increase the amount of foreign aid mounting, it is important to understand its determinants. This paper examines the factors affecting the support for foreign aid among voters in donor countries. A simple theoretical model, which considers an endogenous determination of official and private aid flows, relates individual income to aid support through the elasticity of substitution and also suggests that government efficiency is an important factor in this regard. The empirical analysis of individual attitudes, based on the World Values Surveys, reveals that satisfaction with own government performance and individual relative income are positively related to the willingness to provide foreign aid. Furthermore, when using donor country data we find that aid is adversely affected by government inefficiency and income inequality.
    Keywords: foreign aid, donors, perceptions, development, corruption
    JEL: H41 O10
    Date: 2006
  30. By: Maria Alejandra Vélez (The Earth Institute, Columbia University); John K. Stranlund (Department of Resource Economics, University of Massachusetts Amherst); James J. Murphy (Department of Resource Economics, University of Massachusetts Amherst)
    Abstract: This paper develops and tests several models of pure Nash strategies of individuals who extract from a common pool resource when they are motivated by a combination of self-interest and other motivations such as altruism, reciprocity, inequity aversion and conformism. We test whether an econometric summary of subjects’ strategies is consistent with one of these motivations using data from a series of common pool resource experiments conducted in three regions of Colombia. As expected, average extraction levels are less than that predicted by a model of pure self-interest, but are nevertheless sub-optimal. Moreover, we find that a model of conformism with monotonically increasing best response functions best describes average strategies. Our empirical results are inconsistent with models of altruism, reciprocity and inequity aversion.
    Keywords: common pool resources, experiments, altruism, reciprocity, conformism
    JEL: C93 D64 H41 Q20 C70
    Date: 2005–03
  31. By: Bas van Groezen; Hannah Kiiver; Brigitte Unger
    Abstract: This paper explores the underlying factors which explain the diversity in public opinion of EU citizens on the preferred way of financing pensions and the implications for international policy coordination. We find that preferences are mainly determined by the current pension provision and unspecified nation-specific effects, while personal characteristics only play a minor role. Furthermore, some countries have substantial regional differences, others have rather homogeneous regions. Overall, our results suggest that policy making on pension financing at the EU level is not feasible, the more so when taking regional differences into account. Policy coordination within several subgroups of countries whose citizens share similar opinions would be a more realistic option.
    Keywords: international policy coordination, opinion, pensions
    JEL: C25 F42 H55
    Date: 2006–09
  32. By: Peter Haan; Viktor Steiner
    Abstract: We evaluate three policy reforms targeted at older unemployed people: (i) an hourly wage subsidy, (ii) an in-work credit, and (iii) a subsidy of social security contributions on low wages. The work incentive, labour supply and welfare effects of these hypothetical reforms are analysed on the basis a detailed micro-simulation model for Germany which includes a structural household labour supply model. We find that the simulated labour supply effects of the three policy reforms would be rather similar and of moderate size, ranging between 20,000 and 30,000 older women and between 10,000 and 20,000 older men. Our results also suggest that the hourly wage subsidy yields the highest welfare gains.
    Keywords: in-work support, wage subsidies, unemployment, elderly workers
    JEL: J21 J48 H21
    Date: 2006
  33. By: Eric A. Hanushek; Steven G. Rivkin
    Abstract: Substantial uncertainty exists about the impact of school quality on the black-white achievement gap. Our results, based on both Texas Schools Project (TSP) administrative data and the Early Childhood Longitudinal Survey (ECLS), differ noticeably from other recent analyses of the black-white achievement gap by providing strong evidence that schools have a substantial effect on the differential. The majority of the expansion of the achievement gap with age occurs between rather than within schools, and specific school and peer factors exert a significant effect on the growth in the achievement gap. Unequal distributions of inexperienced teachers and of racial concentrations in schools can explain all of the increased achievement gap between grades 3 and 8. Moreover, non-random sample attrition for school changers and much higher rates of special education classification and grade retention for blacks appears to lead to a significant understatement of the increase in the achievement gap with age within the ECLS and other data sets.
    JEL: H4 H7 I2 J15 J7 I1
    Date: 2006–10
  34. By: Eytan Sheshinski
    Abstract: For the last fifty years, countries in Asia and elsewhere witnessed a surge in aggregate savings per capita. Some empirical studies attribute this trend to the increases in life longevity of the populations of these countries. It has been argued that the rise in savings is short-run, eventually to be dissipated by the dissaving of the elderly, whose proportion in the population rises along with longevity. This paper examines whether these conclusions are supported by economic theory. A model of life cycle decisions with uncertain survival is used to derive individuals’ consumption and chosen retirement age response to changes in longevity from which changes in individual savings are derived. Conditions on the age-profile of improvements in survival probabilities are shown to be necessary in order to predict the direction of this response. Population theory (e.g. Coale, 1952) is used to derive the state-state population age density function, enabling the aggregation of individual response functions and a comparative steady-state analysis. Under certain conditions, increased longevity is shown to increase aggregate savings per capita. These conclusions pertain to an economy with a competitive annuity market. The absence of such market compels individuals to leave unintended bequests, whose size depends on the (random) age of death. While an increase in longevity raises individual savings for given endowments, it is shown that the effect on expected steady-state aggregate savings, taking into account the endogenous ergodic distribution of endowments, cannot be determined a-priori.
    Keywords: longevity, annuities, life cycle savings, retirement age, steady-state, aggregate savings
    JEL: D10 D60 E20 H00
    Date: 2006
  35. By: Bruno S. Frey; Alois Stutzer
    Abstract: Cross-disciplinary ‘happiness research’ has made big progress in the measurement of individual welfare. This development makes it tempting to pursue the old dream of maximizing aggregate happiness as a social welfare function. However, we postulate that the appropriate approach is not to maximize aggregate happiness in seeking to improve outcomes by direct policy interventions. The goal of happiness research should rather be to improve the nature of the processes through which individuals can express their preferences. Individuals should become better able to advance their idea of the good life, both individually and collectively.
    Keywords: Economic policy; happiness; life satisfaction; political economy; social welfare; utility
    JEL: D60 D70 H11 I31
    Date: 2006–10
  36. By: Reint Gropp (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany); Arjan Kadareja
    Abstract: We propose a new approach to measuring the effect of unobservable private information or beliefs on volatility. Using high-frequency intraday data, we estimate the volatility effect of a well identified shock on the volatility of the stock returns of large European banks as a function of the quality of available public information about the banks. We hypothesise that, as the publicly available information becomes stale, volatility effects and its persistence should increase, as the private information (beliefs) of investors becomes more important. We find strong support for this idea in the data. We argue that the results have implications for debate surrounding the opacity of banks and the transparency requirements that may be imposed on banks under Pillar III of the New Basel Accord. JEL Classification: G21, G14.
    Keywords: Realised volatility, public information, transparency.
    Date: 2006–10
  37. By: Vincent Vicard
    Abstract: This paper investigates the determinants of the different forms taken by regional integration in different parts of the world. This raises the issue of the relationship between economic and political integration. The theoretical model shows that, in an insecure world, the interplays between security and economic forces shape the decision to form a regional trading agreement (RTA) and its institutional design. Empirical results confirm that regionalism should be understood as a regulation mechanism: countries experiencing more interstate disputes are more likely to create a deep RTA, such as custom union or common market, whereas international insecurity deters the formation of preferential and free trade agreements.
    Keywords: conflict, trade, regionalism, political integration
    JEL: D74 F02 F15 H56
    Date: 2006
  38. By: Sirisha C. Naidu (Wright State University)
    Abstract: In the past two decades, theoretical and empirical evidence suggests that communities of resource users are capable of overcoming social dilemmas, and are capable of creating and sustaining institutions designed to prevent degradation of common pool natural resources. However, there is incomplete understanding of what motivates this group-level behavior and why some communities are better adept at solving collective action problems than others. This paper specifically explores the role of group heterogeneity in collective action among forest communities in the northwestern Himalayas. Heterogeneity can have important social and ecological consequences and understanding both its nature and effects can help in neutralizing the negative and enhancing the positive. Based on data from 54 forest communities in Himachal Pradesh, India, this paper finds that heterogeneity has at least three dimensions: wealth, identity and interest, and each may significantly affect collective actions related to natural resource management. However, their effects are far from simple and linear.
    Keywords: common pool resources, group outcomes, heterogeneity, forests
    JEL: D63 D71 H41 Q23 Q57
    Date: 2005–11
  39. By: Margarita Katsimi; Thomas Moutos
    Abstract: In this paper we build a model of trade in vertically differentiated products and find that income inequality can affect the demand for imports even in the presence of homothetic preferences. The empirical importance of changes in inequality on the demand for imports is then assessed by examining US data for the 1948-1996 period. Using the Johansen (1988) procedure we find that there is no evidence of a long run relationship of a standard imports equation (one including imports, income, and relative prices). However, once we include a measure of inequality in our VAR specification we find not only evidence for the existence of a cointegrating equation in imports, income, relative prices and inequality, but that the evolution of inequality has a large and positive influence on the demand for imports in the US. Moreover we find that our results are robust to alternative methods of estimating cointegration equations.
    Keywords: inequality, US import demand, vertically differentiated products, cointegration
    JEL: F13 H23 O24
    Date: 2006
  40. By: Alberto Abadie; Sofia Dermisi
    Abstract: The attacks of September 11, 2001, and more recently the Madrid and London downtown train bombings, have raised concerns over both the safety of downtowns and the continuous efforts by terrorists to attack areas of such high density and significance. This article employs building-level data on vacancy rates to investigate the impact of an increased perception of terrorist risk after 9/11 on the office real estate market in downtown Chicago. Chicago provides the perfect laboratory to investigate the effects of an increase in the perceived level of terrorist risk in a major financial district. Unlike in New York, the 9/11 attacks did not restrict directly the available office space in downtown Chicago. Moreover, the 9/11 attacks induced a large increase in the perception of terrorist risk in the Chicago Central Business District, which includes the tallest building in the U.S. (the Sears Tower) and other landmark buildings which are potential targets of large-scale terrorist attacks. Our results show that, following the 9/11 attacks, vacancy rates experienced a much more pronounced increase in the three most distinctive Chicago landmark buildings (the Sears Tower, the Aon Center and the Hancock Center) and their vicinities than in other areas of the city of Chicago. Our results suggest that economic activity in Central Business Districts can be greatly affected by changes in the perceived level of terrorism.
    JEL: H56 K42 R33
    Date: 2006–11

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