nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒03‒03
25 papers chosen by
Peren Arin
Massey University

  1. Anticipated Fiscal Policy and Adaptive Learning By George W. Evans; Seppo Honkapohja; Kaushik Mitra
  2. Public Investment in Infrastructure in Latin America: Is Debt the Culprit? By Eduardo Lora
  3. Political Institutions and Economic Growth By Marsiliani, Laura; Renström, Thomas I
  4. Effects of Tax Morale on Tax Compliance: Experimental and Survey Evidence By Ronald G. Cummings; Jorge Martinez-Vazquez; Michael McKee; Benno Torgler
  5. Do High Taxes Lock-in Capital Gains? Evidence from a Flat Rate Tax System By Daunfeldt, Sven-Olov; Praski-Ståhlgren, Ulrika; Rudholm, Niklas
  6. A formula for the optimal taxation in Probabilistic Voting Models characterized by Single Mindedness By Canegrati, Emanuele
  7. SUSTAINABILITY OF FISCAL DEFICITS: THE U.S. EXPERIENCE 1929-2004 By Ananda Jayawickrama; Tilak Abeysinghe
  8. Capital taxation and Laffer effects in endogenous growth models By Fredriksson, Anders
  9. Monetary conservatism and fiscal policy By Klaus Adam; Roberto M. Billi
  10. Fiscal Policy in an Estimated Model of the European Monetary Union By Aurélien Eyquem (CREM - CNRS)
  11. Public investment: a remedy or a curse? Examining the Role of Public Investment for Macroeconomic Performance By Ismihan, Mustafa; Ozkan, F Gulcin
  13. Growth, public investment and corruption with failing institutions By David De La Croix; Clara Delavallade
  14. Contracting out: Dutch municipalities reject the solution for the VAT-distortion By Wassenaar, M.C.; Dijkgraaf, E.; Gradus, R.H.J.M.
  15. Taxing Financial Arrangements: Harmonising Tax and Accounting? By Rodney Fisher
  16. Providing Public Goods Without Strong Sanctioning Institutions By Anke Gerber; Philipp C. Wichardt
  17. Schooling, Inequality and Government Policy By Oleksiy Kryvtsov; Alexander Ueberfeldt
  18. Public The fiscal vulnerability of the social cost: Is Different Latin America? By Eduardo Lora
  19. Education, corruption and growth in developing countries By Cuong Le Van; Mathilde Maurel
  20. The Excess Burden of Government Indecision By Francisco Gomes; Laurence J. Kotlikoff; Luis M. Viceira
  21. Productivity, Employment and Taxes - A SVAR Analysis of Trade-offs and Impacts By Kari Alho; Nuutti Nikula
  22. Red Tape, Corruption and Finance By Keith Blackburn; Rashmi Sarmah
  23. Seigniorage By Buiter, Willem H
  24. Building Criminal Capital behind Bars: Peer Effects in Juvenile Corrections By Patrick Bayer; Randi Hjalmarsson; David Pozen
  25. Macroeconomic Implications of Size-Dependent Policies By Guner, Nezih; Ventura, Gustavo; Xu, Yi

  1. By: George W. Evans (University of Oregon Economics Department); Seppo Honkapohja (University of Cambridge); Kaushik Mitra (University of St Andrews)
    Abstract: We consider the impact of anticipated policy changes when agents form expectations using adaptive learning rather than rational expectations. To model this we assume that agents combine limited structural knowledge with a standard adaptive learning rule. We analyze these issues using two well-known set-ups, an endowment economy and the Ramsey model. In our set-up there are important deviations from both rational expectations and purely adaptive learning. Our approach could be applied to many macroeconomic frameworks.
    Keywords: Taxation, expectations, Ramsey model
    JEL: E62 D84 E21 E43
    Date: 2007–02–18
  2. By: Eduardo Lora (Research Department, Inter-American Development Bank)
    Abstract: Panel data for seven Latin American countries are used to assess the influence of public indebtedness on public investment in infrastructure in the period 1987- 2001. Debt increases are associated with higher public infrastructure investment, an effect that is robust to the inclusion of many other fiscal and macroeconomic variables. This paper also finds some evidence of complementarity between public and private investment and of the negative effect of IMF adjustment loans on infrastructure expenditures. No evidence is found that debt defaults affect public investment in infrastructure.
    Keywords: Public investment; Public infrastructure; Public debt; Fiscal policies; Default; Latin America
    Date: 2007–01
  3. By: Marsiliani, Laura; Renström, Thomas I
    Abstract: We analyze the impact of micro-founded political institutions on economic growth in an overlapping-generations economy, where individuals differ in preferences over a public good (as well as in age). Labour and capital taxes finance the public good and a public input. The benchmark institution is a parliament, where all decisions are taken. Party entry, parliamentary composition, coalition formation, and bargaining are endogenous. We compare this constitution to delegation of decision-making, where a spending minister (elected in parliament or appointed by the largest party). Delegation of decision-making tends to yield lower growth, mainly due to the occurrence of production inefficiency.
    Keywords: bargaining; endogenous growth; overlapping generations; taxation; voting
    JEL: D72 D90 H20 H41 O41
    Date: 2007–02
  4. By: Ronald G. Cummings; Jorge Martinez-Vazquez; Michael McKee; Benno Torgler
    Abstract: There is considerable evidence that enforcement efforts can increase tax compliance. However, there must be other forces at work because observed compliance levels cannot be fully explained by the level of enforcement actions typical of most tax authorities. Further, there are observed differences, not related to enforcement effort, in the levels of compliance across countries and cultures. To fully understand differences in compliance behavior across cultures one needs to understand differences in tax administration and citizen attitudes toward governments. The working hypothesis is that cross-cultural differences in behavior have foundations in these institutions. Tax compliance is a complex behavioral issue and its investigation requires the use of a variety of methods and data sources. Results from laboratory experiments conducted in different countries demonstrate that observed differences in tax compliance levels can be explained by differences in the fairness of tax administration, in the perceived fiscal exchange, and in the overall attitude towards the respective governments. These experimental results are shown to be robust by replicating them for the same countries using survey response measures of tax compliance.
    JEL: H20 C90
    Date: 2007–02–27
  5. By: Daunfeldt, Sven-Olov (The Swedish Retail Institute (HUI)); Praski-Ståhlgren, Ulrika (The Department of Economics); Rudholm, Niklas (The Swedish Retail Institute (HUI))
    Abstract: The purpose of this paper is to study, using a comprehensive Swedish panel data set, whether investors are less willing to realize capital gains when the marginal tax rate on capital gains is relatively high. In Sweden capital gains are taxed independently of ordinary income at a flat rate, making it possible to avoid endogenity problems and to include direct measures of capital gains taxation in the empirical analysis. The results indicate that a 10% increase in capital gains tax rate reduces the number of realizations of capital gains with 8.7% and the realized amount, given the decision to realize, with 1.9%. In addition, wealthy individuals seem to respond more to changes in capital gains tax rates than less-wealthy individuals.
    Keywords: Capital gains realizations; tax avoidance; panel data
    JEL: H24 H31
    Date: 2007–01–31
  6. By: Canegrati, Emanuele
    Abstract: This work intends to specify a formula for the optimal taxation in Probabilistic Voting Models with Single Mindedness Theory. The goal is to find an equivalent expression to the Ramsey’s rule for a political economy environment where Governments are assumed to be Leviathans rather than benevolents.
    Keywords: probabilistic voting model; single mindedness theory; optimal taxation; positive approach
    JEL: D63 H24 H23 H21 D71 I38 D72 H31 H27 H53 D78
    Date: 2007–02–23
  7. By: Ananda Jayawickrama (Department of Economics, National University of Singapore); Tilak Abeysinghe (Department of Economics, National University of Singapore)
    Abstract: Recurrent large fiscal deficits and accumulating public debt frequently ring alarm bells around the world on the sustainability of U.S. federal fiscal policy. The present-value borrowing constraint, which states that, for the fiscal policy to be sustainable the current debt stock should match the discounted sum of expected future primary surpluses, provides a framework for analysing fiscal sustainability. Incorporating rational expectations we extend the methodology developed by Hamilton and Flavin (1986) to test the sustainability hypothesis in a cointegrating framework that can accommodate both stationary and non-stationary variables. Our model predicts dynamically diverse episodes of the debt series extremely well. Our results support the hypothesis that the U.S. government is solvent despite the large increase in the debt stock in recent years.
    Keywords: Fiscal Policy Sustainability, Present-value Borrowing Constraint, Rational Expectations, Cointegration.
    JEL: E62 H62 H63
  8. By: Fredriksson, Anders (Institute for international economic studies)
    Abstract: This paper adds to a literature asking whether tax cuts rather than tax increases can improve the government budget. We use an endogenous growth model with physical and human capital to study possibilities for such self-financing tax cuts. Apart from the standard dynamic effect from taxation in endogenous growth models a second margin is introduced when physical and human capital are taxed differently. Endogenizing leisure with a raw-time specification introduces both a consumption/leisure trade-off and a dynamic effect through leisure´s impact on the growth rate. By providing analytical expressions for when Laffer effects occur the influence of each of these margins is shown. The addition of these margins adds scope for Laffer effects that are not present in the AK-models previously studied.
    Keywords: Human capital; compositional effects from taxation; dynamic effects from taxation; Laffer effect; dynamic scoring
    JEL: E62 H30 O41
    Date: 2007–02–23
  9. By: Klaus Adam; Roberto M. Billi
    Abstract: Does an inflation conservative central bank à la Rogoff (1985) remain desirable in a setting with endogenous fiscal policy? To provide an answer we study monetary and fiscal policy games without commitment in a dynamic stochastic sticky price economy with monopolistic distortions. Monetary policy determines nominal interest rates and fiscal policy provides public goods generating private utility. We find that lack of fiscal commitment gives rise to excessive public spending. The optimal inflation rate internalizing this distortion is positive, but lack of monetary commitment robustly generates too much inflation. A conservative monetary authority thus remains desirable. When fiscal policy is determined before monetary policy each period, the monetary authority should focus exclusively on stabilizing inflation, as this eliminates the steady state biases associated with lack of monetary and fiscal commitment. It also leads to stabilization policy that is close to if not fully optimal.
    Date: 2007
  10. By: Aurélien Eyquem (CREM - CNRS)
    Abstract: We explore the welfare implications of several fiscal policies in an estimated two-country New Open Economy Macroeconomics (NOEM) model of the EuropeanMonetary Union (EMU). The model features incomplete financial markets and home bias in final consumption baskets. We define the optimal monetary and fiscal policy and contrast the (small) contribution of financial markets incompleteness to welfare losses. We also investigate the welfare implications of simple public spending rules. We find (i) that welfare maximizing public spending rules imply significant welfare losses with respect to the optimal policy - equivalent to an average 7.3% drop in permanent consumption and (ii) that estimated public spending rules imply low welfare losses with respect to welfare maximizing rules - equivalent to an average 1% drop in permanent consumption. In our framework, these losses can be reduced by either promoting a deeper trade integration in the EMU, or by increasing the number of available fiscal instruments.
    Keywords: Monetary Union, Fiscal Stabilization, Optimal Monetary and Fiscal Policy, Welfare Analysis, Fiscal Rules
    JEL: E52 E61 E62 E63 F32
    Date: 2007
  11. By: Ismihan, Mustafa; Ozkan, F Gulcin
    Abstract: This paper explores the implications of public investment for macroeconomic performance within a simple two-period policymaking model. We show that under the balanced-budget rule, the contribution of public investment to future output plays a key role in determining its effects on macroeconomic performance. When policymakers resort to debt issue in financing expenditures, the attractiveness of public investment crucially depends on the return from capital spending relative to the cost of public borrowing. We also consider the case of a capital borrowing rule where only public investment could be financed by additional borrowing and find similar results. Our findings point to the key role of the quality of public investment in its impact on macroeconomic outcome and highlight the importance of efficient mechanisms for selection, implementation and monitoring of public investment projects in both developed and developing countries.
    Keywords: macroeconomic performance; public debt; public investment
    JEL: E62 H50 H63
    Date: 2007–02
  12. By: Jean-Paul Faguet; Fabio Sanchez
    Abstract: The effects of decentralization on public sector outputs is much debated but little agreed upon. This paper compares the remarkable case of Bolivia with the more complex case of Colombia to explore decentralization’s effects on public education outcomes. In Colombia, decentralization of education finance improved enrollment rates in public schools. In Bolivia, decentralization made government more responsive by re-directing public investment to areas of greatest need. In both countries, investment shifted from infrastructure to primary social services. In both, it was the behavior of smaller, poorer, more rural municipalities that drove these changes.
    Date: 2006–03–30
  13. By: David De La Croix (CORE - Department of Economics - [Université Catholique de Louvain]); Clara Delavallade (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    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 distorsion, we propose an optimal growth model where households vote for the composition of public spending subject to an incentive constraint reflecting individuals' 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 with 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.
    Date: 2007–02–08
  14. By: Wassenaar, M.C. (Vrije Universiteit Amsterdam, Faculteit der Economische Wetenschappen en Econometrie (Free University Amsterdam, Faculty of Economics Sciences, Business Administration and Economitrics); Dijkgraaf, E.; Gradus, R.H.J.M.
    Abstract: In 2003, the Dutch government introduced a VAT-compensation fund in order to create a level-playing field for local governments with respect to Value Added Tax (VAT). By introducing this fund the tax difference between governments that supply services themselves and governments that contract out to the private sector was eliminated. This paper shows, however, that according to most of the municipalities differences in VAT treatment did not hinder the contracting out of public services. Therefore, the fund lacks a great deal of its legitimacy. More important, the fund is not effective, as the number of contracted public services has hardly increased since the introduction. In general, municipalities have a negative opinion about this fund. They state that more than the budgetary effects, other arguments are relevant in the decision-making on the outsourcing of activities such as the quality of services and the employment in the own municipality. As the budgetary position for a number of municipalities will decline in the near future, the fund still may stimulate the outsourcing of public services in future.
    Keywords: VAT; Contracting out; Municipalities; Compensation fund
    JEL: H25 H32 L33
    Date: 2007
  15. By: Rodney Fisher
    Abstract: This paper comments critically on the proposed provisions governing the Taxation of Financial Arrangements (TOFA). It describes the tortuous consultation process and the somewhat piecemeal introduction of aspects of the taxation of financial arrangements legislation that have come in. It critiques the approach taken in the Exposure Draft and identifies a number of anomalies. The article regrets that the revenue authorities have been reluctant to link tax outcomes more directly to accounting outcomes in relation to taxing financial arrangements. The article notes the breadth of impact on a range of taxpayers that the Exposure Draft will have. The article accepts that some of the provisions appear to be moving in the right direction, but notes that there is still a need for modification and fine tuning before the legislation can be fairly regarded as final.
    Keywords: TOFA, Tax, financial arrangements, accounting
    Date: 2007–02–26
  16. By: Anke Gerber (; Philipp C. Wichardt (University of Bonn, Department of Economics, Econ. Theory III, Adenauerallee 24-42, 53113 Bonn, Germany.
    Abstract: This paper proposes a simple mechanism aimed to establish positive contributions to public goods in the absence of powerful institutions to sanction free-riders. The idea of the mechanism is to require players to commit to the public good by paying a deposit prior to the contribution stage. If all players commit in this way, those players who do not contribute their share to the public good forfeit their deposit. If there is no universal commitment, all deposits are refunded and the standard game is played. Given deposits are sufficiently high, prior commitment and full ex post contributions are part of a strict subgame perfect Nash equilibrium for the resulting game. As the mechanism obviates the need for any ex post prosecution of free-riders, it is particularly suited for situations where players do not submit to a common authority as in the case of international agreements.
    Keywords: public goods, cooperation, institutions, Climate-Change Treaties
    JEL: C72 D61
    Date: 2007–02
  17. By: Oleksiy Kryvtsov; Alexander Ueberfeldt
    Abstract: This paper asks: What is the effect of government policy on output and inequality in an environment with education and labor-supply decisions? The answer is given in a general equilibrium model, consistent with the post 1960s facts on male wage inequality and labor supply in the U.S. In the model, education and labor-supply decisions depend on progressive income taxation, the education system, the social security system, and technology-driven wage differentials. Government policies affect output and inequality through two channels. First, a policy change leads to an asymmetric adjustment of working hours and savings of schooled and unschooled individuals. Second, there is a redistribution of the workforce between schooled and unschooled workers. Using a battery of proposed government policies, we demonstrate that skill redistribution dampens the response of wage inequality to a policy change and amplifies the response of output by an additional 1 to 2 percent.
    Keywords: Labour markets; Potential output; Productivity
    JEL: H52 J31 J38
    Date: 2007
  18. By: Eduardo Lora (Research Department, Inter-American Development Bank)
    Abstract: Se utiliza un panel desbalanceado de medio centenar de países para el período 1985-2003 con el objeto de evaluar la vulnerabilidad del gasto público social (en educación y salud) frente a las variables fiscales corrientes y la deuda pública en América Latina en comparación con el resto del mundo en desarrollo. El gasto social es significativamente más bajo en América Latina (aunque absorbe una proporción mayor del gasto primario) y es más vulnerable frente a mayores pagos de intereses de la deuda, pero más insensible a las variaciones del resto del gasto público. Como en otras regiones del mundo en desarrollo, el gasto social en América Latina se contrae con los aumentos de deuda pública, y aún más si se trata de deudas con la banca multilateral. A diferencia del resto del mundo, en América Latina los incumplimientos de deuda llevan a reducir la participación del gasto social en el gasto público.
    Keywords: Social Expenditure; Public debt; Fiscal policies; Latin America
    Date: 2007–01
  19. By: Cuong Le Van (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I]); Mathilde Maurel (CES - Centre d'économie de la Sorbonne - [CNRS : UMR8174] - [Université Panthéon-Sorbonne - Paris I])
    Abstract: Education is key in explaining growth, as emphasized recently by Krueger and Lindahl (2001). But for a given level of education, what can explain the missing growth in developing countries ? Corruption, the poor enforcement of property rights, the government share of property rights, the government share of GDP, the regulations it imposes might influence the Total Factor Productivity (TFP thereafter) of a country's economic system. A number of empirical papers emphasize the consequences bad institutions have on growth, but few are examining the link between education, corruption (more generally bad institutions) and growth. Our model assumes that at low level of GDP per head and high level of corruption education spending has no impact on growth. The slope gets positive only at above critical size of corruption. The implications are tested using the data set of Xavier Sala-i-Martin, Gernot Doppelhofer and Ronald I. Miller (2004), which is extended with the aggregate governance indicators of Kaufman et ali.
    Keywords: Public spending, education, corruption, endogeneous growth.
    Date: 2007–02–08
  20. By: Francisco Gomes (London Business School and CEPR); Laurence J. Kotlikoff (Boston University and NBER); Luis M. Viceira (Harvard Business School)
    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, they engender 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 age-25 agent would respond to learning at an early age 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 large 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.
    Date: 2006–07
  21. By: Kari Alho; Nuutti Nikula
    Abstract: The paper considers time series evidence on the relationships, and possible trade-offs, between productivity and employment, and on the impact of taxes in this connection. First, a theoretical model is built for an open economy leading to the identification of technology, non-technology and labour and capital tax wedge shocks, as based on their long-run effects. Then structural VAR models are estimated for the EU-15 and some other OECD countries to infer the above relationships. Our conclusion is that there is in the EU a fairly uniform and significant short-run negative impulse on employment from a positive productivity shock, while this becomes smaller and statistically insignificant over time in most, but not in some member countries. The former situation is interpreted to be an indication of nominal and the latter that of real or structural rigidity in the economy. In the US, there is no such trade-off, either in the short or long run. The impulse response of the shocks in the tax wedge on labour in the EU-15 is a fairly sizeable and significant negative impact on employment both in the short and long run, while the effects of capital income tax shocks are negative on productivity, but not significant in statistical terms.
    Keywords: Productivity, employment, taxes, EU
    JEL: O49 H29 J20
    Date: 2007–02–27
  22. By: Keith Blackburn; Rashmi Sarmah
    Abstract: We study the effects of red tape and corruption in a model of occupational choice, entry regulation and imperfect capital markets. Red tape is the set of rules and regulations that private agents are obliged to comply with in order to engage in entrepreneurial activity. Corruption is the payment of bribes to public officials for the purpose of circumventing red tape. Capital market imperfections are the asymmetries of information between borrowers and lenders about the returns to entrepreneurship. We show that both red tape and corrup- tion deter entrepreneurial activity, but that only corruption affects financial market outcomes, including the probability of bankruptcy and the costs of verifying bankruptcy claims. The existence of corruption compounds the effects of both aggregate uncertainty and capital market frictions, each of which compounds the effects of corruption. We examine the interactions between red tape and corruption when both are endogenous to the bureaucratic process.
    Date: 2006
  23. By: Buiter, Willem H
    Abstract: Governments through the ages have appropriated real resources through the monopoly of the ‘coinage’. In modern fiat money economies, the monopoly of the issue of legal tender is generally assigned to an agency of the state, the Central Bank, which may have varying degrees of operational and target independence from the government of the day. In this paper I analyse four different but related concepts, each of which highlights some aspect of the way in which the state acquires command over real resources through its ability to issue fiat money. They are (1) seigniorage (the change in the monetary base), (2) Central Bank revenue (the interest bill saved by the authorities on the outstanding stock of base money liabilities), (3) the inflation tax (the reduction in the real value of the stock of base money due to inflation and (4) the operating profits of the central bank, or the taxes paid by the Central Bank to the Treasury. To understand the relationship between these four concepts, an explicitly intertemporal approach is required, which focuses on the present discounted value of the current and future resource transfers between the private sector and the state. Furthermore, when the Central Bank is operationally independent, it is essential to decompose the familiar consolidated ‘government budget constraint’ and consolidated ‘government intertemporal budget constraint’ into the separate accounts and budget constraints of the Central Bank and the Treasury. Only by doing this can we appreciate the financial constraints on the Central Bank’s ability to pursue and achieve an inflation target, and the importance of cooperation and coordination between the Treasury and the Central Bank when faced with financial sector crises involving the need for long-term recapitalisation or when confronted with the need to mimick Milton Friedman’s helicopter drop of money in an economy faced with a liquidity trap.
    Keywords: central bank budget constraint; coordination of monetary and fiscal policy; inflation targeting; inflation tax
    JEL: E4 E5 E6 H6
    Date: 2007–02
  24. By: Patrick Bayer; Randi Hjalmarsson; David Pozen
    Abstract: This paper analyzes the influence that juvenile offenders serving time in the same correctional facility have on each other's subsequent criminal behavior. The analysis is based on data on over 8,000 individuals serving time in 169 juvenile correctional facilities during a two-year period in Florida. These data provide a complete record of past crimes, facility assignments, and arrests and adjudications in the year following release for each individual. To control for the non-random assignment to facilities, we include facility and facility-by-prior offense fixed effects, thereby estimating peer effects using only within-facility variation over time. We find strong evidence of peer effects for burglary, petty larceny, felony and misdemeanor drug offenses, aggravated assault, and felony sex offenses; the influence of peers primarily affects individuals who already have some experience in a particular crime category. We also find evidence that peer effects are stronger in smaller facilities and that the predominant types of peer effects differ in residential versus non-residential facilities; effects in the latter are consistent with network formation among youth serving time close to home.
    JEL: H0 H23 J0 J24 K0
    Date: 2007–02
  25. By: Guner, Nezih; Ventura, Gustavo; Xu, Yi
    Abstract: Government policies that impose restrictions on the size of large establishments or firms, or promote small ones, are widespread across countries. In this paper, we develop a framework to systematically study policies of this class. We study a simple growth model with an endogenous size distribution of production units. We parameterize this model to account for the size distribution of establishments and for the (observed) large share of employment in large establishments. Then, we ask: quantitatively, how costly are policies that distort the size of production units? What is the impact of these policies on productivity measures, the equilibrium number of establishments and their size distribution? We find that these effects are potentially large: policies that reduce the average size of establishments by 20% lead to reductions in output and output per establishment up to 8.1% and 25.6% respectively, as well as large increases in the number of establishments (23.5%).
    Keywords: establishment size; productivity differences; size distortions
    JEL: E23 O40
    Date: 2007–02

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