nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒02‒10
thirty-six papers chosen by
Peren Arin
Massey University

  1. Early warning or just wise after the event? The problem of using cyclically adjusted budget deficits for fiscal surveillance By Andrew Hughes Hallett; Rasmus Kattai; John Lewis
  2. Explaining the Variation in Tax Structures in the MENA Region By Mehmet Tosun
  3. With or Against the People? The Impact of a Bottom-Up Approach on Tax Morale and the Shadow Economy By Benno Torgler; Friedrich Schneider; Christoph A. Schaltegger
  5. Tax-tariff reform with costs of tax administration By Knud Jørgen Munk
  6. Taxing Capital? Not a Bad Idea After All! By Juan Carlos Conesa; Sagiri Kitao; Dirk Krueger
  7. Government Size and the Composition of Public Spending in a Neoclassical Growth Model By Oliviero A. Carboni; Giuseppe Medda
  8. The Excess Burden of Government Indecision By Francisco J. Gomes; Laurence J. Kotlikoff; Luis M. Viceira
  9. A Unifying Model of How the Tax System and Generally Accepted Accounting Principles Affect Corporate Behavior By Douglas A. Shackelford; Joel Slemrod; James M. Sallee
  10. Welfare Effects of Tax and Price Changes and the CES-UT Utility Function By Knud Jørgen Munk
  11. Taxation and Market Work: Is Scandinavia an Outlier? By Richard Rogerson
  12. The Relevance of the fiscal Theory of the Price Level revisited By Thams, Andreas
  13. Risky human capital and deferred capital income taxation By Borys Grochulski; Tomasz Piskorski
  14. Fiscal Relations Across Levels of Government in Australia By Vassiliki Koutsogeorgopoulou
  15. Rules of Normalisation and their Importance for Interpretation of Systems of Optimal Taxation By Knud Jørgen Munk
  16. School finance in Vermont: balancing equal education and fair tax burdens By Darcy Rollins Saas
  17. The Farm, the City, and the Emergence of Social Security By Elizabeth M. Caucutt; Thomas F. Cooley; Nezih Guner
  18. Searching for Fiscal Effects: A VECM Model of Household Consumption Expenditures By Erdogdu, Oya
  19. Fiscal Decentralization in China and India: Competitive, Cooperative or Market Preserving Federalism? By Singh, Nirvikar
  20. Growth, public investment and corruption with failing institutions By David, DE LA CROIX; Clara, DELAVALLADE
  21. Social Preferences and Public Economics: Are good laws a substitute for good citizens? By Samuel Bowles
  22. On the Rationale for the Use of Border Taxes in Developing Countries By Knud Jørgen Munk
  23. Growth Effects of Spatial Redistribution Policies By Calin Arcalean; Gerhard Glomm; Ioana Schiopu
  24. Social Capital and Relative Income Concerns: Evidence from 26 Countries By Justina A.V. Fischer; Benno Torgler
  26. Has Social Security Influenced Family Formation and Fertility in OECD Countries? An Economic and Econometric Analysis By Isaac Ehrlich; Jinyoung Kim
  27. Law and State Power: The Institutional Roots of the Strong State in Islamic History By Metin Cosgel; Rasha Ahmed; Thomas Miceli
  28. Estimating economic and social welfare impacts of pension reform By van de Coevering, Clement; Foster, Daniel; Haunit, Paula; Kennedy, Cathal; Meagher, Sarah; Van den Berg, Jennie
  29. The Pros and Cons of Banking Socialism By Martin Gregor
  30. Public enterprise reforms and efficiency in regulated environments: the case of the postal sector By Juan carlos Morales Piñero; Joaquim Vergés Jaime
  31. Should Political Scientists Use the Self-Confirming Equilibrium Concept? Explaining the Choices of Cognitively Limited Actors By Lupia, Arthur; Zharinova, Natasha; Levine, Adam Seth
  32. The Impact of Institutional Characteristics on the Use and Effectiveness of Rainy Day Funds: A Pilot Study of Municipal Governments in West Virginia By Michael Daugherty; Odd Stalebrink; Mehmet Tosun
  33. The impact of private provision of public education : empirical evidence from Bogota ' s concession schools By Barrera-Osorio, Felipe
  35. The Preferences of Voters Over Road Tolls and Road Capacity By Amihai Glazer; Stef Proost
  36. Optimal disability assistance when fraud and stigma matter By Laurence, JACQUET

  1. By: Andrew Hughes Hallett; Rasmus Kattai; John Lewis
    Abstract: The effectiveness of cyclically adjusted balances (CABs) as an indicator of the health of public finances depends on the accuracy with which cyclically adjusted figures can be calculated in real time. This paper measures the accuracy of such figures using a specially constructed real time dataset containing published values of deficits, output gaps and cyclically adjusted deficits from successive issues of OECD economic outlook. We find that data revisions are so great that real-time CABs have low power in detecting fiscal slippages as defined by the ex post data.
    Keywords: fiscal surveillance, cyclically adjusted budget balance, real time data
    JEL: H62 H68
  2. By: Mehmet Tosun (Department of Economics, University of Nevada, Reno)
    Abstract: This paper examines the tax structures of the Middle East and North Africa (MENA) countries by focusing on the quality of governance and demographic changes as two influential factors in region’s economies. The objective of is to determine whether these factors can explain the variation in the tax structures of these countries. Results from regressions on the MENA countries and the ones based on a larger sample of 61 countries show that these factors affected the level of taxation, measured by the tax ratio, more strongly than they affected the tax composition. While the quality of governance seems to have affected the tax structures in the MENA countries more than in other comparable Non-OECD countries, demographics seems to have played a bigger role in determining the tax structures in other Non-OECD countries. However, neither of these factors explained changes in the income tax share satisfactorily. One key result is that the increase in the quality of governance has decreased the reliance on domestic taxes on goods and services. The paper provides a discussion on the policy implications of these results.
    Keywords: Tax structure, quality of governance, demographics, MENA countries
    JEL: E62 H20 H71 H87
    Date: 2006–12
  3. By: Benno Torgler; Friedrich Schneider; Christoph A. Schaltegger
    Abstract: Policymakers often propose strict enforcement strategies to fight the shadow economy and to increase tax morale. However, there is also a bottom-up approach: decentralizing the political power to those who are close to the problems and give them a direct political say. This paper analyses the impact of direct democracy and local autonomy on tax morale and the size of the shadow economy. We use two different data sets on tax morale at the individual level (World Values Survey and International Social Survey Programme), and macro data of the size of the shadow economy to systematically analyse the effects of institutions in Switzerland, a country where participation rights and the degree of federalism vary across different cantons. The findings suggest that direct democratic rights and local autonomy, have a significantly positive effect on tax morale and the size of the shadow economy.
    Keywords: Tax Morale; Shadow Economy; Tax Compliance; Tax Evasion; Direct Democracy; Local Autonomy
    JEL: H26 H73 D70
    Date: 2007–01
  4. By: Manos Matsaganis (Athens University of Economics and Business); Maria Flevotomou (Athens University of Economics and Business)
    Abstract: Fiscal welfare, i.e. the use of the tax system to achieve social policy goals, is assuming ever greater importance throughout Europe and beyond. In housing, the favourable tax treatment of mortgage interest repayments has often coexisted alongside public programmes of housing benefit or social housing. Although the distributional effects of tax expenditure are known to be regressive, the issue has remained relatively under-researched. The paper uses the European tax-benefit model EUROMOD to quantify the distributional impact of mortgage interest tax relief in five European countries: the Netherlands, Sweden, Finland, Italy and Greece. The analysis reveals that higher-income groups capture a disproportionate share of total expenditure on mortgage interest tax relief in all countries, and that this effect is most regressive in the Netherlands and least regressive in Sweden. The paper concludes with a discussion of results and their policy implications.
    Keywords: tax relief, mortgage repayments, inequality, microsimulation
    JEL: H23 I38 R21
    Date: 2007–02
  5. By: Knud Jørgen Munk (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: As is broadly recognized, the straightforward application of the Diamond-Mirrlees (1971) production efficiency theorem implies that when lump-sum taxation is not available, then it is optimal for the government in a small open economy to rely on taxes on the net demand of households rather than on border taxes to finance its resource requirements. However, the theorem does not hold when taxation is associated with administrative costs. The present paper explores the implications of taking into account the costs of tax administration for optimal taxation and for desirable directions of tax-tariff reform in countries at different levels of economic development. The paper clarifies the reasons for, and lends support to, the criticism by Stiglitz (2003) of the IMF and the World Bank's recommendation to developing countries to adopt VAT to replace border taxes.
    Keywords: Optimal taxation, optimal trade policy, VAT, tax-tariff reform, costs of tax administration, informal sector, developing countries
    JEL: F11 F13 H21
    Date: 2006–12–30
  6. By: Juan Carlos Conesa; Sagiri Kitao; Dirk Krueger
    Abstract: In this paper we quantitatively characterize the optimal capital and labor income tax in an overlapping generations model with idiosyncratic, uninsurable income shocks, where households also differ permanently with respect to their ability to generate income. The welfare criterion we employ is ex-ante (before ability is realized) expected (with respect to uninsurable productivity shocks) utility of a newborn in a stationary equilibrium. Embedded in this welfare criterion is a concern of the policy maker for insurance against idiosyncratic shocks and redistribution among agents of different abilities. Such insurance and redistribution can be achieved by progressive labor income taxes or taxation of capital income, or both. The policy maker has then to trade off these concerns against the standard distortions these taxes generate for the labor supply and capital accumulation decision. We find that in our model the optimal capital income tax rate is significantly positive. The optimal (marginal and average) tax rate on capital is 36%, in conjunction with a progressive labor income tax code that is, to a first approximation, a flat tax of 23% with a deduction that corresponds to about $6,000 (relative to an average income of households in the model of $35,000). We argue that the high optimal capital income tax is mainly driven by the life cycle structure of the model whereas the optimal progressivity of the labor income tax is due to the insurance and redistribution role of the income tax system.
    JEL: E62 H21 H24
    Date: 2007–01
  7. By: Oliviero A. Carboni; Giuseppe Medda
    Abstract: This paper develops a non-linear theoretical relationship between public spending and economic growth. The model identifies the “optimal” size of government and the “optimal” composition of government spending. Given the size of the government, different allocations of public resources lead to different growth rates in the transition dynamics, depending on their elasticity. We argue that neglecting the hypothesis of non-linearity and the different impact different kinds of public spending have on economic performance results in models which suffer from mis-specification. Traditional linear regression analysis may thus be biased
    Keywords: neoclassical and augmented growth models, fiscal policy; public spending composition
    JEL: E62 O40 H50 E13 H20
    Date: 2007
  8. By: Francisco J. Gomes; Laurence J. Kotlikoff; Luis M. Viceira
    Abstract: Governments are known for procrastinating when it comes to resolving painful policy problems. Whatever the political motives for waiting to decide, procrastination distorts economic decisions relative to what would arise with early policy resolution. In so doing, it engenders excess burden. This paper posits, calibrates, and simulates a life cycle model with earnings, lifespan, investment return, and future policy uncertainty. It then measures the excess burden from delayed resolution of policy uncertainty. The first uncertain policy we consider concerns the level of future Social Security benefits. Specifically, we examine how an agent would respond to learning in advance whether she will experience a major Social Security benefit cut starting at age 65. We show that having to wait to learn materially affects consumption, saving, and portfolio decisions. It also reduces welfare. Indeed, we show that the excess burden of government indecision can, in this instance, range as high as 0.6 percent of the agent's economic resources. This is a significant distortion in of itself. It's also significant when compared to other distortions measured in the literature. The second uncertain policy we consider concerns marginal tax rates. We obtain similar results once we adjust for the impact of tax rates on income.
    JEL: H2 H21 H55 H6
    Date: 2007–01
  9. By: Douglas A. Shackelford; Joel Slemrod; James M. Sallee
    Abstract: This paper models the impact of the tax system and GAAP on the real and financial reporting decisions of corporations. It provides a first step toward joint evaluation of taxation and financial reporting in the standard economic analyses of corporate behavior. The key finding is that value arises from real decisions that provide firms with discretion in their tax and financial reporting. This desire for flexibility modifies the optimal decisions of firms, in theory, and we provide examples that illustrate this behavior in the real world.
    JEL: H21 H25 M41
    Date: 2007–01
  10. By: Knud Jørgen Munk (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: Dixit’s 1975 paper "Welfare Effects of Tax and Price Changes" constitutes a seminal contribution to the theory of tax reform within a second-best general equilibrium framework. The present paper clarifies ambiguities with respect to normalisation which has led to misinterpretation of some of Dixit’s analytical results. It proves that a marginal tax reform starting from a proportional tax system will improve social welfare if it increases the supply of labour, whatever the rule of normalisation adopted. In models which impose additive separability between consumption and leisure in household preferences this insight cannot be articulated. This paper proposes as an alternative a parameterised utility function with explicit representation of the use of time, the CES-UT, which allows a flexible representation of the relationship between consumption and leisure. It also demonstrates how standard compensated price elasticities can be derived from the parameters of the CES-UT and how it may be used for applied tax reform analysis.
    Keywords: Public economics, optimal taxation, tax reform, tax simulation, CGE models
    JEL: H2
    Date: 2006–12–30
  11. By: Richard Rogerson
    Abstract: This paper argues that it is essential to explicitly consider how the government spends tax revenues when assessing the effects of tax rates on aggregate hours of market work. Different forms of government spending imply different elasticities of hours of work with regard to tax rates. I illustrate the empirical importance of this point by addressing the issue of hours worked and tax rates in three sets of economies: the US, Continental Europe and Scandinavia. While tax rates are highest in Scandinavia, hours worked in Scandinavia are significantly higher than they are in Continental Europe. I argue that differences in the form of government spending can potentially account for this pattern.
    JEL: E2 J2
    Date: 2007–02
  12. By: Thams, Andreas
    Abstract: This paper analyzes empirically the impact of fiscal policy on the price level for Germany and Spain. We investigate, whether the fiscal theory of the price level (FTPL) is able to deliver a reasonable explanation for the different evolutions of the price levels in these two countries during recent years. We apply a Bayesian VAR model with sign restrictions on the impulse responses to assess the relation between surpluses and public debt. The analysis basically evidences non-Ricardian equilibria in Spain, while the opposite is true for Germany. We interpret this as evidence for the inflation differences in these two countries being partially induced by fiscal policy shocks.
    Keywords: Fiscal theory; policy interaction; monetary policy; public debt; price level; euro area
    JEL: E52 E31 E61
    Date: 2007–02–01
  13. By: Borys Grochulski; Tomasz Piskorski
    Abstract: We study the structure of optimal wedges and capital taxes in a Mirrlees economy with endogenous skills. Human capital is a private state variable that drives the skill process of each individual. Building on the findings of the labor literature, we assume that human capital investment is a) risky, b) made early in the life-cycle, and c) hard to distinguish from consumption. These assumptions lead to the optimality of a) a human capital premium, i.e., an excess return on human capital relative to physical capital, b) a large intertemporal wedge early in the life-cycle stemming from the lack of Rogerson's [Econometrica, 1985] "inverse Euler" characterization of the optimal consumption process, and c) an intra-temporal distortion of the effort/consumption margin even at the top of the skill distribution at all dates except the terminal date. The main implication for the structure of linear capital taxes is the necessity of deferred taxation of physical capital. In particular, deferred taxation of capital prevents the agents from making a joint deviation of under-investing in human capital ex ante and shirking from labor effort at some future date in the life-cycle, as the marginal deferred tax rate on physical capital held early in the life-cycle is history-dependent. The average marginal tax rate on physical capital held in every period is zero in present value. Thus, as in Kocherlakota [Econometrica, 2005], the government revenue from capital taxation is zero. However, since a portion of the capital tax must be deferred, expected capital tax payments cannot be zero in every period. Necessarily, agents face negative expected capital tax payments due early in the life-cycle and positive expected capital tax payments late in the life-cycle. Also, relative to economies with exogenous skills, the optimal marginal wealth tax rate is more volatile
    Keywords: Taxation
    Date: 2007
  14. By: Vassiliki Koutsogeorgopoulou
    Abstract: Key areas of public service provision in Australia are subject to complex patterns of joint government involvement that can lead to inefficiencies. Clarifying government roles and responsibilities is likely to have a significant potential for improving public sector efficiency. Fragmentation of decision making and funding arrangements, particularly in the areas of hospital services and old-age care, creates incentives for cost and blame-shifting between government levels. A collaborative approach between government levels to overcome some of these problems, as recently initiated by the Council of Australian Governments, would help to develop better governance arrangements and improve spending assignments. A less complex system of inter-governmental transfers would also contribute to a more effective specification of spending responsibilities. Stronger revenue-raising capacity of the states, through a further improvement in the efficiency of the state tax system, would raise the ability of sub-national governments to meet expenditure responsibilities and be better prepared for coping with demographic change. <P>Les relations budgétaires entre niveaux d'administration en Australie <BR>La fourniture des principaux services publics en Australie fait intervenir des formules complexes de compétence partagée qui peuvent être source d'inefficience. Le secteur public pourrait sensiblement gagner en efficience si l'on clarifiait les missions et les compétences des différents niveaux d'administration. Le morcellement de la prise de décision et des dispositifs de financement, surtout pour les services hospitaliers et les soins aux personnes âgées, favorise les transferts de coûts et la déresponsabilisation dans les rapports entre niveaux d'administration. Une démarche fondée sur la coopération pour régler certains de ces problèmes, comme celle récemment engagée par le Conseil des gouvernements australiens, contribuerait à la mise en place de structures de gouvernance plus efficaces et à une meilleure affectation des dépenses. Un système moins complexe de transferts entre niveaux d'administration permettrait également de mieux préciser les responsabilités en matière de dépenses. Si les États avaient davantage de capacités de recettes, en améliorant encore l'efficience de leurs systèmes fiscaux, les autorités infranationales pourraient mieux faire face à leurs obligations de dépenses et seraient mieux préparées au changement démographique.
    Keywords: Australia, Australie, fiscal federalism, fédéralisme budgétaire, vertical imbalance, déséquilibre budgétaire vertical, horizontal equalization, peréquation budgétaire horizontale
    JEL: H1 H77
    Date: 2007–01–23
  15. By: Knud Jørgen Munk (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: The adoption of proper rules of normalisation is in general considered a trivial problem which deserves little attention. Possibly for that very reason errors in normalisation have resulted in flawed interpretations of the conditions for optimal commodity taxation. We state based on an explicit representation of the general equilibrium conditions the rules of normalisation in standard optimal tax models. This allows us to provide an intuitive explanation of what determines the optimal tax system. Finally, we review a number of examples where lack of precision with respect to normalisation in otherwise important contributions to the literature on optimal taxation has given rise to misinterpretations of of analytical results.
    Keywords: Public economics, optimal taxation, normalisation rules, p-complements, q-complements, distance function
    JEL: H2
    Date: 2006–12–30
  16. By: Darcy Rollins Saas
    Abstract: An education finance system that is constitutional under the Brigham ruling mandates sacrifices on the part of taxpayers for a public good—educated citizens. It remains to be seen if current proposals can make that sacrifice more palatable or ensure that those bearing the burden have the most stake in the outcomes of the system.
    Keywords: Public schools - Vermont ; Local finance - Vermont ; Taxation - Vermont ; Education - Vermont
    Date: 2007
  17. By: Elizabeth M. Caucutt; Thomas F. Cooley; Nezih Guner
    Abstract: During the period from 1880 to 1950, publicly managed retirement security programs became an important part of the social fabric in most advanced economies. In this paper we study the social, demographic and economic origins of social security. We describe a model economy in which demographics, technology, and social security are linked together. We study an economy with two locations (sectors), the farm (agricultural) and the city (industrial). The decision to migrate from rural to urban locations is endogenous and linked to productivity differences between the two locations and survival probabilities. Furthermore, the level of social security is determined by majority voting. We show that a calibrated version of this economy is consistent with the historical transformation in the United States. Initially a majority of voters live on the farm and do not want to implement social security. Once a majority of the voters move to the city, the median voter prefers a positive social security tax, and social security emerges.
    JEL: E61 H2 H55
    Date: 2007–01
  18. By: Erdogdu, Oya
    Abstract: Consumption expenditures is one significant component of aggregate demand. As opposed to lifetime income and permanent income hypothesises based on Ricardian policies, recent theoretical and empirical studies indicate possible fiscal impacts on household consumption decisions. Besides providing insights to determinants of consumption decisions, these studies also guide to policy solutions to high and risky current account deficits and high and persisting inflation rate problems. This empirical study for Turkey is another attempt to distinguish any non Ricardian policy and search for possible fiscal policy effects on household consumption decisions. Allowing for long run and short run effects indicates that the expentionary Keynesian impact of fiscal policy on household consumption is significant only if fiscal policy is sustainable.
    Keywords: Consumption; Fiscal Policy; Vector Error Correction Models
    JEL: E21 C32
    Date: 2006
  19. By: Singh, Nirvikar
    Abstract: This paper provides a comparative assessment of fiscal decentralization in China and India, including the standard components of expenditure and revenue assignments and institutions for intergovernmental transfers, as well as the nature of subnational authorities over general economic activity. In particular, the case of China, where town and village enterprises have been very active, is contrasted with that of India, where local governments remain circumscribed in their authority, despite decentralizing reforms. The implications of differences in decentralization for fiscal outcomes and economic growth are discussed. The characterization of each country in terms of concepts of federalism, i.e., competitive, cooperative and market preserving federalism, is discussed, in attempting to abstract from the two cases to more general lessons for fiscal decentralization.
    Keywords: cooperative federalism; competitive federalism; market-preserving federalism; decentralization; economic development
    JEL: P35 O10 P26
    Date: 2007–01
  20. By: David, DE LA CROIX (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics); Clara, DELAVALLADE
    Abstract: Corruption is thought to prevent poor countries from catching-up. We analyze one channel through which corruption hampers growth : public investment can be distorted in favor of specific types of spending for which rent-seeking is easier and better concealed. To study this distortion, we propose an optimal growth model where households vote for the composition of public spending subject to an incentive constraint reflecting individualsÕ choice between productive activity and rent-seeking. At equilibrium, the intensity of corruption and the structure of public investment are determined by the predatory technology and the distribution of political power. Among different regimes, the model shows a possible scenario of distortion without corruption in which there is no effective corruption yet still the possibility of corruption distorts the allocation of public investment, thus hampering growth. We test the implications of the model on a panel of countries estimating a system of equations which instrumental variables. We find that countries with a high predatory technology invest more in housing and physical capital in comparison with health and education. For equal initial conditions, such countries grow slower and have higher corruption, in particular when political power is concentrated
    Keywords: Public investment, Optimal growth, Corruption, Political power
    JEL: H50 D73
    Date: 2006–10–26
  21. By: Samuel Bowles (Santa Fe Institute, University of Siena and University of Massachusetts)
    Abstract: Laws and policies designed to harness self-regarding preferences to public ends may fail when they compromise the beneficial effects of pro-social preferences. Experimental evidence indicates that incentives that appeal to self interest may reduce the salience of intrinsic motivation, reciprocity, and other civic motives. Motivational crowding in also occurs. The evidence for these processes is reviewed and a model of optimal explicit incentives is presented. JEL Categories: D64, D52, H41, H21, Z13, C92
    Keywords: Social preferences, implementation theory, incentive contracts, incomplete contracts, framing, behavioral experiments, motivational crowding out, ethical norms, constitutions
    Date: 2007–01
  22. By: Knud Jørgen Munk (School of Economics and Management, University of Aarhus, Denmark)
    Abstract: With reference to the size of the informal sector, Stiglitz (2003) argues that border taxes are superior to VAT in certain developing countries. By way of a quantitative example this paper shows that, while Stiglitz’ claim is probably will turn out to be correct, a large informal sector is not a sufficient condition for border taxes to be preferable to a VAT regime as shown by Keen (2006). Making the case for using border taxes also requires the plausible supplementary assumptions that (i) border taxes are associated with lower administrative costs, and (ii) that this difference is sufficiently large to justify the larger distortionary costs associated with border taxes compared to domestic taxes.
    Keywords: Optimal trade policy, VAT, tax-tariff reform, costs of tax administration, informal sector, developing countries
    JEL: F11 F13 H21
    Date: 2006–12–30
  23. By: Calin Arcalean (Indiana University); Gerhard Glomm (Indiana University); Ioana Schiopu (Indiana University)
    Abstract: We develop a two-region, two sector model with migration and public investment in infrastructure and education. In a numerical example calibrated to Portugal, we find that the structural funds can improve the growth rate of the lagging region and slightly reduce the regional inequality, without necessarily producing convergence. When the mix of national public investment departs from optimum, the allocation of supra-national funds across infrastructure and public education can partially offset this national sub-optimality. We also find that the short-run growth-maximizing mix is different from the long-run mix. Moreover, the rich region has an incentive to bias the allocation of structural funds towards human capital formation.
    Keywords: endogenous growth, spatial redistribution, regional policy, European Union
    JEL: H7 R12 R58
    Date: 2007–01
  24. By: Justina A.V. Fischer; Benno Torgler
    Abstract: Research evidence on the impact of relative income position on individuals’ attitudes and behaviour is sorely lacking. Therefore, using the International Social Survey Programme 1998 data from 26 countries this paper investigates the impact of relative income on 14 measurements of social capital. We find support for a considerable deleterious positional concern effect of persons below the reference income. This effect is more sizeable by far than the beneficial impact of a relative income advantage. Most of the results indicate that such an effect is non-linear. Lastly, changing the reference group (regional versus national) produces no significant differences in the results.
    Keywords: Relative income; positional concerns; social capital; social norms; happiness
    JEL: Z13 I30 D31
    Date: 2007–01
  25. By: Francesco Figari (Institute for Social & Economic Research); Levy H (Institute for Social & Economic Research); Sutherland H (Institute for Social & Economic Research)
    Abstract: We explore the prospects for using the EU-SILC as the underlying micro-database for policy simulation across the EU. In particular we consider the issues to be addressed, and the advantages arising, from building a database from the EUSILC for the EU tax-benefit model, EUROMOD. In order to identify the issues and illustrate their importance a trial database for Spain is constructed. It is used within EUROMOD to calculate some selected social indicators as well as indicators of work incentives and the effects of fiscal drag in Spain between 2003 and 2006. We conclude that, although transforming the EU-SILC into a database for EUROMOD would require a significant amount of effort, this is likely to be worthwhile because of the consequential improvements in comparability across countries, efficiency in developing and maintaining the model for many countries and simplification of access arrangements. We therefore offer some suggestions for how to improve the User Database for this purpose.
    Keywords: EU-SILC, European Union; Microsimulation
    JEL: C81 C88 I32
    Date: 2007–01
  26. By: Isaac Ehrlich; Jinyoung Kim
    Abstract: There is growing concern about a decline in the total fertility rate worldwide, but nowhere is the concern greater than in OECD countries, some of which already face the prospect of population decline as well. While the trend is largely the result of structural economic and social changes, our paper indicates that it is partly influenced by the scale of the defined-benefits, pay-as-you-go (PAYG) social security systems operating in most countries. Through a dynamic, overlapping-generations model where the generations are linked by parental altruism, we show analytically that social security tax and benefit rates generate incentives for individuals to reduce not just the fertility rate within families, but also the incentive to form families, which we capture empirically by the fraction of adults married. We conduct calibrated simulations as well as regression analyses that measure the quantitative importance of social security tax rates in lowering both net marriage and total fertility rates. Our results show that the impact of social security on these variables has been non-trivial. Our calibrated simulations also enable us to study the effects of changes in the structure of social security on family formation and fertility.
    JEL: J1 O1
    Date: 2007–01
  27. By: Metin Cosgel (University of Connecticut); Rasha Ahmed (University of Connecticut); Thomas Miceli (University of Connecticut)
    Abstract: The struggle for power has been a persistent phenomenon throughout history, involving the rulers, general public, and various other interest groups. As one of these groups, the legal community has been in a unique position to regulate the relationship between the ruler and the public because of its dual responsibilities to provide services to the public and to impose constraints on the rulers. Using a political economy model of state power and focusing on the power of the rulers to tax and spend, we study the role of the legal community in regulating the coercive powers of the rulers in Islamic history. We examine the power relationship between the rulers, the legal community, and the general public, explain long term trends in the development of the rulersÇ power, and identify the institutional roots of the strong state in the Ottoman Empire and other Islamic states.
    Keywords: state power, taxation, political economy, Islamic Law, legal community
    Date: 2007–01
  28. By: van de Coevering, Clement; Foster, Daniel; Haunit, Paula; Kennedy, Cathal; Meagher, Sarah; Van den Berg, Jennie
    Abstract: This paper examines the impact of two effects of the pension reform package that the UK Government put forward in the May White Paper Security in retirement: the likely increase in the number of older people working due to a higher State Pension age and the likely rise in saving due to more people putting away money for retirement. The overall effect of changes to State Pension age and the introduction of personal accounts on UK incomes is likely to be in the range of 0.9 – 3.1 per cent. Although these numbers are relatively small proportions of the total economy, they represent significant sums. In terms of today’s economy, they would be worth around £11 – 38 billion. This paper also applies an innovative economic analysis to examine the scale of the increase in people’s wellbeing as a result of improved consumption smoothing. It finds that if people save for retirement through personal accounts, then generally their wellbeing will be enhanced.
    Keywords: pension reform; consumption smoothing; social welfare
    JEL: E17 E20 H31
    Date: 2006–11–29
  29. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: When nominal wage rigidity is large, and banking sector oligopolistic, the benevolent government may prefer to regulate interest rates to boost labor demand. A government of a transition economy may postpone bank privatization to keep credit provision under control, as long as inefficiencies of state ownership are not prohibitive. We model a transition economy where the government initially owns enterprises as well as banks. The economy features constant wage, and strong market power of banks. Under these conditions, we identify when the government has incentive to privatize enterprises and/or banks. We derive conditions under which the banking socialism (the government owns banks, but privatizes enterprises) dominates other institutional modes: socialism, industrial socialism, and capitalism.
    Keywords: privatization; banking; transition
    JEL: D72 D78 E62 H20
    Date: 2007–01
  30. By: Juan carlos Morales Piñero (Departament d'Economia de l'Empresa, Universitat Autonoma de Barcelona); Joaquim Vergés Jaime (Departament d'Economia de l'Empresa, Universitat Autonoma de Barcelona)
    Abstract: Purpose. This paper focuses on analyzing the effect that public reforms have on the efficiency of state-owned enterprises in regulated environments. Design, methodology, approach. The research is focused in the postal sector where public and private companies must obey a legal framework related to provide a universal service. The analysis is carried out using a panel of 7 European postal operators for the period 1997-2003. The activity analyzed was the letter mail division; we take as key variable the unit cost of a letter and use a translog cost function where as independent variables we include traffic levels, labor cost per employee, quality and availability of the service as well as the type of ownership (public or private). Additionally, in a second stage the geographical differences among countries are considered. Findings. Results indicate that postal operators that experienced organizational changes without being privatized, such as the Spanish and Greek operators, do not have higher unit costs than privatized postal operators like the one of Germany and the Netherlands. Moreover, we find that in all cases the operator of Ireland appear to be the most efficient. In this case restructuring process has been carried out giving an important leadership role to workers. This suggests us that labor culture could be a key variable to study when analyzing reform processes in public enterprises. Originality, value. Our findings show that in a regulated environment like in the postal sector, public and private companies can obtain similar efficiency levels in term of unit costs.
    Keywords: efficiency, public enterprise reforms, postal sector
    Date: 2007–01
  31. By: Lupia, Arthur; Zharinova, Natasha; Levine, Adam Seth
    Abstract: Many claims about political behavior are based on implicit assumptions about human reasoning. One such assumption, that political actors think in complex and similar ways when assessing strategies, is nested within widely used game theoretic equilibrium concepts. Empirical research casts doubt on the validity of these assumptions in important cases. For example, the finding that some citizens expend limited cognitive energy to social concerns runs counter to the assumption that citizens (e.g., jurors) base all decisions on complex thoughts. Similarly, evidence that some political actors (e.g., Democrats and Republicans) think about political cause-and-effect quite differently runs against the assumption that all players reason about politics in similar ways. The self-confirming equilibrium (SCE) concept provides a means for evaluating the robustness of theoretical conclusions to the introduction of a broad range of psychological assumptions. Through arguments and examples, we explain opportunities and challenges inherent in using the SCE concept. We find that the concept provides an improved foundation for more serious and constructive interactions between formal theoretic and psychology-oriented literatures.
    Keywords: political science; equilibrium concepts; cognition; jury decision making; self-confirming equilibrium; Nash equilibrium; need for cognition; conjecture; belief
    JEL: C72 H00 D83
    Date: 2007–01–28
  32. By: Michael Daugherty (West Virginia University, Extension Service); Odd Stalebrink (West Virginia University, Division of Public Administration); Mehmet Tosun (Department of Economics, University of Nevada, Reno)
    Abstract: This research focuses on enhancing the understanding of the use of “rainy day funds” to deal with municipal fiscal shortfalls. It is a pilot study, examining the largest 15 cities in West Virginia. Analysis of data from state reports and interviews with finance directors are used to determine whether, how, and to the degree the cities studied use various reserve fund mechanisms. While almost every city was found to have fiscal reserves, there was great variation in the methods used and amounts in how it was done – some cities followed predictable patterns found elsewhere while others did not.
    Keywords: Rainy day funds, municipal governments, West Virginia
    JEL: H72 H77 H83
    Date: 2006–12
  33. By: Barrera-Osorio, Felipe
    Abstract: In 1999 the city of Bogota, Colombia launched the concession school program designed to broaden the coverage and quality of basic education. It consists of a contract between a group of private schools and the public educational system such that private agents provide education for low-income students. This paper tests three main hypotheses concerning the impact of concessions on the quality of education: first, dropout rates are lower in concession schools than in similar public schools; second, other public schools nearby the concession schools have lower dropout rates in comparison with other public schools outside the area of influence; and third, test scores from concession schools are higher than scores in similar public schools. The paper presents evidence in favor of the three hypotheses using propensity score and matching estimators.
    Keywords: Tertiary Education,Education For All,Secondary Education,Primary Education,Teaching and Learning
    Date: 2007–02–01
  34. By: Sjöholm, Fredrik (European Institute of Japanese Studies)
    Abstract: Equitization (privatization) has been at the core of the policy debate in Vietnam over the last decade but the government’s attitude seems ambivalent. On the one hand, equitization is emphasized in policy statements. On the other, the progress on equitization has been relatively modest and SOEs continue to dominate the Vietnamese economy. This paper examines SOEs and the equitization process in Vietnam. We compare the development with guidelines from economic theory and with lessons from privatization programs in other countries. Equitization in Vietnam is found to target small SOEs and no larger ones, and it does not address the efficiency problem with state ownership since the state typically remains a controlling share of the equitized SOEs. Moreover, economic theory and experience from other countries suggest that the Vietnamese approach with diffused ownership in SOEs and in equitized firms; equitization to employees and management; and little participation of strategic investors, might not be the most efficient approach to public ownership and to equitization. We argue in this paper that Vietnam still has an opportunity to change its approach towards SOEs and equitization and thereby secure increased efficiency and economic growth.
    Keywords: State Owned Enterprises; Privatization; Equitization; Vietnam
    JEL: L32 P21 P31
    Date: 2006–08–01
  35. By: Amihai Glazer (Department of Economics, University of California-Irvine); Stef Proost (Faculty of Economics and Applied Economics, Catholic University of Leuven)
    Abstract: We consider a congestible road, where the cost of travel increases with the number of users on the road and decreases with capacity. Those persons who do not use the road favor a toll which would maximize revenue, and they oppose spending on road capacity. Users of the road prefer a low toll and a large capacity financed by general revenues. We describe conditions that make majority voting lead to a toll and capacity level that equals the socially optimal toll and capacity, that is smaller, or that is larger. This model can also explain the decrease over time of user fees for road use.
    Keywords: Positive qnalysis of policy-paking and implementation; Externalities; Government policy on transportation
    JEL: D78 H23 L98
    Date: 2007–01
  36. By: Laurence, JACQUET (UNIVERSITE CATHOLIQUE DE LOUVAIN, Institut de Recherches Economiques et Sociales (IRES))
    Abstract: I study the optimal redistributive structure when individuals with distinct productivities also differ in disutility of work due to either disability or distase for work. Taxpayers have resentment against inactive benefit recipients because some of them are not actually disabled but lazy. Therefore, disabled people who take up transfers are stigmatized. Their stigma disutility increases with the number of non-disabled recipients. Tagging transfers according to disability characteristics decreases stigme. However, tagging is costly and imperfect. In this context, I show how the level of the per capital cost of monitoring relative to labor earnings of low-wage workers determines the optimality of tagging. Under mild conditions, despite their stigma disutility, inactive and disabled people get a strictly lower consumption than low-wage workers. The results are valid under a utilitarian criterion and a criterion which does not compensage for distate for work.
    Keywords: Tagging, Disability, Benefit, Fraud, Stigma
    JEL: H21 H53
    Date: 2006–11–15

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