nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒04‒21
34 papers chosen by
Peren Arin
Massey University

  1. Brain Drain, Fiscal Competition, and Public Education Expenditure By Hartmut Egger; Josef Falkinger; Volker Grossmann
  2. 0.19% Subsidy-Free Spatial Pricing By DREZE, Jacques; LE BRETON, Michel; SAVVATEEV, Alexei; WEBER, Shlomo
  4. The Productivity Argument for Investing in Young Children By James J. Heckman; Dimitriy V. Masterov
  5. Is Partial Tax Harmonization Desirable? By Conconi, Paola; Perroni, Carlo; Riezman, Raymond
  6. "Optimal Policy and (the Lack of) Time Inconsistency: Insights from Simple Models" By Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares; Pierre-Daniel Sarte; Jorge Soares
  7. "Distortionary Taxes and Public Investment When Government Promises Are Not Enforceable" By Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares; Pierre-Daniel Sarte; Jorge Soares
  8. The Changing Nature of the OECD Shadow Economy By Maurizio Bovi; Roberto Dell'Anno
  9. A Prize to Give for: An Experiment on Public Good Funding Mechanisms By Luca Corazzini; Marco Faravelli; Luca Stanca
  10. Inequality, Fiscal Capacity and the Political Regime: Lessons from the Post-Communist Transition By Christopher Gerry; Tomasz Mickiewicz
  12. "International and Intergenerational Aspects of Capital Income Taxation in an Endogenously Growing World Economy" By Yasushi Iwamoto; Akihisa Shibata
  13. Women and budget deficits By Sébastien Wälti; Signe Krogstrup
  14. How Corruption Hits People When They Are Down By Jennifer Hunt
  15. The Important Thing Is not (Always) Winning but Taking Part: Funding Public Goods with Contests By Marco Faravelli
  16. Minimum Wage and Tax Evasion: Theory and Evidence By Mirco Tonin
  17. "The Effect of Government Size on the Steady-State Unemployment Rate: A Structural Error Correction Model" By Burton A. Abrams; Siyan Wang
  18. The EU Budget Dispute - A Blessing in Disguise? By Ondřej Schneider
  19. Intrinsic Motivation versus Signaling in Open Source Software Development By Bitzer, Jürgen; Schrettl, Wolfram; Schröder, Philipp J.H.
  20. Equipping Immigrants: Migration Flows and Capital Movements By Fabian Lange; Douglas Gollin
  21. Federal, State, and Local Governments: Evaluating their Separate Roles in US Growth By Matthew J. Higgins; Daniel Levy; Andrew T. Young
  22. Nation Formation and Genetic Diversity By DESMET, Klaus; LE BRETON, Michel; ORTUNO-ORTIN, Ignacio
  23. Cost benefit analysis vs. referenda By Martin J. Osborne; Matthew A. Turner
  24. A Good Policy Gone Bad: The Strange Case of the Non-Refundable State EITC By Saul D. Hoffman
  25. Inequality and Underground Economy: A Not so Easy Relationship By Enzo VALENTINI
  26. The companies of participation before the challenge of the management of the demographic change By Martín López, Sonia
  27. "Evolution of Mass Privatization in Bulgaria" By Jeffrey Miller
  28. The Political Economy of Growth and Governance By Paul G. Hare
  29. Migration of Electronics Production. Optimisation of Technology or Labour Costs? By Rünno Lumiste
  30. On the Role of Absorptive Capacity: FDI Matters to Growth By Yuko Kinoshita; Chia-Hui Lu
  31. Credit Elasticities in Less-Developed Economies: Implications for Microcredit By Dean Karlan; Jonathan Zinman
  33. The Single-mindedness theory: empirical evidence from the U.K. By Emanuele, Canegrati
  34. Are Russian Commercial Courts Biased? Evidence from a Bankruptcy Law Transplant By Ariane Lambert-Mogiliansky; Konstantin Sonin; Ekaterina Zhuravskaya

  1. By: Hartmut Egger (University of Zurich, CESifo and GEP); Josef Falkinger (University of Zurich, CESifo and IZA); Volker Grossmann (University of Fribourg, CESifo and IZA)
    Abstract: This paper uses a two-country model with integrated markets for high-skilled labor to analyze the opportunities and incentives for national governments to provide higher education. Countries can differ in productivity, and education is financed through a wage tax, so that brain drain affects the tax base and has agglomeration effects. We study unilateral possibilities for triggering or avoiding brain drain and compare education policies and migration patterns in non-cooperative political equilibria with the consequences of bilateral cooperation between countries. We thereby demonstrate that bilateral coordination tends to increase public education expenditure compared to non-cooperation. At the same time, it aims at preventing migration. This is not necessarily desirable from the point of view of a social planner who takes account of the interests of migrants.
    Keywords: brain drain, educational choice, public education policy, locational competition
    JEL: F22 H52
    Date: 2007–04
  2. By: DREZE, Jacques; LE BRETON, Michel; SAVVATEEV, Alexei; WEBER, Shlomo
    JEL: D70 H20 H73
    Date: 2006–12
  3. By: Alison Booth; Facundo Sepulveda
    Abstract: We study the joint determination of fertility subsidies and Social Security taxes in an overlapping generations model where agents are heterogeneous in endowments. In equilibria where Social Security is valued, old and poor young agents form a coalition that sustains Social Security. When voting for fertility subsidies, the young take into account both the deadweight loss of such subsidies and the gains from a higher future tax base. They also take into account a third effect of increasing population growth: that of a decrease in future Social Security benefits as a consequence of a change in the identity of the future decisive voter.
    JEL: E62 H2 H30 H55 J13 J14
    Date: 2007–03
  4. By: James J. Heckman (University of Chicago, American Bar Foundation, University College Dublin and IZA); Dimitriy V. Masterov (University of Michigan)
    Abstract: This paper presents a productivity argument for investing in disadvantaged young children. For such investment, there is no equity-efficiency tradeoff.
    Keywords: early childhood investment, noncognitive skills, cognitive skills
    JEL: H52 I28
    Date: 2007–04
  5. By: Conconi, Paola (Université Libre de Bruxelles (ECARES), University of Warwick (CSGR) and CEPR); Perroni, Carlo (University of Warwick and CESifo); Riezman, Raymond (University of Iowa and CESifo)
    Abstract: We consider a setting in which capital taxation is characterized by two distortions working in opposite directions. On one hand, governments engage in tax competition and are tempted to lower capital tax rates. On the other hand, they are unable to commit to future policies and, once capital has been installed, have incentives to increase taxes. In this setting, there exists a tax that optimally trades off the two distortions. We compare three possible tax harmonization scenarios: no tax harmonization (all countries set taxes unilaterally), global tax harmonization (all countries coordinate their capital taxes), and partial tax harmonization (only a subset of all countries coordinate capital taxes). We show that, if capital is sufficiently mobile, partial tax harmonization benefits all countries compared to both global and no harmonization.
    Keywords: Tax Competition ; Commitment ; Partial Coordination
    JEL: H21 F21 C73
    Date: 2007
  6. By: Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares (Department of Economics, University of Iowa); Pierre-Daniel Sarte (Federal Reserve Bank of Richmond); Jorge Soares (Department of Economics,University of Delaware)
    Abstract: In the standard neoclassical model with a representative agent, a benevolent planner who can commit to future policies will, if feasible, levy a single confiscatory tax on capital in the initial period and commit never to set positive taxes thereafter. We show that this policy, which allows for the disposal of distortional taxes entirely, can arise even when sequential governments are unable to credibly promise future tax rates, regardless of how public expenditures are determined.
    Keywords: Capital Taxation, Ramsey, Commitment, Markov-Perfect equilibrium, Time consistent policy, Overlapping Generations
    JEL: H3 H6 H21 E62
    Date: 2006
  7. By: Marina Azzimonti, Pierre-Daniel Sarte, Jorge Soares (Department of Economics, University of Iowa); Pierre-Daniel Sarte (Federal Reserve Bank of Richmond); Jorge Soares (Department of Economics,University of Delaware)
    Abstract: We characterize Markov-perfect equilibria in a setting where the absence of government commitment affects the financing of productive public capital. We show that at any date, a government in office only considers intertemporal distortions over two consecutive periods in choosing taxes. We then use our framework to quantify the value of commitment, which we define as that obtained from binding governments to a course of actions that produce the second-best allocations.
    Keywords: Public Investment, Commitment, Time consistency, Discretion, Ramsey, Markov-Perfect
    JEL: E61 E62 H11
    Date: 2006
  8. By: Maurizio Bovi (ISAE - Institute for Studies and Economic Analyses); Roberto Dell'Anno (Università di Foggia, DSEMS)
    Abstract: As recently suggested, the shadow economy and its determinants (taxation, regulations, corruption, etc.) are linked such that just two stable equilibria are possible. In the good one there is a small hidden sector, large fiscal revenues and honest/appreciated institutions. The other (bad) equilibrium is quite the opposite. Our paper examines the links between these variables in relatively uncorrupt systems. Unlike the mainstream literature, we suggest that a continuum of SE equilibrium rates can emerge and that taxation and underground activities can be positively correlated. Empirical evidence for OECD countries broadly supports the model.
    Keywords: shadow economy; multiple equilibria; taxation; rule of law.
    JEL: H26 K42 O17
    Date: 2007–04
  9. By: Luca Corazzini (Department of Economics, University of Milan-Bicocca); Marco Faravelli (Department of Economics, University of Milan-Bicocca); Luca Stanca (Department of Economics, University of Milan-Bicocca)
    Abstract: This paper investigates fund-raising mechanisms based on a prize as a way to overcome free riding in the private provision of public goods, under the assumptions of income heterogeneity and incomplete information about income levels. We compare experimentally the performance of a lottery, an all-pay auction and a benchmark voluntary contribution mechanism. We find that prize-based mechanisms perform better than voluntary contribution in terms of public good provision after accounting for the cost of the prize. Comparing the prize-based mechanisms, total contributions are significantly higher in the lottery than in the all-pay auction. Focusing on individual income types, the lottery outperforms voluntary contributions and the all-pay auction throughout the income distribution.
    Keywords: Auctions, Lotteries, Public Goods, Laboratory Experiments
    JEL: C91 D44 H41
  10. By: Christopher Gerry; Tomasz Mickiewicz
    Abstract: Using panel data for twenty-seven post-communist economies between 1987-2003, we examine the nexus of relationships between inequality, fiscal capacity (defined as the ability to raise taxes efficiently) and the political regime. Investigating the impact of political reform we find that full political freedom is associated with lower levels of income inequality. Under more oligarchic (authoritarian) regimes, the level of inequality is conditioned by the state’s fiscal capacity. Specifically, oligarchic regimes with more developed fiscal systems are able to defend the prevailing vested interests at a lower cost in terms of social injustice. This empirical finding is consistent with the model developed by Acemoglu (2006). We also find that transition countries undertaking early macroeconomic stabilisation now enjoy lower levels of inequality; we confirm that education fosters equality and the suggestion of Commander et al (1999) that larger countries are prone to higher levels of inequality.
    Keywords: income inequality, democracy, oligarchy, fiscal capacity, economic reform, transition
    JEL: D31 H21 P26 P35
    Date: 2006–07–01
  11. By: Alison Booth; Melvyn Coles
    Abstract: This paper considers optimal educational investment and labour supply with increasing returns to scale in the earnings function. In so doing we develop the work of Rosen (1983), who first highlighted the increasing returns argument that arises because private returns to human capital investment are increasing in subsequent utilization rates. We demonstrate that increasing returns generates task specialisation - individuals choose to become either home specialists or work specialists. With heterogeneous workers, we show for certain types, that a tax on labour income leads to large, non-marginal substitution effects; i.e. those with a comparative advantage in home production are driven out of the market sector. Tax deadweight losses are consequently large. Consistent with the theory, our empirical results, using a cross-country panel, find that gender differences in labour supply responses to tax policy can play an important role in explaining differences in aggregate labour supply across countries.
    JEL: H24 J13 J24 J31 J42
    Date: 2007–03
  12. By: Yasushi Iwamoto (Faculty of Economics, University of Tokyo); Akihisa Shibata (Kyoto Institute of Economic Research, Kyoto University)
    Abstract: This paper discusses how capital income taxation affects economic growth and welfare in an endogenously growing world economy with perfect capital mobility and worldwide externalities. Worldwide ex-ternalities provide a mechanism for equalizing national growth rates even with different capital income tax rates. The welfare of future generations is more influenced by a change in the growth rate than by the international spillover effect which has been the primary concern of the previous studies. Moreover, our model finds intergenerational conflicts arising from the change in the growth rate caused by a change in the source tax rate of the foreign country.
    Date: 2007–04
  13. By: Sébastien Wälti (Department of Economics, Trinity College Dublin); Signe Krogstrup (Graduate Institute of International Studies, Geneva)
    Abstract: If women have different economic preferences than men, then female economic and political empowerment is likely to change policy and household decisions, and in turn macroeconomic outcomes. We test the hypothesis that female enfranchisement leads to lower government budget deficits due gender differences in preferences over fiscal outcomes. Estimating the impact of women’s vote on budget deficits in a differences-in-differences regression for Swiss cantonal panel data, we find that including women in the electorate reduces average per capita budget deficits by a statistically significant amount.
    Keywords: Fiscal policy, budget deficit, enfranchisement, median voter, gender
    JEL: D7 E6 H6 J16
    Date: 2006–09
  14. By: Jennifer Hunt
    Abstract: Using cross–country and Peruvian data, I show that victims of misfortune, particularly crime victims, are much more likely than non–victims to bribe public officials. Misfortune increases victims’ demand for public services, raising bribery indirectly, and also increases victims’ propensity to bribe certain officials conditional on using them, possibly because victims are desperate, vulnerable, or demanding services particularly prone to corruption. The effect is strongest for bribery of the police, where the increase in bribery comes principally through increased use of the police. For the judiciary the effect is also strong, and for some misfortunes is composed equally of an increase in use and an increase in bribery conditional on use. The expense and disutility of bribing thus compound the misery brought by misfortune.
    Keywords: Corruption, bribery, governance
    JEL: H1 K4 O1
    Date: 2006–08–01
  15. By: Marco Faravelli
    Abstract: This paper considers a public good game with heterogeneous endowments and incomplete information affected by extreme free-riding. We overcome this problem through the implementation of a contest in which several prizes may be awarded. We identify a monotone equilibrium, in which the contribution is strictly increasing in the endowment. We prove that it is optimal for the social planner to set the last prize equal to zero, but otherwise total expected contribution is invariant to the prize structure. Finally, we show that private provision via a contest Pareto-dominates public provision and is higher than the total contribution raised through a lottery.
  16. By: Mirco Tonin
    Abstract: The paper investigates the role of the minimum wage in a competi- tive economy in which there is underreporting of earnings by employed labour. The minimum wage induces higher compliance by some low- productivity workers and transforms a nominally neutral ?scal system into a regressive one. A spike in the wage distribution at the mini- mum wage level appears and a positive correlation between the size of the spike and the size of the informal economy is predicted and documented using cross-country data for Europe. A further result is that employees whose o¢ cially declared earnings appear to be boosted by a minimum wage hike actually experience a decline in their true income. This prediction ?nds support in an empirical test using the massive increase in the minimum wage that took place in Hungary in 2001 as a quasi-natural experiment.
    Keywords: MinimumWage, Tax Evasion,Wage Distribution, Hungary
    JEL: J38 H26 H32 P2
    Date: 2007–01–01
  17. By: Burton A. Abrams (Department of Economics,University of Delaware); Siyan Wang (Department of Economics,University of Dela)
    Abstract: In this paper, we investigate the relationship between government size and the unemployment rate using a structural error correction model that describes both the short-run dynamics and long-run determination of the unemployment rate. Using data from twenty OECD countries from 1970 to 1999, we find that government size, measured as total government outlays as a percentage of GDP, plays a significant role in affecting the steady-state unemployment rate. We disaggregate government outlays and find that transfers and subsidies significantly affect the steady-state unemployment rate while government expenditures on goods and services play no significant role.
    Keywords: Steady-State Unemployment Rate; Government Size; Error Correction Model; Dynamic Panel Data Model; Arellano-Bond Estimator
    JEL: C23 H10 H19 H50 J64
    Date: 2006
  18. By: Ondřej Schneider (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: This paper analyses the European budget and the position of the ten new member states. We argue that the EU budget should be reconsidered, as the Union has expanded to 27 member states and has become more heterogeneous. The budget priorities must be re-oriented towards potentially productive spending programmes. A simple economic growth model illustrates that the current EU budget setting is, at best, neutral with respect to the EU-wide long-term growth potential and may actually hamper growth in the majority of the EU countries if the distortionary nature of taxation is taken into account.
    Keywords: Budget, European Union, growth
    JEL: E6 H77
    Date: 2007–04
  19. By: Bitzer, Jürgen (Free University Berlin); Schrettl, Wolfram (Free University Berlin); Schröder, Philipp J.H. (Department of Economics, Aarhus School of Business)
    Abstract: This papers sheds light on the puzzling fact that even though open <p> source software (OSS) is a public good, it is developed for free by <p> highly qualified, young, motivated individuals, and evolves at a rapid <p> pace. We show that when OSS development is understood as the private <p> provision of a public good, these features emerge quite naturally. <p> We adapt a dynamic private-provision-of-public-goods model to reflect <p> key aspects of the OSS phenomenon. Apart from extrinsic motives <p> (namely signaling), the present model also contains intrinsic motives <p> of OSS programmers, such as play value or homo ludens payoff, userprogrammers’ <p> and gift culture benefits. Such intrinsic motives feature <p> extensively in the wider OSS literature and contribute new insights to <p> the economic analysis
    Keywords: open source software; public goods; homo ludens; war of attrition
    JEL: H41 L31 L86
    Date: 2006–09–01
  20. By: Fabian Lange (Yale University and IZA); Douglas Gollin (Williams College)
    Abstract: Both policy makers and researchers have devoted considerable attention in recent years to the large current account and capital account imbalances among OECD countries. In particular, the size of the United States current account deficit has attracted intense attention and spawned numerous explanations. There are undoubtedly many reasons for this deficit, including government fiscal policy imbalances, but one explanation that has not previously received much attention is that current account deficits and the matching capital inflows are responses to international flows of labor. Migrants must be equipped with machines, and the resulting demands for capital are likely, all else being equal, to generate cross-border flows of capital. This paper explores the extent to which migration-related capital flows can explain the movements and magnitudes of current and capital account imbalances in OECD countries.
    Keywords: migration, capital flows
    JEL: F21 F22
    Date: 2007–04
  21. By: Matthew J. Higgins; Daniel Levy; Andrew T. Young
    Abstract: We use US county level data (3,058 observations) from 1970 to 1998 to explore the relationship between economic growth and the size of government at three levels: federal, state and local. Using 3SLS-IV estimation we find that the size of federal, state and local government all either negatively correlate with or are uncorrelated with economic growth. We find no evidence that government is more efficient at more or less decentralized levels. Furthermore, while we cannot separate out the productive and redistributive services of government, we document that the county-level income distribution became slightly wider from 1970 to 1998. Our findings suggest that a release of government-employed labor inputs to the private sector would be growth-enhancing.
    Date: 2006–11
  22. By: DESMET, Klaus; LE BRETON, Michel; ORTUNO-ORTIN, Ignacio
    JEL: H77 D70 F02 H40
    Date: 2006–09
  23. By: Martin J. Osborne; Matthew A. Turner
    Abstract: We consider a planner who chooses between two possible public policies and ask whether a referendum or a cost benefit analysis leads to higher welfare. We find that a referendum leads to higher welfare than a cost benefit analyses in "common value" environments. Cost benefit analysis is better in "private value" environments.
    Keywords: Cost benefit analysis, elections, referenda, project evaluation
    JEL: H43 H11 Q51
    Date: 2007–04–13
  24. By: Saul D. Hoffman (Department of Economics,University of Delaware)
    Abstract: Twenty states and several cities have adopted their own EITC programs, typically piggy-backing on the federal EITC by offering benefits equal to some designated proportion of the federal benefits. In all but four states, the state EITC is fully refundable, just like the Federal EITC. Using the example of Delaware, which adopted a non-refundable EITC in 2006, I show the peculiar distribution effects of such a policy. Roughly the lower income half of the EITC recipient population is ineligible for the Delaware non-refundable EITC. Married couples and both single-parent and two-parent families with less than two children also often lose eligibility and/or a substantial portion of benefits. The average benefit received by Federal EITC recipients falls by almost two-thirds. It is likely that these impacts of EITC non-refundability results would hold in other states considering such a policy.
    Keywords: EITC, Earned Income Tax Credit
    JEL: H72 H75 I38 I39
  25. By: Enzo VALENTINI ([n.a.])
    Abstract: Economic theory is paying increasing attention to non-observed economy (NOE) and its causes. Recently, a couple of works (Rosser et al. 2000, Rosser et al. 2003) have claimed that there is a positive relationship between income inequality and the size of NOE. This supposed relationship is not so clear and deserves in-depth analysis. There is a crucial aspect that has been completely avoided in these studies: income inequality is mainly measured using "regular" incomes and this fact could lead to some bias. The existence of a certain size of NOE implies some income evasion which can affect the inequality indexes used in the study of the relationship between NOE and inequality. Including the regional share of NOE in a wage equation I find that, in the specific case of the Italian private sector employees, the income evasion attached to NOE tends to reduce inequality measured by regular wages statistics.
    Keywords: inequality, tax evasion, underground economy
    JEL: H26 I3
    Date: 2007–04
  26. 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: P13 J54 E24 H55
    Date: 2006
  27. By: Jeffrey Miller (Department of Economics,University of Delaware)
    Keywords: Bulgaria, mass privatization, dilution
    JEL: P5 P3 G3
    Date: 2006
  28. By: Paul G. Hare
    Abstract: There are diverse ideas about governance around the world, and this paper studies them through the following questions: (a) what does the available evidence tell us about the political and institutional requirements for sustained economic growth? (b) What do we need from the state to secure growth? (c) How do a country's internal characteristics support or impede its growth? (d) How does the external environment of a country influence its economic growth prospects? These elements are then put together into a model of growth, from which we derive conclusions about governance arrangements. Thus the paper outlines a simple framework within which to think about the political economy of growth that can be summed up in five points: good government, with secure political conditions; credible macroeconomic stability; savings and investment high enough to sustain adequate growth; openness to the world economy; and the discipline of external engagement. It then argues that the growth model needs to be underpinned by suitable governance arrangements, and suggests that good governance has two main elements, each quite complex in practice, namely: protection of property rights, and accountability of government.
    Keywords: political economy, global economy, economic growth, governance, macroeconomic stability, property rights
    JEL: O43 H11
    Date: 2007
  29. By: Rünno Lumiste (School of Economics and Business Administration, Tallinn University of Technology)
    Abstract: Electronics industry is one of the most dynamic industrial activities in the world. Dynamism is expressed by new products and, for our concern, especially by constant relocation and transfer of production. New factories and research laboratories are opened and old ones closed every week. Foreign investments and transfer of production are not new events. However, their scope and volume are unprecedented in historical terms. In this paper we analyse the location patterns. We analyse the factory relocation both on local (Estonian) and global level. Based on Johann von Thünen model we construct also a model for explaining the location. We try to base on technical and technological argumentation rather than on social factors.
    Keywords: electronics industry, delocalization, relocation, deindustrialization; public governance.
    JEL: F15 F42 H70 J40 L63
    Date: 2006
  30. By: Yuko Kinoshita; Chia-Hui Lu
    Abstract: The paper studies the effects of foreign direct investment (FDI) on economic growth when sufficient provisions of infrastructure is a pre-requisite. In the overlapping generations setting, we show that technology spillovers via FDI take place only when the host country has the sufficient level of infrastructure. Infrastructure has a subsequent positive feedback on further investment which leads the country to grow faster. If infrastructure falls short of the critical level, however, then FDI has little effect on growth as the country is trapped in a lowgrowth equilibrium. We also present the simulations and empirical results based on panel data for 42 developing countries between 1970 and 2000. They support the model that FDI and infrastructure are complementary in affecting per capita GDP growth.
    Keywords: foreign direct investment; economic growth, technology diffusion, infrastructure
    JEL: F21 O40 O33 H54
    Date: 2006–11–01
  31. By: Dean Karlan; Jonathan Zinman
    Abstract: Policymakers often urge microfinance institutions to increase interest rates to eliminate reliance on subsidies. However, existing research provides little evidence on interest rate sensitivities in MFI target markets as well as little guidance on how to derive rates. MFI policymakers generally presume that the poor are largely insensitive to interest rates and recommend that MFIs increase interest rates without fear of diminishing access. In this working paper, CGD non-resident fellow and his co-author test the elasticity of demand for microcredit using field data from South Africa. A for-profit South African lender worked with the authors to randomize 50,000 individual interest rate direct mail offers and tracked gross revenue and repayment, allowing the authors to access the effects on the targeted access margin that interests policymakers. They also worked with the lender to explore a margin of loan contracting that has been largely ignored by academics, policy makers and practitioners: loan maturity. They found that price sensitivity increased sharply when individuals were offered a rate above their prior loan's rate. They also found that loan size is far more responsive to changes in loan maturity than to changes in interest rates. This paper is one in a series of six CGD working papers by Dean Karlan on various aspects of microfinance (Working Paper Nos. 106 –111).
    Keywords: interest rates, subsidies,credit elasticity,loan maturity, microfinance, credit market
    JEL: G21 M20 E51 E43 H20
  32. By: Alison 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 endogenously 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.
    JEL: H24 J13 J24 J31 J42
    Date: 2007–02
  33. By: Emanuele, Canegrati
    Abstract: In this paper I will exploit answers coming from the British Election Study in order to assess the validity of the Single Mindedness Theory. In particular, I will evaluate whether political preferences of voters for political candidates depend on their age and some other characteristics such as gender, education, religion, social and economic conditions. Performing LOGIT and PROBIT regression I will demonstrate that variable age is statistically significant, demonstrating that Single Mindedness Theory assumptions hold in the UK political environment.
    Keywords: Single-mindedness; political survey; electorate preferences; Logit; Probit
    JEL: H31 D72 D83 H56 H51 C35 C25 D78 J14
    Date: 2007–04
  34. By: Ariane Lambert-Mogiliansky (PSE (CNRS, EHESS, ENPC, ENS) Paris); Konstantin Sonin (New Economic School/CEFIR and CEPR); Ekaterina Zhuravskaya (New Economic School/CEFIR and CEPR)
    Abstract: We study the nature of judicial bias in bankruptcy proceedings following the enactment of the 1998 bankruptcy law in Russia. The two main findings are as follows. First, regional political characteristics affected judicial decisions about the number and types of bankruptcy proceedings initiated after the law took effect. Controlling for indicators of firms’ insolvency and the quality of the regional judiciary, re-organization procedures were significantly more frequent in regions with politically popular governors and governors who had hostile relations with the federal center. Poor judicial quality was also associated with higher incidence of re-organizations. Second, the quality of the regional judiciary ffected performance of firms under the re-organization procedure: in regions with low quality judges, firms that were re-organized according to the 1998 law had significantly lower growth in sales, labor productivity, and product variety compared to firms not subject to bankruptcy proceedings. In contrast, in regions with high quality judges, firms in re-organization outperformed firms not in bankruptcy proceedings. This effect of judicial quality on the performance of re-organized firms was stronger when governors were politically popular. These findings are consistent with the view that politically strong governors subverted enforcement of the 1998 bankruptcy law.
    JEL: D23 G33 H11 H77
    Date: 2007–03

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