nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒11‒25
forty-four papers chosen by
Peren Arin
Massey University

  1. Using a discontinuous grant rule to identify the effect of grants on local taxes and spending By Dahlberg, Matz; Mörk, Eva; Rattso, Jorn; Ågren, Hanna
  2. Asymmetric and Non-Linear Adjustments in Local Fiscal Policy By Gabriella Legrenzi; Costas Milas
  3. How Successful is the Dual Income Tax? Evidence from the Finnish Tax Reform of 1993 By Pirttilä, Jukka; Selin, Håkan
  4. Fiscal Consolidation in Israel: A Global Fiscal Model Perspective By Selim Elekdag; Marialuz Moreno-Badia; Natan P. Epstein
  5. The Unemployment Benefit System: a Redistributive or an Insurance Institution? By Fernando Sanchez-Losada; Daniel Cardona
  6. Tax Incentives and Household Portfolios: A Panel Data Analysis By Sule Alan; Søren Leth-Petersen
  7. The dynamic behaviour of budget components and output – the cases of France, Germany, Portugal, and Spain By António Afonso; Peter Claeys
  8. Fiscal Policies, External Deficits, and Budget Deficits By Michel Normandin
  9. Economic and Political Determinants of Tax Amnesties in the U.S. States By Eric Le Borgne
  10. Green Taxes and Double Dividends in a Dynamic Economy By Gerhard Glomm; Daiji Kawaguchi; Facundo Sepulveda
  11. The "Flat Tax(es)": Principles and Evidence By Kevin Kim; Ricardo Varsano; Michael Keen
  12. Decomposition of s-Concentration Curves By Paul Makdissi; Stéphane Mussard
  13. Fiscal Implications of Multilateral Tariff Cuts By Hans P. Lankes; Azim M. Sadikov; Jean-Jacques Hallaert; Dustin Smith; Katrin Elborgh-Woytek
  14. Employment and growth in Europe and the US - The role of fiscal policy composition By T. DHONT; F. HEYLEN
  15. Rewarding the consumer for curbing the evasion of commodity taxes?. By Marchese, Carla
  16. On the Properties of Various Estimators for Fiscal Reaction Functions By Oya Celasun; Joong Shik Kang
  17. Merged Municipalities, Higher Debt: On Free-riding and the Common Pool Problem in Politics By Jordahl, Henrik; Liang, Che-Yuan
  18. Secure Implementation By Tatsuyoshi Saijo; Tomas Sjostrom; Takehiko Yamato
  19. The Magnitude and Distribution of Fuel Subsidies: Evidence from Bolivia, Ghana, Jordan, Mali, and Sri Lanka By Kangni Kpodar; Moataz El-Said; David Coady; Paulo A. Medas; David Newhouse; Robert Gillingham
  20. New Evidence on Fiscal Adjustment and Growth in Transition Economies By Alejandro Simone; Alex Segura-Ubiergo; Sanjeev Gupta
  21. Americans' Dependency on Social Security By Laurence J. Kotlikoff; Ben Marx; Pietro Rizza
  22. Fuel Price Subsidies in Gabon: Fiscal Cost and Distributional Impact By Daniel Leigh; Moataz El-Said
  23. How Does Neopatrimonialism Affect the African State? The Case of Tax Collection in Zambia By Christian von Soest
  24. Short-term Pain for Long-Term Gain: The Impact of Structural Reform on Fiscal of Outcomes in EMU By Paul van den Noord; Boris Cournède
  25. Fiscal and Monetary Nexus in Emerging Market Economies: How Does Debt Matter? By Garima Vasishtha; Taimur Baig; Manmohan S. Kumar; Edda Zoli
  26. User cost of capital with delayed investment grants By Jorge Navas; Jesus Marin-Solano
  27. Do Debt-Service Savings and Grants Boost Social Expenditures? By Alun H. Thomas
  28. Bequest and Tax Planning: Evidence From Estate Tax Returns By Wojciech Kopczuk
  29. Fiscal Determinants of Inflation: A Primer for the Middle East and North Africa By Ludvig Söderling; Domenico Fanizza
  30. Voluntary contributions with imperfect information: An experimental study By Annamaria Fiore; M. Vittoria Levati; Andrea Morone
  31. A Principal-Agent Theory Approach to Public Expenditure Management Systems in Developing Countries By Elisabeth Paul; Luc Leruth
  32. Between-Group Transfers and Poverty-Reducing Tax Reforms By Paul Makdissi; Stéphane Mussard
  33. Incentives and Institutions. A Bottom-up Approach to Climate Policy By Carlo Carraro
  34. Against the mainstream: Nazi privatization in 1930s Germany By Germa Bel
  35. Optimal Transfers and Participation Decisions in International Environmental Agreements By Carlo Carraro; Johan Eyckmans; Michael Finus
  36. Interactions Between Monetary and Fiscal Policy: How Monetary Conditions Affect Fiscal Consolidation By Rudiger Ahrend; Pietro Catte; Robert Price
  37. Border Wars: Tax Revenues, Annexation, and Urban Growth in Phoenix (revised version) By Carol E. Heim
  38. The Permanent Effect of Domestic Income on the Growth of Governments By Gabriella Legrenzi
  39. Post-Crisis Recovery: When Does Increased Fiscal Discipline Work? By Pritha Mitra
  40. Secure Implementation Experiments: Do Strategy-proof Mechanisms Really Work? By Timothy N. Cason; Tatsuyoshi Saijo; Tomas Sjostrom; Takehiko Yamato
  41. Parallel Climate Blocs. Incentives to cooperation in international climate negotiations By Carlo Carraro; Barbara Buchner
  42. Political risk and export promotion: evidence from Germany By Moser, Christoph; Nestmann, Thorsten; Wedow, Michael
  43. Mass Privatization and the Postcommunist Mortality Crisis By Patrick Hamm; David Stuckler; Lawrence King
  44. Privatization in Western Europe Stylized Facts, Outcomes, and Open Issues By Bernardo Bortolotti; Valentina Milella

  1. By: Dahlberg, Matz (Department of Economics); Mörk, Eva (Department of Economics); Rattso, Jorn (Department of Economics); Ågren, Hanna (Department of Economics)
    Abstract: When investigating the effects of federal grants on the behavior of lower-level governments, it is hard to defend the handling of grants as an exogenous factor affecting local governments; federal governments often set grants based on characteristics and performance of local governments. In this paper we make use of a discontinuity in the Swedish grant system in order to estimate the causal effects of general intergovernmental grants on local spending and local tax rates. The formula for the distribution of funds is used as an exclusion restriction in an IV-estimation. We find evidence of crowding-in, where federal grants are shifted to more local spending, but not to reduced local tax rates. Our results thus confirm a flypaper effect for Sweden.
    Keywords: Fiscal federalism; grants; flypaper effect: local taxation; local government expenditure; causal effects
    JEL: H21 H71 H77 R51
    Date: 2006–11–06
  2. By: Gabriella Legrenzi (Keele University, Centre for Economic Research and School of Economic and Management Studies); Costas Milas (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: We introduce possible asymmetries and non-linearities in the analysis of the taxing and spending decisions of local governments. Our empirical results evidence a down-ward inflexibility of both local government spending and taxation, pointing to a budget-maximizing local government. These asymmetries will need to be explicitly tackled in fiscal federalism reforms, in order for decentralization to positively contribute to the achievement of the European Monetary Union objectives.
    Keywords: Fiscal federalism, non-linear time series, asymmetric adjustment, fly-paper effect
    JEL: H10 H71 C22
    Date: 2006–08
  3. By: Pirttilä, Jukka (Labour Institute for Economic Research); Selin, Håkan (Department of Economics)
    Abstract: Dual income tax systems have become increasingly popular; yet, relatively little is <p> known about the consequences of implementing such tax systems. This paper uses a representative panel of taxpayers from the 1993 Finnish tax reform to measure how overall taxable income and the relative shares of capital income and labour income reacted to the reform. The Finnish tax reform appears to be particularly suitable for analysing the effect of separating labour and capital income tax bases. The reform radically reduced the marginal tax rates on capital income to some, but not all, taxpayers, while the taxation of labour income was not reformed at the same time. We find that the reform led to a small positive impact on overall taxable income, but part of the positive response was probably offset by income shifting among the self-employed.
    Keywords: Taxable income; income shifting; dual tax system
    JEL: C21 H21 H31
    Date: 2006–11–09
  4. By: Selim Elekdag; Marialuz Moreno-Badia; Natan P. Epstein
    Abstract: Fiscal consolidation has become an important policy prescription for many emerging market countries (EMCs), particularly for the highly indebted ones. Although prudent fiscal policies tend to reduce vulnerabilities, their implementation is usually postponed. This paper represents, to the best of our knowledge, one of the first attempts in the literature to quantify the costs of delaying fiscal consolidation in an EMC. In particular, using the IMF's Global Fiscal Model (GFM), we find that early consolidation through expenditure cuts would result in a substantial increase in Israel's long-term output growth relative to the case with delayed fiscal adjustment. Using an alternative fiscal instrument, we find that delaying tax cuts would result in cumulative real GDP that is much larger than otherwise.
    Keywords: Fiscal consolidation , distortionary taxes , government debt ,
    Date: 2006–11–10
  5. By: Fernando Sanchez-Losada; Daniel Cardona (Universitat de Barcelona)
    Abstract: In this paper we analyze how the composition of labor taxation affects unemployment in a unionized economy with capital accumulation and an unemployment benefit system. We show that if the unemployment benefit system is gross Bismarckian then the unemployment rate is reduced if wage taxes are decreased (and thus payroll taxes are increased). However, if the unemployment benefit system is net Bismarckian then the unemployment rate does not depend on how the system is financed. Besides, in a Beveridgean system the labor tax composition does not affect the unemployment rate if and only if the unemployed do not pay taxes and the employed pay a constant marginal tax rate. We also analyze when an unemployment benefit budget-balanced rule makes the economy to have a hysteresis process.
    Keywords: payroll tax, unemployment benefit system, wage tax
    JEL: E24 E62 H53 J50 J65
    Date: 2005
  6. By: Sule Alan; Søren Leth-Petersen
    Abstract: This paper investigates the responsiveness of household portfolios to tax incentives by exploiting a substantial tax reform that altered after-tax returns and cost of debt for a large number of households. An extraordinary panel data set that covers two years before and after the reform is used for the analysis. Our empirical findings suggest that households reshuffle their balance sheets in the case of a partial deductibility phase-out. In particular, heavily taxed, interest-bearing assets are used to pay off mortgage debt. Furthermore, we find that taxes have a significant impact on the structure of household portfolios even after controlling for unobserved heterogeneity.
    Keywords: Household portfolios, taxation, panel data, natural experiment
    JEL: G11 H31
    Date: 2006–10
  7. By: António Afonso; Peter Claeys
    Abstract: The main focus of this paper is the relation between the cyclical components of total revenues and expenditures and the budget balance in France, Germany, Portugal, and Spain. We try to uncover past trends behind the development of public finances that contribute to explaining the current stance of fiscal policy. The disaggregate analysis of fiscal policy in an SVAR that mixes long and short-term constraints allows us to look into the transmission channels of fiscal policy and to derive a model-based indicator of structural balance. The main conclusions are that fiscal slippages are mainly due to reversals in tax policies, which are unmatched by expenditure adjustments. As a consequence, deficits rise when economic conditions worsen but cause a ‘ratcheting up’ in the size of government in economic booms. The Stability and Growth Pact has not eradicated these procyclical policies. Bad policies in good times also contribute to aggregate macroeconomic instability.
    Keywords: fiscal indicator; structural balance; output gap; SGP; EMU; SVAR; short and longterm restrictions.
    JEL: E62 E65 E66 H61 H62
  8. By: Michel Normandin (IEA, HEC Montréal)
    Abstract: This paper studies the effects of fiscal policies on external and budget deficits. From a tractable small open-economy, overlapping-generation model, the effects are measured by the responses of the external deficit to an increase in the budget deficit due to a tax-cut. The responses are positively affected by the birth rate and the degree of persistence of the budget deficit. Empirical results for the G7 countries over the post-1975 period reveal that the values of birth rate are small for all, but one, countries; but the responses of external and budget deficits are substantial and persistent for most countries. In particular, the fiscal policy has the most important effects on the external deficits for Canada, Japan, and the United States; somewhat smaller impacts for France, Germany, and the United Kingdom; and negligible effects for Italy.
    Keywords: Agents’ superior information; birth rate; impact and dynamic responses; G7 Countries; orthogonality restrictions.
    JEL: E62 F32 F41
    Date: 2006–05
  9. By: Eric Le Borgne
    Abstract: This paper revisits earlier studies on the determinants of tax amnesties. The novel findings are (i) amnesties are more likely to be declared during fiscal stress periods, and (ii) political factors significantly affect the introduction and timing of amnesties. In particular, the paper empirically disentangles opposite theoretical effects to show that governors perceive amnesties as another revenue source (rather than a tax increase alternative). Finally, supporting evidence shows that by breaking horizontal equity, amnesties might be perceived as unfair: a significant correlation exists between governors who lost their reelection bids and the introduction of a tax amnesty during their election years.
    Keywords: Tax amnesty , gubernatorial elections , Cox model ,
    Date: 2006–10–16
  10. By: Gerhard Glomm (Indiana University Bloomington); Daiji Kawaguchi (Hitotsubashi University); Facundo Sepulveda (Universidad de Santiago de Chile)
    Abstract: This paper examines a revenue neutral green tax reform along the lines of the Double Dividend hypothesis. Using a dynamic general equilibrium model calibrated to the US economy, we find that increasing gasoline taxes and using the revenue to reduce capital income taxes does indeed deliver both types of welfare gains: from higher consumption of market goods (an efficiency dividend), and from a better environmental quality (a green dividend), even though in the new steady state environmental quality may worsen. We also find that, given the available evidence on how much households are willing to pay for improvements in air quality, the size of the green dividend is very small in absolute magnitude, and much smaller than the efficiency dividend.
    Keywords: Green taxes, Double Dividends, Capital Accumulation, Welfare
    JEL: E6 H2
    Date: 2006–11
  11. By: Kevin Kim; Ricardo Varsano; Michael Keen
    Abstract: One of the most striking tax developments in recent years, and one that continues to attract considerable attention, is the adoption by several countries of a form of "flat tax." Discussion of these quite radical reforms has been marked, however, more by assertion and rhetoric than by analysis and evidence. This paper reviews experience with the flat tax, seeking to redress the balance. It stresses that the flat taxes that have been adopted differ fundamentally, and that empirical evidence on their effects is very limited. This precludes simple generalization, but several lessons emerge: there is no sign of Laffer-type behavioral responses generating revenue increases from the tax cut elements of these reforms; their impact on compliance is theoretically ambiguous, but there is evidence for Russia that compliance did improve; the distributional effects of the flat taxes are not unambiguously regressive, and in some cases they may have increased progressivity, including through the impact on compliance; adoption of the flat tax has not resolved common challenges in taxing capital income; and it may have strengthened, not weakened, the automatic stabilizers. Looking forward, the question is not so much whether more countries will adopt a flat tax as whether those that have will move away from it.
    Keywords: Flat tax , tax reform , income tax ,
    Date: 2006–10–11
  12. By: Paul Makdissi (GREDI, Département d'économique, Université de Sherbrooke); Stéphane Mussard (GREDI, Université de Sherbrooke and GEREM, Université de Perpignan)
    Abstract: For any given order of stochastic dominance, standard concentration curves are decomposed into contribution curves corresponding to within-group inequalities, between-group inequalities, and transvariational inequalities. We prove, for all orders, that contribution curve dominance implies systematically welfare-improving tax reforms and conversely. Accordingly, we point out some undesirable fiscal reforms since a welfare expansion may be costly in terms of particular inequalities.
    Keywords: Concentration curves, Contribution curves, Stochastic dominance, Tax reforms
    JEL: D63 H20
    Date: 2006
  13. By: Hans P. Lankes; Azim M. Sadikov; Jean-Jacques Hallaert; Dustin Smith; Katrin Elborgh-Woytek
    Abstract: The paper contributes to the discussion about the revenue implications of trade reform by assessing the approximate fiscal revenue impact of different liberalization formulae under consideration in multilateral trade negotiations for a group of low- and middle-income countries. The study applies a linear optimization framework to data for bound tariffs, applied tariffs, and imports at the HS-6 digit level for 58 developing countries, and simulates results for different sets of import demand elasticities and developing country "flexibilities." While only a small number of countries face a significant impact, results point toward the need for complementary fiscal measures in the countries most affected by revenue loss.
    Keywords: Taxation , Trade Negotiations , Trade Policy. Doha Round , Trade Taxes. ,
    Date: 2006–09–19
  14. By: T. DHONT; F. HEYLEN
    Abstract: We analyze the impact of the composition of fiscal policy on employment and long-run growth. Our theoretical model builds on Barro (JPE, 1990) which we extend by endogenizing the decision to work and by allowing three kinds of government expenditures and three kinds of taxes. The model explains what we basically observe in the data for European countries: relatively high employment and growth in the Nordic countries, but poor employment and low growth in the core countries of the euro area. Our model can also explain employment and growth in the US.
    Keywords: fiscal policy, taxes, transfers, government spending, employment, endogenous growth
    JEL: E24 E62 J22 O41
    Date: 2006–11
  15. By: Marchese, Carla
    Abstract: Monetary or in-kind transfers can be used as an incentive for consumers to request o.cial receipts for goods they purchase. A novel system of in-kind transfers in the form of lottery tickets has recently been introduced in China. Price subsidies (often granted through tax deductions or refunds) are also widely used. This paper extends the standard model of commodity tax evasion for firms (in a competitive market and under the conjectural variation approach) in order to describe the e.ects of subsidies on tax evasion and in terms of incidence and of government revenue. The role of search costs and of enforcement costs is also taken into account.
    JEL: H31 H32 K42
    Date: 2006–11
  16. By: Oya Celasun; Joong Shik Kang
    Abstract: This paper evaluates the bias of the least-squares-with-dummy-variables (LSDV) method in fiscal reaction function estimations. A growing number of studies estimate fiscal policy reaction functions-that is, relationships between the primary fiscal balance and its determinants, including public debt and the output gap. A previously unexplored methodological issue in these estimations is that lagged debt is not a strictly exogenous variable, which biases the LSDV estimator in short panels. We derive the bias analytically to understand its determinants and run Monte Carlo simulations to assess its likely size in empirical work. We find the bias to be smaller than the bias of the LSDV estimator in a comparable autoregressive dynamic panel model and show the LSDV method to outperform a number of alternatives in estimating fiscal reaction functions.
    Keywords: Fiscal reaction functions , panel data , dynamic models ,
    Date: 2006–08–07
  17. By: Jordahl, Henrik (Research Institute of Industrial Economics); Liang, Che-Yuan (Department of Economics)
    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
  18. By: Tatsuyoshi Saijo (Osaka University); Tomas Sjostrom (Department of Economics, Rutgers University); Takehiko Yamato (Department of Values and Decision Science, Tokyo Institute of Technology)
    Abstract: Strategy-proofness, requiring that truth-telling is a dominant strategy, is a standard concept in social choice theory. However, this concept has serious drawbacks. In particular, many strategy-proof mechanisms have multiple Nash equilibria, some of which produce the wrong outcome. A possible solution to this problem is to require double implementation in Nash equilibrium and in dominant strategies, i.e., secure implementation. We characterize securely implementable social choice functions, and compare our results with dominant strategy implementation. In standard quasi-linear environments with divisible private or public goods, there exist Pareto efficient (non-dictatorial) social choice functions that can be securely implemented. But in the absence of side-payments, secure implementation is incompatible with Pareto efficiency.
    JEL: C92 D71 D78 H41
    Date: 2005–07
  19. By: Kangni Kpodar; Moataz El-Said; David Coady; Paulo A. Medas; David Newhouse; Robert Gillingham
    Abstract: With the recent jump in world oil prices, the issue of petroleum product pricing has become increasingly important in developing countries. Reflecting a reluctance of many governments to pass these price increases onto energy users, energy price subsidies are absorbing an increasing share of scarce public resources. This paper identifies the issues that need to be discussed when analyzing the fiscal and social costs of fuel subsidies. Using examples from analyses recently undertaken for five countries, it also identifies the magnitude of consumer subsidies and their fiscal implications. The results of the analysis show that-in all of these countries-energy subsidies have significant social and fiscal costs and are badly targeted.
    Keywords: Energy prices , subsidies , welfare distribution , household survey data ,
    Date: 2006–11–03
  20. By: Alejandro Simone; Alex Segura-Ubiergo; Sanjeev Gupta
    Abstract: This paper analyzes the relationship between fiscal adjustment and real GDP growth in a panel of 26 transition economies during 1992-2001. Unlike most previous studies using cross-country regressions, the paper finds a positive and statistically significant relationship between fiscal adjustment and growth that is robust to different model specifications and estimation methods. The paper also presents country experiences to delve deeper into the mechanisms that may underlie this statistical relationship.
    Keywords: Fiscal adjustment , growth , transition economies , fiscal policy ,
    Date: 2006–10–31
  21. By: Laurence J. Kotlikoff; Ben Marx; Pietro Rizza
    Abstract: This paper determines the standard of living reductions that young, middle aged, and older households would experience were the U.S. government to cut Social Security benefits (but not taxes) to deal with its well documented (see Gokhale and Smetters, 2005) long-term fiscal crisis. To determine pre- and post-retirement living standards in the absence and presence of Social Security benefit cuts the paper relies on ESPlanner, a financial planning software program. ESPlanner calculates a household's highest sustainable living standard taking into account the household's economic resources including its claims to future Social Security benefits. The program also incorporates borrowing/liquidity constraints that limit households' abilities to smooth their living standards over their life cycles. The analysis considers both stylized single and married households of different ages and resource levels as well as actual households sampled from the 2004 Federal Reserve Survey of Consumer Finances (SCF). The extent of current and future living standard reductions in response to announcements of future Social Security benefit cuts depends critically on the age of the household, when the cuts are announced, the size of the cuts, the income of the household, and the degree to which the household is liquidity constrained. For our stylized households on the brink of retirement the complete elimination of Social Security benefits would entail retirement living standards reductions ranging from roughly one third to one hundred percent depending on the household's income. Our SCF findings also point to a strong dependency on Social Security. Indeed, 41 percent of older SCF couples and 33 percent of SCF singles would experience a living standard reduction of 90 percent or more were Social Security benefits eliminated. A surprising finding is the major dependency of very high-income households on Social Security. Take the highest earning couple in our stylized sample. This couple earns $500,000 per year from age 30 through age 64 when it retires. It enters retirement with over $2.3 million in assets. But given the length of its potential retirement, the modest real return it can safely earn on its assets, its off-the-top housing expenses, and its tax payments, this household is highly dependent on Social Security benefits, notwithstanding their taxable status. Indeed, were this household denied all its Social Security benefits on the eve of its retirement, it would suffer a 35.6 percent reduction in its living standard throughout retirement.
    JEL: H22 H55
    Date: 2006–11
  22. By: Daniel Leigh; Moataz El-Said
    Abstract: This paper looks at the fiscal cost and distributional impact of implicit fuel price subsidies in Gabon, where fuel prices have remained largely unchanged since 2002. Using estimated implicit import parity prices, we evaluate the total fiscal cost of the subsidies at 3.2 percent of non-oil GDP in 2005-more than total public health expenditures. We also analyze the distribution of the subsidies using household survey data and find that the bulk of the subsidies benefit higher-income households. Finally, we suggest use of a number of existing programs to provide a more targeted and cost-effective means of protecting the real incomes of lower-income households from the effects of energy price increases.
    Keywords: Fuel-price subsidies , Gabon , income distribution ,
    Date: 2006–10–31
  23. By: Christian von Soest (GIGA Institute of African Affairs)
    Abstract: Following the neopatrimonialism paradigm, it can be hypothesised that in African states informal politics of the rulers infringe on the collection of taxes and in turn reduce state revenues. This article tests this proposition for the case of Zambia. The main finding is that there is no linear correlation between a neopatrimonial system and the collection of taxes. Neopatrimonial continuity in the country is evidenced by three factors; the concentration of political power, the award of personal favours and the misuse of state resources. De-spite this continuity, the revenue performance has increased considerably with the crea-tion of the semi-autonomous Zambia Revenue Authority. This demonstrates that the effect of neopatrimonialism on public policy in the African state is highly context-specific and dependent on the interaction with additional variables. Donor pressure has been the most important in the Zambian case. In order to apply neopatrimonialism for further empirical work on public policy in the African state, these additional variables have to be incorpo-rated into the analysis.
    Keywords: Neopatrimonialism, collection of revenue, tax systems, Zambia, African state, donors
    Date: 2006–11
  24. By: Paul van den Noord; Boris Cournède
    Abstract: The 2005 reform of the EU Stability and Growth Pact has provided leeway for governments to let their fiscal deficit temporarily breach the 3% rule to finance the immediate budgetary cost of structural reform, such as compensation schemes to offset redistributive effects. Against this backdrop, it is useful to dispose of empirical estimates of the effect of structural reform on fiscal outcomes, not only the short term cost but also the long-run fiscal gain stemming from changes in spending parameters and better economic performance. Based on econometric estimates for a pool of 21 OECD countries, this study finds a significant net fiscal gain of structural reform. <P>Quelques coûts à court terme pour des gains durables : Les conséquences budgétaires des réformes de structure dans l’UEM <BR>La réforme du Pacte de stabilité et de croissance (PSC) de l’Union européenne opérée en 2005 a ouvert la possibilité d’autoriser les États membres à dépasser temporairement le seuil de 3% afin de financer les coûts budgétaires de court terme que les réformes de structure peuvent engendrer, comme par exemple la compensation des effets distributifs non souhaités. Dans ce contexte, il est utile de disposer d’estimations empiriques des effets budgétaires des réformes de structure, non seulement s’agissant des coûts de court terme mais aussi des gains à long terme qui résultent des modifications des programmes de dépense publique et d’une meilleure performance économique. Au moyen d’estimations économétriques réalisées sur un panel de 21 pays membres de l’OCDE, cette étude conclut que les réformes structurelles se traduisent au plan budgétaire par un gain net d’une ampleur significative.
    Keywords: fiscal policy, politique budgétaire, Economic and Monetary Union, Union économique et monétaire, stability and growth pact, pacte de stabilité et de croissance
    JEL: E61 E62 H3 H5 H6
    Date: 2006–11–03
  25. By: Garima Vasishtha; Taimur Baig; Manmohan S. Kumar; Edda Zoli
    Abstract: This paper examines two main aspects of the interaction between fiscal and monetary policy in emerging market economies. First, it explores the interest rate-inflation relationship in economies with different levels of external and domestic public debt using panel- and crosssection data. The results show that interest rate-inflation elasticity weakens with debt/GDP and external debt/GDP. Second, it utilizes high-frequency data from Brazil, Turkey, and Poland to examine how market-determined variables react to economic news. The results suggest that when vulnerabilities are high, budget news has the most significant impact on country spreads and interest rates, and the impact of monetary policy is weakened.
    Keywords: Public debt , fiscal policy , monetary policy , Emerging markets , Public debt , Fiscal policy , Monetary policy ,
    Date: 2006–08–14
  26. By: Jorge Navas; Jesus Marin-Solano (Universitat de Barcelona)
    Abstract: The usual assumption when considering investment grants is that grant payments are automatic when investments are undertaken. However, evidence from case studies shows that there can exist some time lag until funds are received by granted firms. In this paper the effects of delays in grant payments on the optimal investment policy of the firm are analyzed. It is shown how these delays lead not only to a higher financing cost but to an effective reduction in the investment grant rate, and in some cases, how benefits from investment grants could be canceled due to interactions with tax effects.
    Keywords: delayed grant payments, user cost of capital
    JEL: C61 D92 H32
    Date: 2006
  27. By: Alun H. Thomas
    Abstract: This paper evaluates whether debt relief and grants can boost social expenditures in lowincome countries. It finds that declines in debt-service help raise social expenditures, but no relationship between grants and social expenditures. Moreover, since the mid-1980s, lowincome countries have managed to fully insulate social expenditures from the effects of budgetary tightening. The magnitude of the impact of these effects on social expenditures, however, is dwarfed by the resources needed to enable these countries to reach the Millennium Development Goals.
    Keywords: debt relief , grants , social expenditures , millennium development goals , Debt relief , Social policy , Government expenditures , Millennium Development Goals ,
    Date: 2006–08–04
  28. By: Wojciech Kopczuk
    Abstract: I study bequest and wealth accumulation behavior of the wealthy (subject to the estate tax) shortly before death. The onset of a terminal illness leads to a very significant reduction in the value of estates reported on tax returns - 15 to 20% with illness lasting "months to years" and about 5 to 10% in case of illness reported as lasting "days to weeks". I provide evidence suggesting that these findings cannot be explained by real shocks to net worth such as due to medical expenses or lost income, but instead reflect "deathbed" estate planning. The results suggest that wealthy individuals actively care about disposition of their estates, but that this preference is dominated by the desire to hold on to their wealth while alive.
    JEL: D12 D31 D91 H2
    Date: 2006–11
  29. By: Ludvig Söderling; Domenico Fanizza
    Abstract: Many countries in the Middle East and North Africa (MENA) region have recently experienced surges in money growth that apparently have not generated significant inflationary pressures. Moreover, several MENA countries have followed monetary policy rules that according to standard monetary theory should have produced macroeconomic instability and possibly hyperinflation. We argue that the Fiscal Theory of the Price Level could usefully provide insights on these developments. Our main conclusion is that a sound fiscal position constitutes a necessary condition for macroeconomic stability whereas "sound" monetary policy is neither sufficient nor necessary. Hence, fiscal policy and public debt deserve particular attention for maintaining macroeconomic stability, by and large consistent with Fund policy advice to MENA countries.
    Keywords: Fiscal theory of the price level , Algeria , Egypt , Lebanon , Morocco , Tunisia ,
    Date: 2006–10–06
  30. By: Annamaria Fiore; M. Vittoria Levati; Andrea Morone
    Abstract: We use a two-person linear voluntary contribution mechanism with stochastic marginal benefits from the public good to examine the effect of imperfect information on contributions levels. To assess prior risk attitudes, individual valuations of several risky prospects are elicited via a second-price auction. We find that limited information about the productivity of the public good lowers significantly initial contributions in comparison to a setting with perfect information, whereas different information conditions do not result in qualitatively different contribution patterns. Moreover, our results show clear evidence of risk aversion, and of a negative relationship between the latter and willingness to cooperate.
    Keywords: Public goods experiments, Vickrey auctions, Imperfect information, Risk attitudes
    JEL: C72 C92 D80 H41
    Date: 2006–11
  31. By: Elisabeth Paul; Luc Leruth
    Abstract: A well-functioning public expenditure management (PEM) system is considered a critical pillar of government efficiency, on par with a low-distortion tax system and efficient tax administration. The paper discusses PEM systems in developing countries using an analytical framework based on principal-agent theory. This simple model can be applied to various PEM systems, and allows for comparisons between institutional settings. To illustrate this, we analyze the benefits derived from the use by the Ministry of Finance (MoF) of two control instruments; ex post audits and ex ante controls, and assess their value in terms of their ability to deter cheating. We derive a set of possible "control regimes" which can be used by the MoF. Although we illustrate the use of the model using developing countries, it is also relevant to developed economies.
    Keywords: Public expenditure management , principal-agent theory , developing countries ,
    Date: 2006–09–22
  32. By: Paul Makdissi (GREDI, Département d'économique, Université de Sherbrooke); Stéphane Mussard (GREDI, Université de Sherbrooke and GEREM, Université de Perpignan)
    Abstract: In this paper, we propose the conception of within-group CD-curve, to apprehend the impact of indirect tax reforms on truncated distributions of consumption expenditures. This confers decision makers the ability to perform within-group transfers as well as between-group transfers to reduce poverty in particular groups or to obtain an overall poverty alleviation. Between-group transfers are implemented in order to introduce a fairness element into the indirect tax framework, allowing to test for the robustness of reducing-tax reforms, for any order of stochastic dominance.
    Keywords: Between-group redistribution, CD-curves, Stochastic dominance of order s, Tax reforms
    JEL: D63 H20
    Date: 2006
  33. By: Carlo Carraro (Department of Economics, University Of Venice Cà Foscari)
    Abstract: This paper comments and assesses “Fragmented Carbon Markets and Reluctant Nations: Implications for the Design of Effective Architectures”, a paper that David Victor presented at the international workshop on "Architectures for Agreement: Addressing Global Climate Change in the Post-Kyoto World", organized by Joe Aldy and Rob Stavins at the J.F. Kennedy School of Government in May 2006. By analyzing Victor’s proposals for an effective climate agreement post 2012, this paper emphasizes the contribution that game-theoretical analyses have provided to the design of climate agreements. It therefore emphasizes how incentives and institutions play a crucial role in affecting the final outcome of negotiations on climate change control, and how incentives and institutions can be modified to achieve a better control of climate change. This paper also discusses a wider policy approach that can enhance the effectiveness of measures designed to address the climate change problem.
    Keywords: Agreements, Climate, Incentives, Negotiations, Policy
    JEL: C72 H23 Q25 Q28
    Date: 2006
  34. By: Germa Bel (Universitat de Barcelona)
    Abstract: The Great Depression spurred State ownership in Western capitalist countries. Germany was no exception; the last governments of the Weimar Republic took over firms in diverse sectors. Later, the Nazi regime transferred public ownership and public services to the private sector. In doing so, they went against the mainstream trends in the Western capitalist countries, none of which systematically reprivatized firms during the 1930s. Privatization in Nazi Germany was also unique in transferring to private hands the delivery f public services previously provided by government. The firms and the services transferred to private ownership belonged to diverse sectors. Privatization was part of an intentional policy with multiple objectives and was not ideologically driven. As in many recent privatizations, particularly within the European Union, strong financial restrictions were a central motivation. In addition, privatization was used as a political tool to enhance support for the government and for the Nazi Party.
    Keywords: germany, nazi economy, privatization, public enterprise
    JEL: G38 L32 L33 N44
    Date: 2006
  35. By: Carlo Carraro (Department of Economics, University Of Venice Cà Foscari); Johan Eyckmans (European University College Brussels EHSAL and Center for Economic Studies, Katholieke Universiteit Leuven.); Michael Finus (Department of Economics, University of Hagen and National University of Singapore)
    Abstract: The literature on international environmental agreements has recognized the role transfers play in encouraging participation in international environmental agreements. However, the results achieved so far are overly specific. Therefore, we develop a more general framework that enables us to study the role of transfers in a systematic way. We propose transfers using both internal and external financial resources for making “welfare optimal agreements” self-enforcing. To illustrate the relevance of our transfer scheme, we use a stylized integrated assessment simulation model of climate change to show how appropriate transfers may induce almost all countries into signing a self-enforcing climate treaty.
    Keywords: Self-enforcing International Environmental Agreements, Climate Policy, Transfers
    JEL: C72 H23 Q25 Q28
    Date: 2006
  36. By: Rudiger Ahrend; Pietro Catte; Robert Price
    Abstract: This paper assesses how and in what circumstances, fiscal consolidations are affected by monetary conditions, using data covering 24 OECD countries over the past 25 years, Focusing on fiscal consolidation “episodes”, it is found that these tend to occur when large budget deficits threaten sustainability and usually when other macroeconomic indicators -- inflation, the exchange rate and unemployment -- suggest a “crisis” situation. After controlling for these factors, the paper finds strong econometric evidence that consolidation efforts are more likely to be pursued and to succeed if the monetary policy stance is eased in the initial stages of the episode, thus contributing to offsetting the contractionary impact of fiscal tightening. However, the link is far from mechanical and there are also counter-examples where monetary easing was followed by aborted consolidation efforts. Central bank independence explicitly precludes direct responses of monetary policy to fiscal actions. However, the paper also provides evidence that the indirect reaction of monetary policy and financial markets to fiscal consolidation may be influenced by the quality of fiscal adjustment, as short and long-term interest rates are more likely to fall during episodes characterised by greater reliance on current expenditure cuts. While this means that causality runs both ways, the paper provides evidence that, even after controlling for this proxy of fiscal adjustment quality, changes in monetary stance do affect the chances that a fiscal retrenchment plan will be successfully pursued. <P>Interactions entre la politique monétaire et budgétaire : L’effet des conditions monétaires sur les consolidations budgétaires <BR>Cet article, utilisant des données relatives à 24 pays de l’OCDE sur les 25 dernières années, examine comment et dans quelles circonstances des ajustements budgétaires sont affectés par les conditions monétaires. Les ajustements budgétaires interviennent le plus souvent lorsque d’importants déficits menacent la soutenabilité des finances publiques, ou lorsque d'autres indicateurs macroéconomiques -- inflation, taux de change ou niveau de chômage -- sont très dégradés. En contrôlant ces variables, l’article apporte des preuves économétriques robustes suivant lesquelles les efforts de consolidation budgétaire ont davantage de chance d’être mis en oeuvre et couronnés de succès si la politique monétaire est accommodante dans la période initiale de l’ajustement, contribuant ainsi à amortir l’effet défavorable pour la croissance du resserrement budgétaire. Le lien n’est cependant pas mécanique, comme l’atteste l’existence d’épisodes de desserrement monétaire suivis d’un abandon des efforts d’ajustement fiscal. Par ailleurs, si l’indépendance des banques centrales fait explicitement obstacle à une réponse directe de la politique monétaire aux opérations budgétaires, l’article montre que la qualité de l’ajustement fiscal peut indirectement influer sur les banques centrales et les marches financiers. Par exemple, les taux d'intérêt à court et long terme semblent se replier davantage si l’ajustement budgétaire prend la forme d’une maîtrise stricte des dépenses courantes. Au total, l’influence entre l’ajustement budgétaire et la conduite de la politique monétaire est réciproque mais l’article montre que, même en contrôlant la qualité d'ajustement budgétaire, la politique monétaire continue à influencer la probabilité d’une consolidation des finances publiques d’être menée à bien.
    Keywords: financial markets, marchés financiers, fiscal policy, politique budgétaire, monetary policy, politique monétaire, fiscal adjustment, fiscal consolidation, interest rate, taux d'intérêt, fiscal stance, monetary conditions, conditions monétaires, central bank, banque centrale, quality of fiscal adjustment, modalités de l'ajustement budgétaire, policy co-ordination, coordination des politiques économiques, ajustement budgétaire, consolidation budgétaire
    JEL: E58 E63 G12 H62
    Date: 2006–11–03
  37. By: Carol E. Heim
    Abstract: <p>Phoenix and neighboring municipalities, like many in the South and West, pursued a growth strategy based on annexation in the decades after World War II. This paper explores the link between annexation and competition for tax revenues. After discussing arguments for annexation, it traces the history of annexation in the Phoenix metropolitan area. A long-running series of "border wars" entailed litigation, pre-emptive annexations, and considerable intergovernmental conflict. The paper argues that tax revenues have been a key motivation for annexation, particularly since the 1970s. It then considers several related policy issues and argues that while opportunities for annexation are becoming more limited, competition for tax revenues (particularly sales tax revenues) continues to be fierce and to create dilemmas for municipalities in the region</p><p>(Paper revised July 2006.)</p>
    Keywords: annexation, municipal revenues, sales tax, Phoenix, urban growth, intergovernmental relations
    JEL: H71 H77 N92 R51
    Date: 2006
  38. By: Gabriella Legrenzi (Keele University, Centre for Economic Research and School of Economic and Management Studies)
    Abstract: We empirically model the growth of the Italian government on a long historical dataset, starting from the country's unification. Our findings point to the existence of a long-run equilibrium relationship between gross domestic product and government spending, that is robust to different specifications of the government growth equation and to different levels of government. The estimated income elasticities of government spending present a clear pattern of growth and decline, suggesting the existence of possible cycles in the growth of government. The estimated speed of adjustment of government spending is rather slow, especially in the case of local expenditure, pointing to administrative rigidities.
    Keywords: Wagner's law, cointegration, general government expenditure, local expenditure, persistence profile
    JEL: H50 C32 C51
    Date: 2006–09
  39. By: Pritha Mitra
    Abstract: Emerging market financial crises during the late 1990s were marked by sudden withdrawals of funds by foreign creditors, resulting in production declines. The IMF favored positive signals to potential foreign creditors and initially recommended disciplined fiscal policy during the height of crisis, countering standard Keynesian recommendations of expansionary fiscal stimulus. This paper formulates an open-economy general equilibrium model for resolving this policy conundrum and analyzing the impact of disciplined fiscal policy on post-crisis recovery. The model demonstrates via simulations that disciplined fiscal policy will improve (worsen) post-crisis recovery in the presence (absence) of appropriately defined production flexibility.
    Keywords: financial crisis , emerging markets , fiscal policy ,
    Date: 2006–10–13
  40. By: Timothy N. Cason (Department of Economics, Purdue University); Tatsuyoshi Saijo (Osaka University); Tomas Sjostrom (Department of Economics, Rutgers University); Takehiko Yamato (Department of Value & Decision Science, Tokyo Institute of Technology)
    Abstract: Strategy-proofness, requiring that truth-telling is a dominant strategy, is a standard concept used in social choice theory. Saijo et al. (2003) argue that this concept has serious drawbacks. In particular, many strategy-proof mechanisms have a continuum of Nash equilibria, including equilibria other than dominant strategy equilibria. For only a subset of strategy-proof mechanisms do the set of Nash equilibria and the set of dominant strategy equilibria coincide. For example, this double coincidence occurs in the Groves mechanism when preferences are single-peaked. We report experiments using two strategy-proof mechanisms. One of them has a large number of Nash equilibria, but the other has a unique Nash equilibrium. We found clear differences in the rate of dominant strategy play between the two.
    Keywords: Experiment, Laboratory, Secure Implementation, Groves-Clarke, Pivotal, Learning
    JEL: C92 D71 D78 H41
    Date: 2005–07
  41. By: Carlo Carraro (Department of Economics, University Of Venice Cà Foscari); Barbara Buchner (Fondazione Eni Enrico Mattei)
    Abstract: There are increasing signals that countries that negotiate on GHG emission control are unlikely to sign and ratify a single climate protocol, even though almost all countries have subscribed the UNFCCC convention that sets the framework of international climate cooperation. In addition to the US decision not to ratify the Kyoto Protocol, New Zealand and Australia recently led to the formation of a new alliance in which technological cooperation is the main tool to achieve GHG emission control. In the U.S., some States on the Eastern coast are negotiating to adopt emission reduction targets and to establish a permit market despite the opposition of the federal government. Cooperation on climate policy is also the objective of recent negotiations between ASEAN countries. Given this background, this paper aims at examining whether the aforementioned events are simply the noise of a political process leading to a global agreement on climate change control or are instead consistent with some basic economic incentives that are pushing countries towards the formation of two (or more) parallel climate blocs. To this aim, this paper uses a well known integrated assessment climate-economy model to evaluate the incentives to cooperation in climate negotiations for the main world countries. A game-theoretic framework is adopted to analyse a country’s incentive to belong to a climate coalition. In our setting, a given country can either join one of the existing climate coalitions or can propose a new one or can decide to free-ride on the other countries’ cooperative abatement effort. We then analyse the characteristics of the main possible outcomes and assess which outcomes are most likely to prevail in future negotiations, at least as far as economic incentives are concerned.
    Keywords: Agreements, Climate, Incentives, Negotiations, Policy
    JEL: C72 H23 Q25 Q28
    Date: 2005
  42. By: Moser, Christoph; Nestmann, Thorsten; Wedow, Michael
    Abstract: Political risk represents an important hidden transaction cost that reduces international trade. This paper investigates the claim that German public export credit guarantees (Hermes guarantees) mitigate this friction to trade flows and hence promote exports. We employ an empirical trade gravity model, where we explicitly control for political risk in the importing country in order to evaluate the effect of export guarantees. The idea behind export promotion through public export credit agencies (ECAs) is that the private market is unable to provide adequate insurance for all risks associated with exports. As a consequence, firms' export activities are limited in the absence of insurance provision. Using a novel data set on guarantees we estimate the effect of guarantees in a static and dynamic panel model. We find a statistically and economically significant positive effect of public export guarantees on exports which indicates that export promotion is indeed effective. Furthermore, political risk turns out to be a robust determinant of exports and hence should be taken into account in any empirical model of trade.
    Keywords: public export credit guarantees, political risk, panel regression
    JEL: C23 F13 H81
    Date: 2006
  43. By: Patrick Hamm; David Stuckler; Lawrence King
    Abstract: During the transition to capitalism, postcommunist countries have experienced unprecedented mortality crises, although there has been considerable variation within — and between — countries and regions. Much of this variation remains unexplained, although alcohol and psychological stress have been found to be major causes of declining life expectancy. We move beyond this finding by showing that the implementation of neoliberal-inspired rapid large-scale privatization programs (mass privatization) was a major determinant of the decline in life expectancy. We find that mass privatization also increased alcohol-related deaths, heart disease, and suicide rates, strong evidence that mass privatization created psychosocial stress that directly resulted in higher mortality. We also find that mass privatization modestly contributed to a decline in the number of physicians, dentists, and hospital beds per capita; however, we find only very weak evidence that this reduction in health resources directly contributed to the mortality crisis itself. By using “control function” and instrumental variable approaches to account for the potential endogeneity of mass privatization, we also demonstrate that the choice of mass privatization as a property-reform strategy was not economically determined, but was rather caused by ethnic politics and the mimicking of policies adopted by powerful neighboring countries.
    Keywords: postcommunist, mortality crisis, privatization, psychosocial stress
    JEL: I12 J18 L33 P36
    Date: 2006
  44. By: Bernardo Bortolotti (Fondazione Eni Enrico Mattei); Valentina Milella (Fondazione Eni Enrico Mattei)
    Abstract: Privatization has certainly been one of the main events of the economic and financial history of the 20th century. Between 1997 and 2004 more than 4,000 privatization operations were carried out in the world, bringing to governments revenues for over 1,350US$billion. Western Europe emerges as the most important region, having implemented the greatest number of privatizations and raised a half of global revenues. The relevance of Western Europe in the process can be ascribed to several factors. This paper investigates the causes of this process, summarizes the main trends of privatization activity at the country level, analyzes the main privatization drivers and provides an account of the main findings of the effects of privatization at the macro and microeconomic level.
    Keywords: Privatization, State-Owned Sector, Capital Markets, Financial Development
    JEL: L33
    Date: 2006–10

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