nep-pbe New Economics Papers
on Public Economics
Issue of 2006‒12‒16
nineteen papers chosen by
Peren Arin
Massey University

  1. The Effects of the Ageing European Population on Economic Growth and Budgets: Implications for Immigration and Other Policies By Martin S. Feldstein
  2. Taxing Consumption and Other Sins By James R. Hines Jr.
  3. Evaluating Effects of Tax Preferences on Health Care Spending and Federal Revenues By John F. Cogan; R. Glenn Hubbard; Daniel P. Kessler
  4. Coalition Formation in Political Games By Daron Acemoglu; Georgy Egorov; Konstantin Sonin
  5. Government Spending and the Taylor Principle By Gisle James Natvik
  6. Ramsey meets Hosios: the optimal capital tax and labor market efficiency By David M. Arseneau; Sanjay K. Chugh
  7. An Optimal Rate of the National Burden in an Aging Japan By OKAMOTO Akira
  8. Efficiency and coordination of fiscal policy in open economies. By Gilbert KOENIG; Irem ZEYNELOGLU
  9. Measuring fiscal disparities across the U.S. states: a representative revenue system/representative expenditure system approach, fiscal year 2002 By Yesim Yilmaz; Sonya Hoo; Matthew Nagowski; Kim Rueben; Robert Tannenwald
  10. Self-Insurance and Self-Protection as Public Goods By Lohse, Tim; Julio R. Robledo; Ulrich Schmidt
  12. Social services in France : A public/private partnership By Edith Archambault
  13. Social Security's delayed retirement credit and the labor supply of older men By Jonathan F. Pingle
  14. Stratification and Public Utility Services in Colombia: Subsidies to Households or Distortions on Housing Prices? By Carlos Medina; Leonardo Morales
  15. Resilience through Restructuring: Swedish Policy-Making Style and the Consensus on Liberalizations 1980–2000 By Bergh, Andreas; Erlingsson, Gissur
  16. Strong Enforcement by a Weak Authority By Jakub Steiner
  17. Do Students Care about School Quality? Determinants of Dropout Behavior in Developing Countries By Eric A. Hanushek; Victor Lavy; Kohtaro Hitomi
  18. Panel Data Analysis of the Time-Varying Determinants of Corruption By Guillaume R. Fréchette
  19. The effect of temporary employment subsidies on employment duration By Christian, GOEBEL

  1. By: Martin S. Feldstein
    Abstract: The ageing of the population presents a major fiscal challenge for the countries of Europe. The combination of increased longevity and a reduced birth rate will directly reduce the growth rates of the European economies by slowing the growth of the capital stock and by weakening the productivity of the labor force. This slower growth of GDP means a smaller tax base and less tax revenue. In addition, the current tax-financed systems of social pensions and health care will require substantial increases in the already high tax rates. The analysis in this paper shows that the common prescription of increased immigration would do little to reduce the future fiscal burden. The increased revenue from a large rise in immigration would finance only a small part of the coming rise in the cost of pension and health benefits. The only alternative to significantly higher tax rates or substantially lower retirement income is to shift from a pure tax-financed system to a mixed system that supplements the tax financed benefits with benefits based on increased saving financial investment.
    JEL: H2 H55 J61
    Date: 2006–12
  2. By: James R. Hines Jr.
    Abstract: Throughout American history, the U.S. federal and state governments have imposed excise taxes on commodities such as alcohol and tobacco (and more recently, gasoline and firearms). Rates of such "sin" taxation, and consumption taxation broadly (including sales taxes and value-added taxes), are currently much lower in the United States than they are in Europe, Japan, and other affluent parts of the world. In part, this reflects relative government sizes, but that is not the whole story, since even controlling for total tax collections, levels of national income, government decentralization, and openness to international trade, the United States imposes unusually low excise and consumption taxes. As a result, the United States relies to a much greater degree than other countries on personal and corporate income taxes, thereby affording fewer opportunities to use the tax system to protect individuals and the environment by discouraging the consumption of "sinful" commodities, and instead simply discouraging saving and investment.
    JEL: H20 H23 H71
    Date: 2006–12
  3. By: John F. Cogan; R. Glenn Hubbard; Daniel P. Kessler
    Abstract: In this paper, we calculate the consequences for health spending and federal revenues of an above-the-line deduction for out-of-pocket health spending. We show how the response of spending to this expansion in the tax preference can be specified as a function of a small number of behavioral parameters that have been estimated in the existing literature. We compare our estimates to those from other researchers. And, we use our analysis to derive some implications for tax policy toward HSAs.
    JEL: H2 H5 I1
    Date: 2006–12
  4. By: Daron Acemoglu (MIT); Georgy Egorov (Harvard); Konstantin Sonin (CEFIR)
    Abstract: We study the formation of a ruling coalition in political environments. Each individual is endowed with a level of political power. The ruling coalition consists of a subset of the individuals in the society and decides the distribution of resources. A ruling coalition needs to contain enough powerful members to win against any alternative coalition that may challenge it, and it needs to be self-enforcing, in the sense that none of its subcoalitions should be able to secede and become the new ruling coalition. We first present an axiomatic approach that captures these notions and determines a (generically) unique ruling coalition. We then construct a simple dynamic game that encompasses these ideas and prove that the sequentially weakly dominant equilibria (and the Markovian trembling hand perfect equilibria) of this game coincide with the set of ruling coalitions of the axiomatic approach. We also show the equivalence of these notions to the core of a related non-transferable utility cooperative game. In all cases, the nature of the ruling coalition is determined by the power constraint, which requires that the ruling coalition be powerful enough, and by the enforcement constraint, which imposes that no subcoalition of the ruling coalition that commands a majority is self-enforcing. The key insight that emerges from this characterization is that the coalition is made self-enforcing precisely by the failure of its winning subcoalitions to be self-enforcing. This is most simply illustrated by the following simple finding: with simple majority rule, while three-person (or larger) coalitions can be self-enforcing, two-person coalitions are generically not self-enforcing. Therefore, the reasoning in this paper suggests that three-person juntas or councils should be more common than two-person ones. In addition, we provide conditions under which the grand coalition will be the ruling coalition and conditions under which the most powerful individuals will not be included in the ruling coalition. We also use this framework to discuss endogenous party formation.
    Keywords: Coalition Formation, Collective Choice, Cooperative Game Theory, Political Economy,Self-Enforcing Coalitions, Stability
    JEL: D71 D74 C71
    Date: 2006–11
  5. By: Gisle James Natvik (University of Oslo and Norges Bank (Central Bank of Norway))
    Abstract: This paper explores how government size affects the scope for equilibrium indeterminacy in a New Keynesian economy where part of the population live hand-to-mouth. I find that in this framework, a larger public sector may widen the scope for self-fulfilling prophecies to occur. This takes place even though taxes serve to reduce swings in current income. In general, government provision of goods that are Edgeworth substitutes for private consumption tend to narrow the scope for indeterminacy, while government goods that are Edgeworth complements for private consumption increase the problem of indeterminacy. Hence monetary policy should be conducted with an eye to the amount and composition of government consumption.
    Keywords: Public expenditures, Taylor principle, Fiscal policy rules, Rule- of-thumb consumers.
    JEL: E32 E52 E63
    Date: 2006–12–11
  6. By: David M. Arseneau; Sanjay K. Chugh
    Abstract: Heterogeneity between unemployed and employed individuals matters for optimal fiscal policy. This paper considers the consequences of welfare heterogeneity between these two groups for the determination of optimal capital and labor income taxes in a model with matching frictions in the labor market. In line with a recent finding in the literature, we find that the optimal capital tax is typically non-zero because it is used to indirectly mitigate an externality along the extensive labor margin that arises from search and matching frictions. However, the consideration of heterogeneity makes our result differ in an important way: even for a well-known parameter configuration (the Hosios condition) that typically eliminates this externality, we show that the optimal capital income tax is still non-zero. We also show that labor adjustment along the intensive margin has an important effect on efficiency at the extensive margin, and hence on the optimal capital tax, independent of welfare heterogeneity. Taken together, our results show that these two empirically-relevant features of the labor market can have a quantitatively-important effect on the optimal capital tax.
    Date: 2006
  7. By: OKAMOTO Akira
    Abstract: This paper examines an optimal rate of the national burden to establish guidelines for fiscal reform in Japan's graying society. The paper looks at Japanese tax and social security systems through an extended life-cycle general equilibrium simulation model. It explicitly considers the benefits that the government provides to households, which enables us to comprehensively evaluate the balance between benefits and burdens. Simulation results show that an optimal rate of the national burden is high when households put a great utility weight on the benefits coming from public services, and that it is low when the degree of publicness of government expenditure is high. The results also suggest that an optimal rate of the national burden would rise as Japan ages and may exceed 50% during the rapid aging of its population.
    Date: 2006–12
  8. By: Gilbert KOENIG; Irem ZEYNELOGLU
    Abstract: In this paper, we use a two country stochastic “new open economy macroeconomics” model with sticky wages and imperfect competition where public spending and private consumption appear in a non-separable way in individual preferences. We use this setup to define optimal fiscal policy in the face of a productivity shock and to analyze the efficiency of this optimal fiscal policy as a stabilization tool. We also consider strategic games between fiscal authorities in the two countries in order to see if there are additional gains from fiscal cooperation. We find that optimal fiscal policy consists of a deviation in the same direction as the deviation of the shock and that this type of reaction reduces the negative effects of the shock. We find also that fiscal cooperation generates a higher level of welfare than under Nash. However, the gain from cooperation is very likely to be negligible.
    Keywords: Fiscal policy, policy coordination, stabilization, new open economy macroeconomics.
    JEL: E62 F41 F42
    Date: 2006
  9. By: Yesim Yilmaz; Sonya Hoo; Matthew Nagowski; Kim Rueben; Robert Tannenwald
    Abstract: States and their local governments vary both in their needs to provide basic public services and in their abilities to raise revenues to pay for those services. A joint study by the Tax Policy Center and the New England Policy Center at the Federal Reserve Bank of Boston uses the Representative Revenue System (RRS) and the Representative Expenditure System (RES) frameworks to quantify these disparities across states by comparing each state’s revenue capacity, revenue effort, and necessary expenditures to the average capacity, effort, and need in states across the country for fiscal year 2002. ; The fiscal capacity of a state is the state’s revenue capacity relative to its expenditure need. A state with low fiscal capacity has a relatively small revenue base, a relatively high need for expenditures, or—as is often the case—a combination of both. ; The New England and Mid-Atlantic states tend to have high revenue capacity and low expenditure needs compared to the national average. Thus, states in these two regions tend to have high fiscal capacity, or a relatively high capability to cover their expenditure needs using own resources. South Central states, on the other hand, have low fiscal capacity—that is, a low level of revenue-raising capacity given what it would cost to provide a standard set of public services to their citizens. ; Little relation exists between the amount of federal aid received by states and their fiscal capacity; federal money is not primarily distributed to offset differences in the ability to raise revenues or provide services. Given the current level of federal funds allocated to state and local governments, 91 percent of the gap between revenue capacity and expenditure need across the states could be covered if federal funds were reallocated.
    Date: 2006
  10. By: Lohse, Tim; Julio R. Robledo; Ulrich Schmidt
    Abstract: Many public goods like dams, fire departments, and lighthouses do not provide direct utility but act more as insurance devices against floods, fire, and shipwreck. They either diminish the probability or the size of the loss. We extend the public good model with this insurance aspect and generalize Samuelson's efficient allocation rule when self-insurance and self-protection expenditures are pure public goods. Some comparative static results with respect to changes in income and risk behavior are derived. As some of the sketched risks are insurable while some others are not, we introduce further the possibility of risk coverage by private market insurance. We analyze the interaction of such an insurance with the public good level, both for efficient provision and for private provision equilibria. It turns out that the levels of self-insurance and self-protection decrease when being privately provided. Moreover, it appears a strategic substitutability between the public good and market insurance which leads to an additional decline of the provision levels.
    Keywords: self-insurance, self-protection, efficient provision of public goods, private provision of public goods, market insurance
    JEL: G22 H41
    Date: 2006–12
  11. By: Davis, Steven J. (The University of Chicago Graduate School of Business); Henrekson, Magnus (Dept. of Economics, Stockholm School of Economics)
    Abstract: Abstract: Following a severe contraction in the early 1990s, the Swedish economy accumulated a strong record of output growth coupled with a disappointing performance in the labor market. As of 2005, hours worked per person 20–64 years of age are 10.5 percent below the 1990 peak and a mere one percent above the 1993 trough. Employment rates tell a similar story. Our explanation for Sweden’s weak performance with respect to market work activity highlights the role of high tax rates on labor income and consumption expenditures, wage-setting arrangements that compress relative wages, business tax policies that disfavor labor-intensive industries and technologies, and a variety of policies and institutional arrangements that disadvantage younger and smaller businesses. This last category includes tax policies that penalize wealth accumulation in the form of owner-operated businesses, a pension system that steers equity capital and loanable funds to large incumbent corporations, and legally mandated job-security provisions that weigh more heavily on smaller and younger businesses. We describe these features of the Swedish institutional setup and provide evidence of their consequences based largely on international comparisons.
    Keywords: Business taxation; Industry structure; Swedish economic performance; Tax effects; Time allocation; Wage-setting institutions; Work activity
    JEL: D13 H30 J20 L52 O52
    Date: 2006–12–08
  12. By: Edith Archambault (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: After a brief overview of the historical background, the main object of this chapter is to analyse the type of relationship that have been developed between the government, at its different levels, and the non-profit organisations, in the recent years, and the consequences of these new relationship on the traditional functions of non-profit organisations
    Keywords: nonprofit organisations; public/private partnership; welfare mix; decentralisation; social services; antiselection
    Date: 2006–12–08
  13. By: Jonathan F. Pingle
    Abstract: This paper presents estimates of the impact of Social Security's Delayed Retirement Credit on the employment rates of older men. The credit raises lifetime social security benefit payments for recipients who delay receiving benefits after age 65 and offers a rare and important test of whether labor supply incentives built in to the program can promote work at older ages. The results suggest that the increased incentives raised employment among workers over age 65. In addition, the recent increases in social security's Normal Retirement Age also appear to be pushing up labor supply.
    Date: 2006
  14. By: Carlos Medina; Leonardo Morales
    Abstract: Domiciliary public utility services in Colombia have a cross subsidy system which charges subsidized rates to the households who live in houses located in strata associated to low wealth levels, and taxed rates to the better off. We assesses the hypothesis that the flow of subsidies that potentially come from a particular house, are discounted by housing market agents so that most of them are transferred to the prices of the houses that generate the subsidies. By estimating a hedonic prices model applying a regression discontinuity approach, we find that the increment in house value estimated because of subsidies is similar in magnitude to the present value of the flow of subsidies. Likely effects are found on the rent amount. We conclude that subsidies to the poor population through public spending in domiciliary public utility services in Colombia is being achieved, if anything, in a very limited way. Most of the financial effort on this subject ends up distorting housing relative prices according to socioeconomic strata, with an annual cost of up to 0.7% of GDP in supposed gross subsidies to domiciliary public utility services.
    Date: 2006–12–01
  15. By: Bergh, Andreas (Ratio); Erlingsson, Gissur (Ratio)
    Abstract: In 1980, Sweden was a highly regulated economy with several state monopolies and low levels of economic freedom. Less than 20 years later, liberal reforms have turned Sweden into one of the worlds most open economies with a remarkable increase in economic freedom. While taxes and expenditure shares of GDP remain high, there has been a profound restructuring of Sweden’s economy in the 1980s and 1990s. Furthermore, the degree of political consensus is striking, both regarding the policies that characterized Sweden up to 1980, as well as the subsequent liberalizations. Since established theories have difficulties explaining institutional change in heavily institutionalized settings, we seek to understand how the Swedish style of policy-making produced this surprising political consensus on liberal reforms. Building on previous research, we underscore the importance of three complementary factors: (i) Policy-making in Sweden has always been influenced by, and intimately connected to, social science. (ii) Government commissions have functioned as ‘early warning systems’, pointing out future challenges and creating a common way to perceive problems. (iii) As a consequence from social science influence and the role of public investigations, political consensus has evolved as a specific feature of Swedish style of policy-making. The approach to policy-making has been rationalistic, technocratic and pragmatic. Thus, the political consensus in Sweden on substantial liberalizations is no more surprising than the political consensus on the development of the welfare state.
    Keywords: Sweden; Welfare state; institutional change; globalization; policy-making; policy-style
    JEL: H10 H11 H83
    Date: 2006–12–08
  16. By: Jakub Steiner
    Abstract: This paper studies the enforcement abilities of authorities with a limited commitment to punishing violators. Commitment of resources su±cient to punish only one agent is needed to enforce high compliance of an arbitrary number of agents. Though existence of other, non-compliance equilibria is generally inevitable, there exist punishment rules suitable for a limited authority to assure that compliance prevails in the long run under stochastic evolution.
    Keywords: Commitment, Enforcement, Punishment, Stochastic Evolution.
    JEL: C73 D64 H41
  17. By: Eric A. Hanushek; Victor Lavy; Kohtaro Hitomi
    Abstract: School quality and grade completion by students are shown to be directly linked, leading to very different perspectives on educational policy in developing countries. Unique panel data on primary school age children in Egypt permit estimation of behavioral models of school leaving. Students perceive differences in school quality, measured as expected achievement improvements in a given school, and act on it. Specifically, holding constant the student's own ability and achievement, a student is much less likely to remain in school if attending a low quality school rather than a high quality school. This individually rationale behavior suggests that common arguments about a trade-off between quality and access to schools may misstate the real issue and lead to public investment in too little quality. Further, because of this behavioral linkage, there is an achievement bias such that common estimates of rates of return to years of school will be overstated. The paper demonstrates the analytical importance of employing output-based measures of school quality.
    JEL: H4 I2 J2 O15
    Date: 2006–12
  18. By: Guillaume R. Fréchette
    Abstract: There is a long history of models attempting to identify the causes of corruption, yet empirical analysis is complicated. Not only is data difficult to obtain and often available only for few countries and a limited number of years, but such estimation involves inherent complexities. This paper focuses on the use of panel data techniques to better identify factors that affect bureaucratic corruption. Furthermore, this paper identifies an endogeneity problem which arises in the analysis of the causes of corruption, and a new instrumental variable is proposed to solve it. To help in this endeavor, a data set is employed which provides information for as many as 135 countries over a span of sixteen years. Results show that neglecting the endogeneity problem leads to severely biased results. Using panel data techniques reveals that the availability of rents is a crucial determinant of corruption and that previous research may have underestimated the economic significance of rents on corruption. Furthermore, corruption is shown to be procyclical. <P>Depuis longtemps, des modèles sont utilisés dans le but de déterminer les causes de la corruption. Toutefois, l’analyse empirique demeure complexe. Qui plus est, les données sont difficiles à recueillir et couvrent souvent un nombre restreint de pays et une période limitée. Ce genre d’évaluation présente aussi des complexités inhérentes. Le présent document met l’accent sur le recours à des techniques de données de panels dans le but de mieux connaître les facteurs qui influent sur la corruption bureaucratique. En outre, cette analyse souligne le problème d’endogénéité qui ressort de l’analyse des causes de la corruption et propose une nouvelle variable instrumentale permettant de contrer celui-ci. Pour faciliter la démarche, ce document utilise un ensemble de données fournissant des renseignements sur au moins 135 pays et pour une période de seize ans. Les résultats indiquent que si le problème d’endogénéité n’est pas pris en compte, les résultats sont sérieusement biaisés. De plus, la corruption est décrite comme étant procyclique.
    Keywords: corruption, endogeneity, income, rents, corruption, endogénéité
    JEL: H8 K4 C33
    Date: 2006–12–01
  19. By: Christian, GOEBEL
    Abstract: In this paper we estimate the impact of temporary employment subsidies for young long-)term unemployed workers in Belgium on the transition rate from employment to non-employment. We account for selective participation on the basis of a multivariate duration model with correlated unobserved heterogeneity. Our estimates indicate that the policy decreases the transition rate from employment to non-employment in the first year of participation. There is no signification effect on the transition rates in the second year and after participation.
    Keywords: Evaluation, Subsidised employment, MMPH, employment duration
    JEL: J64 J68 C41 H43
    Date: 2006

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