nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒03‒31
forty-four papers chosen by
Peren Arin
Massey University

  1. Emergence and Persistence of Inefficient States By Daron Acemoglu; Davide Ticchi; Andrea Vindigni
  2. Early Warning or Just Wise After the Event? The Problem of Using Cyclically Adjusted Budget Deficits for Fiscal Surveillance By Hughes Hallett, Andrew; Kattai, Rasmus; Lewis, John
  3. Agent-Based Model of Price Competition and Product Differentiation on Congested Networks By Lei Zhang; David Levinson; Shanjiang Zhu
  4. Anticipated Fiscal Policy and Adaptive Learning By Evans, George W; Honkapohja, Seppo; Mitra, Kaushik
  5. Sustainability of the Fiscal Process in Developing Countries- Egypt, Iran and Turkey: A Multicointegration Approach By Amir Kia
  6. Fiscal sustainability: Must the problem be diminished before we can see it? By Erling Holmøy
  7. Politics, political competition and the political budget cycle in Canada, 1870 - 2000: a search across alternative fiscal instruments By J. Stephen Ferris and Stanley L. Winer
  8. Fiscal Competition in Space and Time: An Endogenous-Growth Approach By Daniel Becker; Michael Rauscher
  9. Social Security in Germany : A Prey of Political Opportunism? By Niklas Potrafke
  10. Is Lisbon far from Maastricht? Trade-offs and Complementarities between Fiscal Discipline and Structural Reforms By Buti, Marco; Röger, Werner; Turrini, Alessandro Antonio
  11. Growth, public investment and corruption with failing institutions By David, DE LA CROIX; Clara, DELAVALLADE
  12. The Race for Polluting Permits By Brechet, Thierry; Peralta, Susana
  13. Incidence of the WTO Anti-Discrimination Rules on Corporation Income Taxation By Hatice Jenkins; Glenn Jenkins
  14. Labour Market Adjustment, Social Spending and the Automatic Stabilizers in the OECD By Darby, Julia; Mélitz, Jacques
  15. Why public goods are a pedagogical bad By Frances Woolley
  16. Reassessing the Effects of Bilateral Tax Treaties on US FDI Activity By Daniel Millimet; Abdullah Kumas
  17. A Theory of Child Targeting By Olivier Bargain; Olivier Donni
  18. The fiscal pressure in the cooperative agrarian societies of the second degree: repercussion of the law 3/2002, by that the law is modified 2/1999 gives cooperative andalusian societies By GARRIDO PULIDO, Tomás; PUENTES POYATOS, Raquel
  19. The New Discrimination and Childcare By Patricia Apps
  20. The Effects of Pension Reform on Retirement and Human Capital Formation By Kai-Joseph Fleischhauer
  21. Social Expenditures as a Political Cue Ball? : OECD Countries under Examination By Niklas Potrafke
  22. An Analysis of Tax Revenue Forecast Errors By Martin Keene; Peter Thomson
  23. The Political Economy of Delaying Fiscal Consolidation By Boris Cournède
  24. Framing Effects in Political Decision Making: Evidence From a Natural Voting Experiment By Bütler, Monika; Maréchal, Michel André
  25. Selective Reductions in Labour Taxation : Labour Market Adjustments and Macroeconomic Performance By Anna, BATYRA; Henri R., SNEESSENS
  26. Monetary and budgetary-fiscal policy interactions in a Keynesian context: revisiting macroeconomic governance By Angel Asensio
  27. Top Incomes in Indonesia, 1920-2004 By Andrew Leigh; Pierre van der Eng
  28. Just how much bigger is government in Canada? By J. Stephen Ferris and Stanley L. Winer
  29. The Use of Cash and the Size of the Shadow Economy in Sweden By Guibourg, Gabriela; Segendorf, Björn
  30. Term Limits and Electoral Accountability By Michael Smart; Daniel M. Sturm
  31. New-Consensus Macroeconomic Governance in a Keynesian world, and the Keynesian alternative By Angel Asensio
  32. Does government spending really crowd out charitable contributions? new time series evidence By Thomas A. Garrett; Russell M. Rhine
  33. Resources and Standards in Urban Schools By Stephen Machin; Sandra McNally; Costas Meghir
  34. On Rent-Seeking Cost Under Democracy And Under Dictatorship By R. Carson
  35. Field Experiments: A Bridge Between Lab and Naturally-Occurring Data By John A. List
  36. Does adult education at upper secondary level influence annual wage earnings? By Stenberg, Anders
  37. Turning Unemployment into Self-Employment: Effectiveness and Efficiency of Two Start-Up Programmes By Hans J. Baumgartner; Marco Caliendo
  38. Network Neutrality: Lessons from Transportation By David Levinson
  39. The companies of participation before the challenge of the management of the demographic change By Martín López, Sonia
  40. A Mixed Bentham-Rawls Criterion for Intergenerational Equity By Ngo Van Long
  41. What Works Best in Reducing Child Poverty: A Benefit or Work Strategy? By Peter Whiteford; Willem Adema
  42. Good Governance, Trade and Agglomeration By Candau, Fabien
  43. Congestion Tolling with Agglomeration Externalities By Richard Arnott
  44. A Microfoundation for Increasing Returns in Human Capital Accumulation and the Under-Participation Trap By Alison L. Booth; Melvyn Coles

  1. By: Daron Acemoglu (MIT); Davide Ticchi (Department of Economics, Università di Urbino "Carlo Bo"); Andrea Vindigni (Princeton University)
    Abstract: Inefficiencies in the bureaucratic organization of the state are often viewed as important factors in retarding economic development. Why certain societies choose or end up with such inefficient organizations has received very little attention, however. In this paper, we present a simple theory of the emergence and persistence of inefficient states based on patronage-politics. The society consists of rich and poor individuals. The rich are initially in power, but expect to transition to democracy, which will choose redistributive policies. Taxation requires the employment of bureaucrats. We show that, under certain circumstances, by choosing an inefficient state structure, the rich may be able to use patronage and capture democratic politics. This enables them to reduce the amount of redistribution and public good provision in democracy. Moreover, the inefficient state creates its own constituency and tends to persist over time. Intuitively, an inefficient state structure creates more rents for bureaucrats than would an efficient state structure. When the poor come to power in democracy, they will reform the structure of the state to make it more efficient so that higher taxes can be collected at lower cost and with lower rents for bureaucrats. Anticipating this, when the society starts out with an inefficient organization of the state, bureaucrats support the rich, who set lower taxes but also provide rents to bureaucrats. We show that in order to generate enough political support, the coalition of the rich and the bureaucrats may not only choose an inefficient organization of the state, but they may expand the size of bureaucracy “excessively” so as to gain additional votes. The model shows that an equilibrium with an inefficient state is more likely to arise when there is greater inequality between the rich and the poor, when bureaucratic rents take intermediate values and when individuals are sufficiently forward-looking.
    Keywords: bureucracy; corruption; democracy; patronage politics; political economy; public goods; redistributive politics.
    JEL: P16 H11 H26 H41
    Date: 2007–02
  2. By: Hughes Hallett, Andrew; Kattai, Rasmus; Lewis, John
    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 data set containing published values of deficits, output gaps and cyclically adjusted deficits from successive issues of the OECD's 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. We find that around half the real time errors in CABs can be attributed to revisions in the cyclical component of the budget balance, and around one half to revisions in the deficit to GDP ratio across vintages. Our results are consistent with the conjecture that policy makers have presented favourable estimates of their fiscal position in order to reduce scrutiny or the probability of sanctions for lax behaviour.
    Keywords: Cyclically Adjusted Budget Deficits; False and Missed Alarms; Potential Output; Real Time Data
    JEL: C82 E62 H62
    Date: 2007–03
  3. By: Lei Zhang; David Levinson; Shanjiang Zhu (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota)
    Abstract: Using consistent agent-based techniques, this research models the decision-making processes of users and infrastructure owner/operators to explore the welfare consequence of price competition, capacity choice, and product differentiation on congested transportation networks. Component models include: (1) An agent-based travel demand model wherein each traveler has learning capabilities and unique characteristics (e.g. value of time); (2) Econometric facility provision cost models; and (3) Representations of road authorities making pricing and capacity decisions. Different from small-network equilibrium models in prior literature, this agent-based model is applicable to pricing and investment analyses on large complex networks. The subsequent economic analysis focuses on the source, evolution, measurement, and impact of product differentiation with heterogeneous users on a mixed ownership network (with tolled and untolled roads). Two types of product differentiation in the presence of toll roads, path differentiation and space differentiation, are defined and measured for a base case and several variants with different types of price and capacity competition and with various degrees of user heterogeneity. The findings favor a fixed-rate road pricing policy compared to complete pricing freedom on toll roads. It is also shown that the relationship between net social benefit and user heterogeneity is not monotonic on a complex network with toll roads.
    Keywords: Network dynamics, road pricing, autonomous links, privatization, price competition, product differentiation, agent-based transportation model
    JEL: R40 R42 R48 D10 D21 D23 D24 D43 D83 D85 H21 H23 H44 L92 O33 C72
    Date: 2007
  4. By: Evans, George W; Honkapohja, Seppo; Mitra, Kaushik
    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: expectations; Ramsey model; taxation
    JEL: D84 E21 E43 E62
    Date: 2007–03
  5. By: Amir Kia (Department of Economics, Carleton University)
    Keywords: fiscal sustainability, multicointegration and tax smoothing
    Date: 2005–09
  6. By: Erling Holmøy (Statistics Norway)
    Abstract: Assessments of fiscal sustainability (FS) problems should be based on present values of government revenues and expenditures over an infinite horizon. The paper shows that realistic assumptions imply that the growth rate of government expenditure components may exceed both the steady state growth rate of the economy and the relevant discount rate, which makes the FS problem immeasurably large. The common practice of ad hoc exogenous alignment of government expenditures to the steady state growth path after some distant year may significantly diminish the FS problem, since the effective discounting is likely to remain low. Low effective discounting also makes the FS assessment highly non-robust, reducing its political relevance. It suggests that the fiscal sustainability should be improved by reducing the growth rates of government expenditures, a strategy followed in e.g. the Swedish pension reform.
    Keywords: Fiscal sustainability; long run projections; discounting
    JEL: H30 H55 H62
    Date: 2007–04
  7. By: J. Stephen Ferris and Stanley L. Winer (Department of Economics, Carleton University)
    Abstract: In this paper Engel-Granger time series methodology is used to combine trending economic variables with stationary political factors to search for well-defined political influences on central government budgets in Canada over the entire post-Confederation time period from 1870 to 2000. To motivate such an inquiry we first investigate and find evidence of partisan political influence on Canada’s macro aggregates. However, because politics can influence economic outcomes only if there is a transmission mechanism through actual public policy choices, our finding of cycles in real output growth begs the question of whether such cycles arise through fiscal policy. Our analysis of three main fiscal policy instruments - public non-interest expenditure, taxation and the deficit net of interest - gives little support to any current political theory of public budgets, but does support the hypothesis that the degree of political competition matters for policy choices in both the long and short run. This new channel for the influence of politics on economic policy has not previously been isolated empirically in Canada and poses new questions in trying to reconcile the previous mixed results with respect to the influence of politics on economic aggregates.
    Keywords: expenditure size of government, tax-share, government deficits, political competition, political business cycles, political budget cycles, monetary policy, cointegration and error correction analysis.
    JEL: H1 H3 H5
    Date: 2006–08–08
  8. By: Daniel Becker (University of Rostock); Michael Rauscher (University of Rostock)
    Abstract: Is tax competition good for economic growth? The paper addresses this question by means of a simple model of endogenous growth. There are many small jurisdictions in a large federation and individual governments benevolently maximise the welfare of immobile residents. Investment is costly: Quadratic installation and de-installation costs limit the mobility of capital. The paper looks at optimal taxation and long-run growth. In particular, the effects of variations in the cost parameter on economic growth and taxation are considered. It is shown that balanced endogenous growth paths do not always exist and effects of changes in intallation costs are ambiguous.
    Keywords: Fiscal Federalism, Tax Competition, Endogenous Growth
    JEL: H70 F21 O00
    Date: 2007
  9. By: Niklas Potrafke
    Abstract: This paper examines how politicians influenced social security policy in Germany. Using yearly data from the German Pension Insurance from 1957 to 2005, revenues as well as expenditures are analysed in linear regression models, respectively. In accordance with opportunistic political behaviour, revenues from contributions decreased in pre-election years. Most important, pension expenditures increased in election years. Interestingly, the CDU/FDP governments provided higher subsidies to the social security system than the grand coalition and the SPD/GR government. Overall, there is no evidence for the prospect, that left coalitions caused higher intergenerational redistribution than right governments.
    Keywords: social security, partisan politics, pension system
    JEL: D72 H55
    Date: 2007
  10. By: Buti, Marco; Röger, Werner; Turrini, Alessandro Antonio
    Abstract: While according to the so-called “Brussels-Frankfurt consensus” sound fiscal policies and structural reforms support each other, it is often claimed that the EU fiscal framework, by reducing the budgetary room of manoeuvre and the political capital of governments, may deter reforms. The aim of this paper is to explore which factors determine the relation between fiscal discipline and reforms. By means of a simple model we show that, depending on the time horizon of the government, structural reforms may either be complement or substitute with fiscal discipline. If governments are forward-looking, substitution is more likely; if governments are short-sighted, reforms and fiscal discipline may become complement. We provide empirical evidence supporting this argument. In a sample of EU-15 countries over the past three decades, the introduction of the Maastricht constraints at the beginning of the 1990s does not seem to have affected the probability of labour market reforms on average, but had a positive and significant impact on countries with governments facing elections in the current or forthcoming year (which are hence assumed to behave myopically). Our results suggest that if governments are short-sighted, then the expectation that relaxing fiscal constraints may help to boost structural reforms may be ill-founded.
    Keywords: Economic effects of deficits; Stability and Growth Pact; structural reforms
    JEL: E62 H50 H55 H62 J58 L50
    Date: 2007–03
  11. 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
  12. By: Brechet, Thierry; Peralta, Susana
    Abstract: International markets for tradable emission permits (TEP) co-exist with national energy taxation. A firm trading emission permits in the international market also pays energy taxes in its host country, thus creating an interaction between the international TEP-market and national energy taxes. In this paper we model that interaction in a framework of a perfectly competitive international TEP-market, where heterogeneous firms trade their TEP endowments. National governments set energy taxes non-cooperatively so as to maximize fiscal revenue from energy and profit taxes. We identify the driving forces behind Nash equilibrium taxes. We show how they depend on the total amount of TEPs in the market, on firms' TEP-endowment and on the number of participating countries. We also show how energy taxation varies with the introduction of the market on a previously unregulated world. Finally, we highlight the fact that the TEP-market does not achieve abatement cost efficiency, despite its being perfectly competitive.
    Keywords: fiscal competition; Kyoto protocol; tradable permits
    JEL: H23 H73 Q48 Q52
    Date: 2007–03
  13. By: Hatice Jenkins (Assistant Professor); Glenn Jenkins (Professor)
    Abstract: Many countries with free trade zones or export processing zones now exempt from corporate income taxation the income of firms exporting from these areas. The WTO has attempted to eliminate this exemption through its rules to promote the non-discrimination of fiscal systems with respect to export production. In particular, these rules do not allow countries to exempt the income of firms exporting from Free Trade Zones from corporate income taxation. This paper examines both theoretically as well as empirically the incidence of removing this corporate income tax exemption. The empirical analysis is carried out for the case of the Dominican Republic. The findings indicate that in the case of the Dominican Republic the removal of the corporate income tax exemption would inflict a burden on labour equal to about 6 times the amount of additional corporate tax revenue collected from the companies operating in its free trade zones.
    Keywords: WTO, tax incidence, Free Trade Zones, corporate taxation
    JEL: H22 F13
    Date: 2007–03
  14. By: Darby, Julia; Mélitz, Jacques
    Abstract: The macroeconomic literature on automatic stabilization tends to focus on taxes and dismiss the relevance of government expenditure, aside from unemployment compensation. Our results go sharply contrary to this view. We engage in an empirical analysis of 20 OECD countries from 1980-2001 and find that age- and health-related social expenditure as well as incapacity benefits all react to the cycle in a stabilizing manner. While possibly new in the macro literature, this conforms to many results in studies of labour and health. Moreover, when the focus is on the ratio of the net surplus to output, automatic stabilization comes essentially from the spending side. Taxes contribute nothing at all.
    Keywords: automatic stabilization; cyclically adjusted budget balances; discretionary fiscal policy
    JEL: E0 E6
    Date: 2007–03
  15. By: Frances Woolley (Department of Economics, Carleton University)
    Abstract: The concept of public goods is confusing because it confounds three analytically distinct concepts: excludability, rivalry, and public finance. Pure public goods are of limited relevance as an explanation of government spending. To make matters worse, the broader policy community uses the term in ways that invoke different means of both “public” and “good” than economists favour. For example, “global public goods” describe everything from the global environment, international financial stability and market efficiency, to health, knowledge, peace and security and humanitarian rights. In this essay, I argue for radically reducing the emphasis placed on public goods in the standard undergraduate public finance curriculum, and instead emphasizing the fundamental underlying issues of exclusion, rivalry, and public finance/provision. The ultimate aim of an undergraduate course in public expenditure should, I argue, be to explain government spending.
    Date: 2006–08–08
  16. By: Daniel Millimet (SMU); Abdullah Kumas (SMU)
    Abstract: Despite substantial evidence that foreign direct investment (FDI) is influenced by taxation, the impact of bilateral tax treaties on FDI is surprisingly unclear. We provide a simple theoretical framework illustrating why the impact of tax treaties may be heterogeneous across the distribution of FDI, and thus why focusing on the average effect of tax treaties may be misleading. We then assess the empirical relevance of such heterogeneity by estimating the quantile treatment effects (QTEs) of tax treaties on US inbound and outbound FDI using panel data from 1980--1999. Our results are striking, and consistent with our expectations. We obtain positive effects of tax treaties at lower quantiles of the distribution of FDI, but negative effects in the upper quantiles. Moreover, while the negative effects are substantially larger in absolute terms relative to the positive effects, the two effects are roughly equivalent in percentage terms.
    Keywords: Foreign Direct Investment, Tax Treaties, Quantile Treatment Effects, Propensity Score Weighting
    JEL: C21 F21
    Date: 2007–03
  17. By: Olivier Bargain (University College of Dublin, CHILD and IZA); Olivier Donni (Université de Cergy-Pontoise, THEMA, CIRPEE and IZA)
    Abstract: There is a large empirical literature on policy measures targeted at children but surprisingly very little theoretical foundation to ground the debate on the optimality of the different instruments. In the present paper, we examine the merit of targeting children through two general policies, namely selective commodity taxation and cash transfer to family with children. We consider a household that comprises an adult and a child. The household behavior is described by the maximization of the adult’s utility function, which depends on the child’s welfare, subject to a budget constraint. The relative effects of a price subsidy and of a cash benefit on child welfare are then derived. In particular, it is shown that ‘favorable’ distortions from the price subsidies may allow to redistribute toward the child. The framework is extended to account for possible paternalistic preferences of the State. Finally, it is shown that, in contrast to the traditional view, well-chosen subsidies can be more cost effective than cash transfers in alleviating child poverty.
    Keywords: commodity taxation, child benefit, targeting, intrahousehold distribution, social welfare, paternalism, labeling
    JEL: D13 D31 D63 H21 H31
    Date: 2007–03
    Abstract: Given the remarkable growth of the cooperative field in our country, it is more and more necessary to study the tax pressure that is beared by it. Until now the existing studies about the tax pressure are scarce, and more concretely in the cooperative field, in spite of the importance of it in the global economy. In this work, rather than analyse the favorable tax of this kind of societies, what has been the object of multiple works, we will focus on determining the taxpressure of our agrarian second degree cooperatives, through the efective tax rate. The bulk of the article is constituted by the comparative analysis of the tax pressure taking into account the Law 2/1999 of analusian cooperatives, before and after the modification of it by the Law 3/2002, of Decembre 16th, as well as the Law of the tax of Cooperatives and the Law of Income Tax to check how the consideration of one or another law affects the tax charge.
    Keywords: Second degree cooperatives; tax; income tax; tax pressure; efective tax rate (ETR).
    JEL: Q13
    Date: 2006
  19. By: Patricia Apps
    Abstract: The “new discrimination” refers to the use of government policy to increase the effective gender wage gap, measured in terms of the second earner’s net of tax income gain from working in the market place rather than at home. This paper presents an analysis of the tax treatment of family members and shows how the expansion of policy instruments, such as family tax benefits withdrawn on joint income and the low income tax offset, has raised average and marginal rates on the income of the second earner, typically the female partner. The study concludes that this new discrimination, together with limited access to affordable, high quality childcare, has severely limited the growth of female labour supply needed to fund family support, and is ultimately unsustainable in an ageing population.
    Keywords: childcare, Australian family tax system, marginal tax rates and labour supply
    JEL: H24 H31 J22
    Date: 2006–12
  20. By: Kai-Joseph Fleischhauer
    Abstract: The demographic transition in industrialized countries poses challenges to the pension system which is essentially organized according to the pay-as-you-go principle in most countries. This paper aims at analyzing two proposals for pension reform in a theoretical model that endogenously explains the retirement and training decision of workers who are heterogeneous in ability. Because the economic benefits of motivating late retirement strongly depend on the employment prospects of workers near retirement age, the model includes the firms' employment decision at the extensive margin. The first reform proposal, the implementation of individual retirement accounts, increases the workers' incentives to acquire skills and to postpone retirement. However, if the capital funded pillar of the pension system becomes strong, low-ability workers may not attain their optimal retirement age because firms refuse to employ them any longer. In a similar manner, the second reform proposal to increase the minimum retirement age may not work for lowability workers if their separation date is determined by the firms before the minimum retirement age is achieved. Length: 47 pages
    Keywords: Pension Reform, Endogenous Retirement, Human Capital Formation, Tax-Benefit Link, Individual Retirement Accounts, Minimum Retirement Age
    JEL: D91 H55 J24 J26 J31
    Date: 2007–01
  21. By: Niklas Potrafke
    Abstract: This paper examines how policy affects social expenditures. Analyzing an OECD panel from 1980 to 2003, five political variables are tested: Election- and pre-election years, the ideological party composition of the governments, the number of coalition partners and the fact, if the ruling government has a majority in parliament or not (minority government). I find that neither of these variables have an impact on social expenditures using different model set-ups. The influence of national governments seems to be limited by the globalization, which indeed impairs social expenditures.
    Keywords: social expenditures, electoral cycles, partisan politics, globalisation
    JEL: D72 H50
    Date: 2007
  22. By: Martin Keene; Peter Thomson (New Zealand Treasury)
    Abstract: The New Zealand Treasury forecasts tax revenue for the twice-yearly Economic and Fiscal Updates. The accuracy of these forecasts is important for the government's annual budget decisions as they affect key fiscal aggregates such as the operating balance and debt levels. Good decision-making in this area is important for macroeconomic stability and sustainability, one of the Treasury's outcomes. Over the past six years, Treasury tax forecasts, and the macroeconomic forecasts on which they are based, have underestimated the actual outturns. This report presents an analysis of the Treasury's tax revenue forecast errors, both in aggregate and disaggregated by individual tax type. The analysis focuses primarily on the annual one-year-ahead Budget forecasts that are typically based on rating up past tax revenues by growth rates in related macroeconomic variables such as GDP. The objective of the analysis is to better determine the major sources of tax revenue forecast error and to identify the potential for methodological improvements. A review of the Treasury’s tax forecasting methods is given and a general class of models proposed that encompasses these methods. Adopting one of the simplest of these as a benchmark, the individual tax revenue forecast errors are first disaggregated into component errors due to forecasting the macroeconomic drivers used as a proxy for the tax base, and a component due to forecasting the tax ratio, or ratio of tax revenue to proxy tax base. The tax ratio is further disaggregated into a component error due to forecasting the tax ratio trend and random error. The latter provides a measure of the best accuracy that can be achieved using the benchmark models adopted. Among other findings, the report shows that the main source of tax revenue underforecasting is the underforecasting of the macroeconomic variables used as taxbase proxies. The tax ratio forecasts were generally unbiased, but less precisely determined than the macroeconomic forecasts. This and other evidence indicate that better tax ratio forecasts are likely to be achieved, even with the simple benchmark model used here. The benchmark models have merit as competing models that could be investigated further alongside other simple structural time series models in a systematic evaluation using historical data.
    Keywords: Tax revenue forecasting; forecast error decompositions; disaggregation; benchmark models
    JEL: C53 E17 H68
    Date: 2007–03
  23. By: Boris Cournède
    Abstract: Over the next decades, many OECD countries are anticipating large increases in public spending as a result of population ageing and other long-term structural trends. The need to put public finances on a sustainable footing is widely recognised, but progress has been uneven and slow. Some policy makers may feel that action can be deferred for a few years at little cost because of the long-term nature of the problem. This paper questions this perception by proposing a model of the political costs of consolidating public finances. The main finding is that even a short delay increases political cost of consolidation quite markedly when ultimately policy makers are facing a deadline by which sustainability must be restored. The conclusion is very robust to changes in assumptions and specification. A variant of the model shows that with an infinite horizon the incentive to consolidate is weaker, which highlights the importance of setting a deadline. This paper relates to the 2007 Economic Survey of the Euro area ( <P>L’économie politique du retard à consolider les finances publiques <BR>De nombreux pays de l'OCDE s'attendent à enregistrer de forte hausses de leurs dépenses publiques en raison du vieillissement démographique et d'autres tendances structurelles lourdes. Presque tout le monde s'accorde à reconnaître qu'il est nécessaire de rétablir la viabilité des finances publiques, mais peu de progrès ont été enregistrés. Il se pourrait que certains décideurs considèrent que la mise en oeuvre de mesures puisse être reportée pour quelques années sans qu'il n'en coûte beaucoup. Cette étude met en cause ce jugement en proposant un modèle du coût politique de la consolidation budgétaire. Le résultat principal est que même un court délai augmente le coût politique de la consolidation de manière importante lorsqu'au final les décideurs sont confrontés à une date limite à laquelle la viabilité budgétaire doit être rétablie. Ce résultat est très robuste à des changements d'hypothèses ou de spécification. Une variante du modèle montre qu'avec un horizon temporel infini l'incitation à consolider est plus faible, ce qui souligne combien il importe de fixer une date limite. Ce document se rapporte à l'Étude économique de zone euro 2007 (
    Keywords: public finances, finances publiques, population ageing, vieillissement démographique, fiscal consolidation, political economy, économie politique, structural adjustment, ajustement structurel, consolidation budgétaire
    JEL: D72 E62
    Date: 2007–03–09
  24. By: Bütler, Monika; Maréchal, Michel André
    Abstract: This paper analyzes a recent ballot in which two virtually identical popular initiatives, both demanding a decrease in the legal age of retirement in Switzerland, led to differences in approval rates of nearly seven percentage points. Based on this unique natural experiment, the existence of emphasis framing effects is tested for and their determinants are identified outside of the controlled settings of laboratories. Nonetheless, the analyzed setting allows for considerably more control than usually available in the field: All party, government and interest group recommendations were symmetric for both initiatives, and the simultaneous vote rules out potential variation of individual preferences and compositional changes of the electorate over time. Using community and individual level data it is shown that the difference in approval rates is largely due to the different emphases in the initiatives' titles.
    Keywords: bounded rationality; direct democracy; framing effect; natural experiment; pension reform; voting
    JEL: D1 D72 H55
    Date: 2007–03
  25. By: Anna, BATYRA; Henri R., SNEESSENS (UNIVERSITE CATHOLIQUE DE LOUVAIN, Department of Economics)
    Abstract: Significant differences in unemployment in Europe have been observed across skill groups, with the least skilled suffering the highest and most persistent unemployment rates. To identify policies alleviating this problem, we study the impact of reductions in employer social security contributions. We construct a general equilibrium model with three types of workers and firms, matching frictions, wage bargaining and a rigid minimum wage. We find evidence in favour of narrow tax cuts targeted at the minimum wage, but we argue that it is most important to account for the effects of such reductions on both job creation and job destruction. The failure to do so may explain the gap between macro- and microeconometric evaluations of such policies in France and Belgium. Policy impact on welfare and inefficiencies induced by job competition, ladder effects and on-th-job search are quantified and discussed.
    Keywords: Minimum Wage, Job Creation, Job Destruction, Job Competition, Search Unemployment, Taxation, Computable General Equilibrium Models
    JEL: C68 E24 J64
    Date: 2007–02–15
  26. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - [CNRS : UMR7115] - [Université Paris-Nord - Paris XIII])
    Abstract: Because it was designed for efficient stationary regimes, the New-Consensus Macroeconomic governance carries several drawbacks when implemented in Keynesian non-ergodic regimes. As long as Keynesian unemployment is interpreted in terms of 'natural' rate, it serves as a macroeconomic policy target in such a way that the policy mix may anchor the system far from full employment. We develop an argument that suggests a Keynesian explanation (which involves inappropriate economic policy) of what New Keynesians have referred to as unemployment hysteresis. However, difficulties do not vanish when authorities adopt the Keynesian vision of the world, for policy makers also have to deal with uncertainty. In contrast with the automatic economic-policy rules of the New Consensus Macroeconomics (NCM), we put forward a Keynesian pragmatic and progressive approach, based on intermediate targets designed with respect to the confidence that authorities have in the chances of success (which depends on the context and moves with it). Monetary and budgetary-fiscal policy interactions are discussed in such a context. Even if the monetary policy ability to reduce interest rates and increase effective demand is doubtful, it matters indirectly through avoiding increases in interest rates when fiscal and budgetary policy aims to stimulate effective demand.
    Keywords: Monetary policy, fiscal policy, macroeconomic governance, post-Keynesian
    Date: 2007–03–28
  27. By: Andrew Leigh; Pierre van der Eng
    Abstract: Using taxation and household survey data, this paper estimates top income shares for Indonesia during 1920-2004. Our results suggest that top income shares grew during the 1920s and 1930s, but fell in the post-war era. In more recent decades, we observe a sharp rise in top income shares during the late-1990s, coincident with the economic downturn, and some evidence that top income shares fell in the early-2000s. For pre-war Indonesia, we decompose top income shares by income source, and find that for groups below the top 0.5 percent, a majority of income was derived from wages. Throughout the twentieth century, top income shares in Indonesia have been higher than in India, broadly comparable to Japan, and somewhat lower than levels prevailing in the United States.
    Keywords: inequality, top incomes, personal income taxation, Indonesia
    JEL: H24 N35 O15
    Date: 2007–03
  28. By: J. Stephen Ferris and Stanley L. Winer (Department of Economics, Carleton University)
    Date: 2006–02–06
  29. By: Guibourg, Gabriela (Monetary Policy Department, Central Bank of Sweden); Segendorf, Björn (International Secretariat, Central Bank of Sweden)
    Abstract: We use an “unexplained demand for cash” approach to measure the size of the shadow economy in Sweden. The size of the shadow economy is found to have increased from 3.8 to 6.5 per cent of GDP from 1990 to 2004. This result is also supported by our finding of an increased residual between households’ recorded disposable income and their consumption, investments and changes in net financial positions. Moreover, the correlation between the demand for cash that cannot be explained by recorded transactions and this residual is strong.
    Keywords: Cash use; demand for cash; shadow economy; National Accounts; Financial Accounts;
    JEL: E26 E41 H26
    Date: 2007–03–01
  30. By: Michael Smart; Daniel M. Sturm
    Abstract: Periodic elections are the main instrument through which voters can hold politiciansaccountable. From this perspective term limits, which restrict voters' ability to rewardpoliticians with re-election, appear counterproductive. We show that despite the discipliningeffect of elections, term limits can be ex ante welfare improving from the perspective ofvoters. By reducing the value of holding office term limits can induce politicians toimplement policies that are closer to their private preferences. Such "truthful" behavior byincumbents in turn results in better screening of incumbents. We show that the combinationof these two effects can strictly increase the utility of voters.
    Keywords: Political Agency, Accountability, Term Limits
    JEL: D72 H11
    Date: 2006–12
  31. By: Angel Asensio (CEPN - Centre d'économie de l'Université de Paris Nord - [CNRS : UMR7115] - [Université Paris-Nord - Paris XIII])
    Abstract: The paper presents both the New Consensus and Keynesian equilibrium within the usual four<br />competitive macro-markets structure. It gives theoretical explanations of the pernicious<br />effects that the NCM governance, which has been designed for ergodic stationary regimes,<br />brings about in Keynesian non-ergodic regimes. It put forward Keynesian principles of<br />governance which include monetary, budgetary and fiscal instruments, and suggest new<br />directions for the positive and normative analysis of macro-policies.
    Keywords: Fiscal policy, Macroeconomic governance, Monetary policy, Post-Keynesian
    Date: 2007–03–29
  32. By: Thomas A. Garrett; Russell M. Rhine
    Abstract: We exploit the time series properties of charitable giving data to provide additional insights into the crowding out of charitable contributions in response to government spending. We find that the short-run and long-run government spending and charitable giving relationships are quite different - the long run relationship appears to be largely spurious, and estimates of the short-run relationship provide only weak evidence of crowding out. We also find that system estimation can improve upon the efficiency of single equation models used in previous works. Our results support the prestige theory of charitable giving and the rational ignorance of citizens.
    Keywords: Nonprofit organizations ; Charitable bequests
    Date: 2007
  33. By: Stephen Machin (University College London, CEE, CEP, London School of Economics and IZA); Sandra McNally (CEE, CEP, London School of Economics and IZA); Costas Meghir (University College London, CEE, Institute for Fiscal Studies and IZA)
    Abstract: Despite being central to government education policy in many countries, there remains considerable debate about whether resources matter for pupil outcomes. In this paper we look at this question by considering an English education policy initiative - Excellence in Cities - which has been a flagship policy aimed at raising standards in inner-city secondary schools. We report results showing a positive impact of the extra resources on school attendance and performance in Mathematics (though not for English) but, interestingly, there is a marked heterogeneity in the effectiveness of the policy. Its greatest impact has been in more disadvantaged schools and on the performance of middle and high ability students within these schools. A back-of-envelope cost-benefit calculation suggests the policy to be cost-effective. We conclude that additional resources can matter for children in the poorest secondary schools, particularly when building on a solid educational or ability background. However, small changes in resources have little or no effect on the ‘hard to reach’ children who have not achieved a sufficiently strong prior level.
    Keywords: education, resources, evaluation, disadvantage
    JEL: I21 H52 C52
    Date: 2007–03
  34. By: R. Carson (Department of Economics, Carleton University)
    Abstract: This note argues that, broadly speaking, democracies have a comparative advantage over dictatorships in keeping rent-seeking costs down by imposing penalties that reduce returns to scale in rent-seeking. Dictatorships have a comparative advantage in restricting the number of rent-seekers through higher entry barriers into rent-seeking, although not to the point of eliminating rent-seeking altogether. Of the two, the former is potentially a more effective way to control rent-seeking costs. For this reason, a democracy has the potential to achieve lower rent-seeking losses, as a share of total rent available, than does a dictatorship, although this may require the democracy to achieve a high degree of transparency of government, along with freedom of the press, the judiciary, and public and private watchdog agencies to criticize politicians and public officials.
    JEL: D72 H00 H19
    Date: 2007–03–15
  35. By: John A. List
    Abstract: Laboratory experiments have been used extensively in economics in the past several decades to lend both positive and normative insights into a myriad of important economic issues. This study discusses a related approach that has increasingly grown in prominence of late--field experiments. I argue that field experiments serve as a useful bridge between data generated in the lab and empirical studies using naturally-occurring data. In discussing this relationship, I highlight that field experiments can yield important insights into economic theory and provide useful guidance to policymakers. I also draw attention to an important methodological contribution of field experiments: they provide an empirical account of behavioral principles that are shared across different domains. In this regard, at odds with conventional wisdom, I argue that representativeness of the environment, rather than representative of the sampled population, is the most crucial variable in determining generalizability of results for a large class of experimental laboratory games.
    JEL: C9 C90 C91 C92 C93 D01 H41 Q5 Q51
    Date: 2007–03
  36. By: Stenberg, Anders (Stockholm University, SOFI)
    Abstract: Adult education at upper secondary level (AE) is an integral part of the Swedish educational system. Of the cohort born in 1970, about one third has at some point been registered in AE. This evaluation of AE is the first to use register data on the course credits actually attained. The results indicate that credits equal to one year of AE yield point estimates that range from 5 per cent for individuals with prior two-year upper secondary school to 15 per cent for those with prior compulsory school. The positive effects are mainly driven by courses in health related subjects and computer science. Of the participants in AE, more than 40 per cent continue to university. The returns to years in higher education are not found to be different between individuals with and without a prior AE registration except for those with one year or less at university.
    Keywords: Adult education; wage earnings
    JEL: H52 J68
    Date: 2007–02–20
  37. By: Hans J. Baumgartner (DIW Berlin); Marco Caliendo (DIW Berlin and IZA)
    Abstract: Turning unemployment into self-employment has become a major focus of German active labour market policy (ALMP) in recent years. If effective, this would not only reduce Germany’s persistently high unemployment rate, but also increase its notoriously low selfemployment rate. Empirical evidence on the effectiveness of such programmes is scarce. The contribution of the present paper is twofold: first, we evaluate the effectiveness of two start-up programmes for the unemployed. Our outcome variables include the probability of being employed, the probability of being unemployed, and personal income. Second, based on the results of this analysis, we conduct an efficiency analysis, i.e., we estimate whether the Federal Employment Agency has saved money by placing unemployed individuals in these programmes. Our results show that at the end of the observation period, both programmes are effective and one is also efficient. The considerable positive effects present a stark contrast to findings from evaluations of other German ALMP programmes in recent years. Hence, ALMP programmes aimed at moving the unemployed into self-employment may prove to be among the most effective, both in Germany and elsewhere.
    Keywords: start-up subsidies, evaluation, effectiveness, efficiency, self-employment
    JEL: J68 C14 H43 M13
    Date: 2007–03
  38. By: David Levinson (Nexus (Networks, Economics, and Urban Systems) Research Group, Department of Civil Engineering, University of Minnesota)
    Abstract: The politically-charged notion of network neutrality came to the fore in 2005 and 2006, using analogy from transportation as one of the key tools in motivating arguments. This paper examines how the various notions around network neutrality (common carriage, regulation, price discrimination) have played out in the transportation sector, and suggests many of the current arguments fail to understand the nuances of how complex networks actually operate to serve the many demands placed on them.
    JEL: R41 R42 R48 N71 N74 H41
    Date: 2007
  39. By: Martín López, Sonia
    Abstract: The demographic change that is lived worldwide, and of particular form in Europe, as consequence of the aging of the population because of the increase of the life expectancy and the drastic reduction of the rates of fertility, has made jump the alarms because of the need to get a suitable management that does not put in danger the financial viability of the social protection systems. The members states have to make the necessary reforms that they lead to the modernization of their social protection systems guaranteeing both suitable and viable pensions and a sanitary assistance and an assistance of long duration of quality, accessible and lasting. To achieve these aims there is a widespread agreement to foment employment policies that stimulate the active aging and the prolongation of the professional life to stop the premature exit of the labour market of the 45-year-old major workers. Among the measurements to adopt for the maintenance of the workers in the companies there are the adjustment of the contents of the working places, the use of the internal knowledge and the permanent training of the workers. In the cases in which already there has been produced the expulsion of the labour market, the participation companies will can represent an exit of the situation of unemployment. But in order that the unemployed ones of major age decide to tackle their own managerial initiative they need formation, advice and helps.
    Keywords: Aging population; systems social protection; adjustment of the contents of the working places; workers of major age; cooperative societies; employee-owned companies
    JEL: E24 J54 H55 P13
    Date: 2006
  40. By: Ngo Van Long
    Abstract: This paper proposes a new welfare criterion which satisfies three desiderata: strong sensitivity to the least advantaged, sensitivity to the present, and sensitivity to the future. We develop necessary conditions for optimal paths under this new criterion, and demonstrate that, in a familiar dynamic model of capital accumulation, the optimal growth path exists. The optimal path converges to a steady state which is dependent on the initial stock of capital. Along this path, the minimum standard of living constraint, which is optimally chosen, is binding over some time interval. Optimal paths under the new criterion display properties that seem to be ethically appealing. <P>On propose un nouveau critère d’évaluation du bien-être social qui satisfait trois propriétés : sensibilité au bien-être des membres infortunés de la société, sensibilité au bien-être des générations futures, et sensibilité au bien-être des générations présentes. On obtient les conditions nécessaires pour le sentier optimal sous ce nouveau critère et on montre que le sentier optimal existe dans un modèle d’accumulation du capital sous des conditions normales. Le sentier optimal converge à un état stationnaire qui dépend de la condition initiale. Le long de ce sentier, la contrainte sur le niveau de bien-être minimal, qui est choisi endogènement, est satisfaite avec égalité pendant une certaine phase. Les sentiers optimaux ont des propriétés qui semblent satisfaisantes sur le plan éthique.
    Keywords: welfare, distributive justice, sustainable development, intergenerational equity, bien-être social, juste distribution, développement soutenable, équité entre les générations
    JEL: H4 I3 O2 Q56
    Date: 2007–03–01
  41. By: Peter Whiteford; Willem Adema
    Abstract: Child poverty is firmly on the policy agenda in many OECD countries. One of the main issues in the debate is the appropriate balance between the so-called “benefits strategy” (increasing the adequacy of benefits for low-income families with children) and the so-called “work strategy” (promoting policies to increase employment among poor families). The need to choose between these two apparent alternatives is sometimes seen as a consequence of an unavoidable trade-off between adequacy of benefits, work incentives and the costs of assistance... <BR>La pauvreté des enfants figure aujourd’hui sans aucun doute à l’agenda politique de plusieurs pays de l’OCDE. Une des problématiques dans le débat sur la pauvreté des enfants est de trouver le juste équilibre entre la « stratégie des prestations » (qui consiste à augmenter convenablement les prestations pour les familles à bas revenus avec enfants) et la « stratégie du travail » (qui consiste à encourager les politiques visant à augmenter l’emploi chez les familles pauvres). Le besoin de choisir entre ces deux alternatives est parfois perçu comme étant la conséquence d’une inévitable incompatibilité entre adéquation des prestations, incitations au travail et coûts de l’aide...
    JEL: H53 I32 I38
    Date: 2007–03–05
  42. By: Candau, Fabien
    Abstract: We develop a model for developing countries that investigates the factors behind agglomeration of activities in urban giants. Firstly we show that relatively easier market access to external demand provided by the urban giant tends to attract entrepreneurs to this place. Secondly we find that the attractive power of the urban giant can be linked to a lack of democracy. Indeed we demonstrate that democracy acts as a dispersive force in the sense that by reversing the cost of living effect, it allows to reduce the spatial inequality and then the tendency of agglomeration. Lastly we analyse how the funds embezzled by a bad government vary according to internal and external trade liberalisation. We show that a decrease in the disadvantage of the periphery to trade with the external market can limit the funds embezzled by a Leviathan.
    Keywords: Economic geography; Cities; Trade; Corruption.
    JEL: R12 H25
    Date: 2006–05–31
  43. By: Richard Arnott (Boston College)
    Abstract: Consider an urban economy with two types of externalities, negative traffic congestion externalities and positive agglomeration externalities deriving from non-market interaction. Suppose that urban travel can be tolled, that non-market interaction cannot be subsidized, and that non-market interaction is stimulated by a reduction in travel costs. Then the optimal toll is below the congestion externality cost. This paper explores this line of reasoning.
    Keywords: congestion, congestion toll, agglomeration, externalities
    JEL: D60 H20 R40
    Date: 2007–03–26
  44. By: Alison L. Booth; Melvyn Coles
    Abstract: This paper considers educational investment, wages and hours of market work in an imperfectly competitive labour market with heterogeneous workers and home production. It investigates the degree to which there might be both underemployment in the labour market and underinvestment in education. A central insight is that the ex-post participation decision of workers endogeneously generates increasing marginal returns to education. Although equilibrium implies underinvestment in education, optimal policy is not to subsidise education. Instead it is to subsidise labour market participation which we argue might be efficiently targeted as state provided childcare support.
    Keywords: Education, home production, hours of work, imperfect competition.
    JEL: H24 J13 J24 J31 J42
    Date: 2006–12

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