nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒06‒02
23 papers chosen by
Peren Arin
Massey University

  1. Tax Structure, Size of Government, and the Extension of the Voting Franchise in Western Europe, 1860-1938 By Aidt, T.S.; Jense , P.S.
  2. Public Expenditure in Latin America: Trends and Key Policy Issues By Christopher Faircloth; Benedict J. Clements; Marijn Verhoeven
  3. Quasi-Fiscal Deficit in Non-Financial Enterprises By Robert Tchaidze
  4. Public Debt and Fiscal Vulnerability in the Middle East By Martin Petri; Ludvig Söderling; Wojciech Maliszewski; Hanan Morsy; Manal Fouad; Martin Hommes
  5. Fiscal Policy in Real Time By Jacopo Cimadomo
  6. Imperfect Government Insurance and Treasury Securities Markets By Oscar Mauricio VALENCIA ARANA
  7. Has the Golden Rule of Public Finance Made a Difference in the UK ? By Jerome Creel; Paola Monperrus-Veroni; Francesco Saraceno
  8. The cyclicality of consumption, wages and employment of the public sector in the euro area. By Ana Lamo; Javier J. Pérez; Ludger Schuknecht
  9. Public Pension Reform: A Primer By Alain Jousten
  10. Give and Take: Political Competition, Participation and Public Finance in 20th Century Latin America By Aidt, T.S.; Eterovic, D.S.
  11. Taxes, Institutions and Foreign Diversification Opportunities By Mihir A. Desai; Dhammika Dharmapala
  12. Debt Maturity: Is Long-Term Debt Optimal? By Laura Alfaro; Fabio Kanczuk
  13. Young and old competing for public welfare services By Lars-Erik Borge; Jørn Rattsø
  14. Nominal versus Indexed Debt: A Quantitative Horse Race By Laura Alfaro; Fabio Kanczuk
  15. The Social Value of Public Information with Costly Information Acquisition By Luca Colombo; Gianluca Femminis
  16. Fiscal Policy and the Exchange Rate-Current Account Nexus By Jun Il Kim
  17. Constrained After College: Student Loans and Early Career Occupational Choices By Jesse Rothstein; Cecilia Elena Rouse
  18. Poverty targeting in public programs-- A comparison of some nonparametric tests and their application to Indian microfinance. By Isha Dewan; Rohini Somanathan
  19. Government debts and credit markets in Renaissance Italy By Luciano Pezzolo
  20. The Social Contract with Endogenous Sentiments By Matteo Cervellati; Joan Esteban; Laurence Kranich
  21. Testing the stability of the Benefit Transfer Function for Discrete Choice Contingent Valuation Data By David I. Matthews; Ricardo Scarpa; W. George Hutchinson
  22. Notes on the 'Freezing Hypothesis' By Erlingsson, Gissur
  23. Evidence on the Impact of Adult Upper Secondary Education in Sweden By Stenberg, Anders

  1. By: Aidt, T.S.; Jense , P.S.
    Abstract: We study the consequences of the extension of the voting franchise for the size of (central) government and for the tax structure in 10 Western European countries, 1860-1938. We show, .rstly, that the gradual relaxation of income and wealth restrictions on the right to vote contributed to growth in government spending and taxation. Secondly, we show that the impact of the franchise extension on the tax structure is conditional on tax collection costs. We find that the share of direct taxes (including the personal income tax) is positively affected by the franchise extension, but only if relative collection costs are below a given threshold. We use literacy as a proxy for the cost of levying a broad-based income tax.
    Keywords: Voting franchise, democracy, public finance, taxation.
    JEL: D7 H11
    Date: 2007–04
  2. By: Christopher Faircloth; Benedict J. Clements; Marijn Verhoeven
    Abstract: This paper examines trends in government spending in Latin America from the mid-1990s to 2006. It also examines key policy issues, including the cyclicality of spending, public investment, public employment, and social expenditures. It finds that primary expenditures have trended upward for the past ten years as a share of GDP, driven by increases in current spending, in particular for social expenditures. Fluctuations in real spending have continued to follow a procyclical pattern. The paper finds that there is substantial scope to improve the efficiency of public investment, public employment, and social spending.
    Keywords: Government expenditures , Latin America , Fiscal policy ,
    Date: 2007–02–02
  3. By: Robert Tchaidze
    Abstract: This paper discusses two ways of evaluating the quasi-fiscal deficit (QFD) and the link between them. It also suggests how to properly account for the QFD when calculating the overall deficit of the public sector. Finally, using an example of the energy market, it shows how to untangle a web of mutual nonpayments and properly evaluate the QFD generated in a sector characterized by the presence of both private and public agents.
    Keywords: Budget deficits , Public enterprises , Private sector , Subsidies , Payments arrears , Taxes , Fiscal policy ,
    Date: 2007–01–22
  4. By: Martin Petri; Ludvig Söderling; Wojciech Maliszewski; Hanan Morsy; Manal Fouad; Martin Hommes
    Abstract: Public debt in the Middle East increased during the mid-1990s mainly because of fiscal expansions. It decreased in recent years, thanks to high oil revenue, economic growth, some primary non-oil fiscal adjustment, and debt relief. While countries in the Middle East appear to have adequately reacted to high indebtedness in the past, public debt levels remain uncomfortably high in many, particularly non-oil producing countries and middle income oil producers. Non-oil countries adjust mainly by increasing revenues, whereas oil countries adjust expenditure. For non-oil producing countries, substantial fiscal adjustment would be needed to bring debt down to below 50 percent of GDP. Oil producers as a group appear to follow sustainable, though procyclical, fiscal policies. Middle-income (but not high-income) oil producing countries would need to adjust somewhat to bring their policies in line with the permanent oil income benchmark.
    Keywords: Public debt , Middle East , Fiscal policy , Oil ,
    Date: 2007–01–25
  5. By: Jacopo Cimadomo
    Abstract: Most of the empirical literature on fiscal policy has found that, over the post-World War II period, governments in developing and industrialized countries have reacted “pro-cyclically” to fluctuations in the economic activity (see e.g. Lane (2003) and Kaminsky, Reinhart and Vegh (2004)). Otherwise stated, budgetary decisions such as tax increases and cuts in public spending implemented in “bad times” would have tended to aggravate the length and the severity of economic recessions. On the other side, expansive policies put in place during “good times” would have led economic booms to be more prolonged and vigorous. This empirical evidence has been mainly drawn from the estimation of fiscal policy reaction functions, relating a policy indicator to the output gap and other explanatory variables, based on the use of revised data, i.e. data available in an “updated” form to the econometrician at the time the study is carried out. Since many economic variable are seriously contaminated by revision errors, however, revised data may be substantially different from the ones available in “real-time” to policymakers at the time of budgeting. In other words, as shown by Orphanides (2001) in the framework of monetary policy analysis, unrealistic assumptions about the timeliness of data availability may induce misleading assessments on the historical policy stance. Nevertheless, although informational problems clearly matter also for the evaluation of the fiscal policy stance, little has been done in this field.
    Keywords: Fiscal policy; real-time data; revision errors; endogenous threshold models
    JEL: C23 E30 E62 H30
    Date: 2007–05
  6. By: Oscar Mauricio VALENCIA ARANA
    Abstract: One important financial source for any government is the treasury market. Although a full government control over the interest rate is desirable, microeconomic-strategic behavior in the treasury securities often lead to collusive and precautionary agent behavior affecting government revenues. This paper shows that this behavior has not only consequences over the government income but also over the implementation of the optimal fiscal policy. Two main results are obtained: First, when the government uses uniform auction, a Ramsey policy can be implemented given that agents face a clearing price vector. Second, when the government uses a discriminatory auction format, the Ramsey outcome is not achievable because the optimal value of debt is state dependent. According to this, government losses full control over the interest rate and therefore over the optimal structure of public debt.
    Date: 2006–12–06
  7. By: Jerome Creel (Observatoire Français des Conjonctures Économiques); Paola Monperrus-Veroni (Observatoire Français des Conjonctures Économiques); Francesco Saraceno (Observatoire Français des Conjonctures Économiques)
    Abstract: This paper uses the SVAR methodology to investigate the effects of public investment on growth, and more specifically, the effects of the introduction of a golden rule of public finance. We extend the existing literature by estimating a model of the British economy that takes into account long run factors such as public debt accumulation. We find that in such a long run framework, public investment has a significant and permanently positive effect on GDP growth; this result runs counter to the most recent literature on the topic that was limited to a short run specification. We further find, by comparing different subsamples, that the introduction of the golden rule in 1997 strengthened the positive effect of public investment.
    Keywords: fiscal policy, golden rule of public finance, Structural VAR, Public Investment, UK Economy
    JEL: C32 E60 E63 H60
    Date: 2007
  8. By: Ana Lamo (Directorate General Research, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Javier J. Pérez (Directorate General Economic, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.); Ludger Schuknecht (Directorate General Economic, European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
    Abstract: This study examines the business cycle behaviour of public consumption and its main components; the public wage bill (including compensation per employee and public employment)and intermediate consumption in the euro area aggregate, euro area countries and a group of selected non-euro area OECD countries (Denmark, Sweden, the UK, Japan and the US). It looks across a large number of variables and methods, using annual data from 1960 to 2005. It finds robust evidence supporting that public consumption, wages and employment co-move with the business cycle in a pro-cyclical manner with 1-2 year lags, notably for the euro area aggregate and euro area countries. The findings reflect mainly the correlation between cyclical developments (automatic stabilizers), but also point to the important role of pro-cyclical discretionary fiscal policies. JEL Classification: E62, E63, H50.
    Keywords: Public consumption, public wages, public employment, stylized facts, filtering, thick modelling.
    Date: 2007–05
  9. By: Alain Jousten
    Abstract: The present paper reviews key issues in pension design and pension reform encountered all across the world. The paper heavily refers to the recent U.S. Social Security reform debate in general and to the Personal Retirement Accounts proposal in particular. A particular emphasis is put on annuitization and risk-taking in the economy. Our discussion signals some inadequacy of the proposed measures with respect to the goals of viability of the system and individual financial security during retirement.
    Keywords: Pensions , Social security , Aging , Financial safety nets , Public sector ,
    Date: 2007–02–08
  10. By: Aidt, T.S.; Eterovic, D.S.
    Abstract: Rational choice models predict that political competition and political participation have opposite effects on the size of government. We investigate these theories using data from a panel of 18 Latin American countries during the 20th century. Our research builds evidence for the prediction that reforms enhancing political competition tend to limit the size of government, while reforms increasing political participation tend to increase the size of government. Furthermore, we find that reforms which remove literacy requirements from franchise laws are associated with governmental expansion, while changes in women.s su¤rage laws have no impact on the size of government. Our findings demonstrate the empirical relevance of the distinction between political competition and participation.
    Keywords: Political competition, political participation, the extension of the franchise, women.s su¤rage, literacy requirements; size of government; school enrollment.
    JEL: D7 H11
    Date: 2007–04
  11. By: Mihir A. Desai; Dhammika Dharmapala
    Abstract: Investors can access foreign diversification opportunities through either foreign portfolio investment (FPI) or foreign direct investment (FDI). By combining data on US outbound FPI and FDI, this paper analyzes whether the composition of US outbound capital flows reflect efforts to bypass home country tax regimes and weak host country investor protections. The cross-country analysis indicates that a 10% decrease in a foreign country's corporate tax rate increases US investors' equity FPI holdings by 21%, controlling for effects on FDI. This suggests that the residual tax on foreign multinational firm earnings biases capital flows to low corporate tax countries toward FPI. A one standard deviation increase in a foreign country's investor protections is shown to be associated with a 24% increase in US investors' equity FPI holdings. These results are robust to various controls, are not evident for debt capital flows, and are confirmed using an instrumental variables analysis. The use of FPI to bypass home country taxation of multinational firms is also apparent using only portfolio investment responses to within-country corporate tax rate changes in a panel from 1994 to 2005. Investors appear to alter their portfolio choices to circumvent home and host country institutional regimes.
    JEL: F21 F23 G11 G30 H25
    Date: 2007–05
  12. By: Laura Alfaro; Fabio Kanczuk
    Abstract: We model and calibrate the arguments in favor and against short-term and long-term debt. These arguments broadly include: maturity premium, sustainability, and service smoothing. We use a dynamic equilibrium model with tax distortions and government outlays uncertainty, and model maturity as the fraction of debt that needs to be rolled over every period. In the model, the benefits of defaulting are tempered by higher future interest rates. We then calibrate our artificial economy and solve for the optimal debt maturity for Brazil as an example of a developing country and the U.S. as an example of a mature economy. We obtain that the calibrated costs from defaulting on long-term debt more than offset costs associated with short-term debt. Therefore, short-term debt implies higher welfare levels.
    JEL: E62 F34 H63
    Date: 2007–05
  13. By: Lars-Erik Borge (Department of Economics, Norwegian University of Science and Technology); Jørn Rattsø (Department of Economics, Norwegian University of Science and Technology)
    Abstract: Generational conflict affects the supply of public welfare services, and the rising share of elderly is seen as a threat to educational spending. We offer an analysis of spending in child care, primary and lower secondary education, and care for the elderly related to the size of young and old voters. The age groups face possible disadvantages of being part of a large cohort, but also can gain political strength to crowd out services for the other groups. The decentralization of public services in Scandinavia allows for the simultaneous analysis of age related services. Using panel data from Denmark for the period 1989-1996, we find that the elderly are reducing spending in child care and education, but the young do not threaten services for the elderly. It is a disadvantage for both the elderly and the young to be part of a large cohort. The possible Tiebout-bias is handled with instrument variables predicting the relevant age composition variables.
    Keywords: Public welfare services; group size; age composition of the population; generational conflict
    JEL: H42 H72
    Date: 2007–05–24
  14. By: Laura Alfaro; Fabio Kanczuk
    Abstract: The main arguments in favor and against nominal and indexed debt are the incentive to default through inflation versus hedging against unforeseen shocks. We model and calibrate these arguments to assess their quantitative importance. We use a dynamic equilibrium model with tax distortion, government outlays uncertainty, and contingent-debt service. Our framework also recognizes that contingent debt can be associated with incentive problems and lack of commitment. Thus, the benefits of unexpected inflation are tempered by higher interest rates. We obtain that costs from inflation more than offset the benefits from reducing tax distortions. We further discuss sustainability of nominal debt in developing (volatile) countries.
    JEL: E6 H63
    Date: 2007–05
  15. By: Luca Colombo (DISCE, Università Cattolica); Gianluca Femminis (DISCE, Università Cattolica)
    Abstract: In a beauty contest framework, we show that more precise public information contributes to higher welfare when the precision of private information is endogenous. We consider a Stackelberg game in which public authorities decide the accuracy of public information taking into account how this affects the acquisition of private information and the choice of individual actions in equilibrium. Because the acquisition of private information is costly, an increase in the precision of public information increases welfare by reducing the incentives for acquisition of private information, thereby inducing socially valuable savings of private resources.
    Keywords: Public information, private information, coordination, welfare
    JEL: C70 D82 E10
    Date: 2007–03
  16. By: Jun Il Kim
    Abstract: By using a simple intertemporal model of the current account, I show that the exchange rate elasticity of the trade balance would ceteris paribus be smaller for countries with higher government spending ratios (relative to GDP) and with more limited scope for private consumption smoothing. This finding may have important implications for the design of adjustment programs and for resolving current global imbalances. It could also help explain and reconcile mixed empirical findings on trade elasticities.
    Keywords: Exchange rates , Current account , Balance of trade , Fiscal policy , Consumption , Economic models ,
    Date: 2007–02–06
  17. By: Jesse Rothstein; Cecilia Elena Rouse
    Abstract: In the early 2000s, a highly selective university introduced a "no-loans" policy under which the loan component of financial aid awards was replaced with grants. We use this natural experiment to identify the causal effect of student debt on employment outcomes. In the standard life-cycle model, young people make optimal educational investment decisions if they are able to finance these investments by borrowing against future earnings; the presence of debt has only income effects on future decisions. We find that debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid "public interest" jobs. We also find some evidence that debt affects students' academic decisions during college. Our estimates suggest that recent college graduates are not life-cycle agents. Two potential explanations are that young workers are credit constrained or that they are averse to holding debt. We find suggestive evidence that debt reduces students' donations to the institution in the years after they graduate and increases the likelihood that a graduate will default on a pledge made during her senior year; we argue this result is more likely consistent with credit constraints than with debt aversion.
    JEL: D91 H52 I20 J24
    Date: 2007–05
  18. By: Isha Dewan (Indian Statistical Institute); Rohini Somanathan (Delhi School of Economics)
    Abstract: Many popular social programs have limited coverage among households at the very bottom of the income and wealth distribution. If a program reaches the poor, but neglects the destitute, the (pre-program) income distribution of participants and non-participants will cross. We are interested in the statis-tical methods that can be used to test for this particular pattern of program participation. Our numerical simulations suggest that recently developed tests for distribution crossing are powerful even when the two distributions under study are fairly similar and they can be usefully combined with more stan-dard quantile tests to characterize program participation among the very poor. We apply this approach to data on household expenditures and membership of micro-credit groups in India and find that participation among the poorest households in the study area was lower than that of slightly richer households.
    Date: 2007–05
  19. By: Luciano Pezzolo (Department of Economics, University Of Venice Ca’ Foscari)
    Abstract: At first sight a marked difference turns out among the Italian governments of early Renaissance: the means of financing their deficit. There are, on the one hand, communal cities and republics, raising money from citizens through the system of forced or voluntary loans; there are, on the other, princes and lords who exploit services of bankers and merchants. These two different systems of borrowing bring about significant financial and political aspects. In this paper I will examine the main features characterizing the two mechanisms of indebtedness and the implications concerning the emergence of a true financial market connected with state bonds.
    Keywords: Public debts; Renaissance Italy; financial markets; financial institutions
    JEL: N2 N23
    Date: 2007
  20. By: Matteo Cervellati; Joan Esteban; Laurence Kranich
    Abstract: Moral values influence individual behavior and social interactions. A specially significant instance is the case of moral values concerning work effort. Individuals determine what they take to be proper behaviour and judge the others, and themselves, accordingly. They increase their esteem -and self-esteem- for those who perform in excess of the standard and decrease their esteem for those who work less. These changes in self-esteem result from the self-regulatory emotions of guilt or pride extensively studied in Social Psychology. We examine the interactions between sentiments, individual behaviour and the social contract in a model of rational voting over redistribution where individual self-esteem and relative es-teem for others are endogenously determined. Individuals differ in their productivities. The desired extent of redistribution depends both on individual income and on individual attitudes toward others. We characterize the politico-economic equilibria in which s
    Keywords: Social Contract, Endogenous Sentiments, Voting over Taxes, Moral Work
    JEL: D64 D72 Z13 H3 J2
    Date: 2007–03–01
  21. By: David I. Matthews (Agri-Food and Biosciences Institute); Ricardo Scarpa (University of Waikato); W. George Hutchinson (Queen’s University Belfast)
    Abstract: We examine the stability of the benefit transfer function across 42 recreational forests in the British Isles. A working definition of reliable function transfer is put forward, and a suitable statistical test is provided. The test is based on the sensitivity of the model log-likelihood to removal of individual forest recreation sites. We apply the proposed methodology on discrete choice contingent valuation data and find that a stable function improves our measure of transfer reliability, but not by much. We conclude that, in empirical studies on transferability, function stability considerations are secondary to the availability and quality of site attribute data. Modellers’ can study the advantages of transfer function stability vis-à-vis the value of additional information on recreation site attributes.
    Keywords: Benefit function transfer ; Function stability tests; Transfer reliability Forest recreation values; Contingent Valuation; Split sample
    JEL: Q26 H41 C25
    Date: 2007–05–25
  22. By: Erlingsson, Gissur (The Ratio Institute)
    Abstract: It is now 40 years since Lipset and Rokkans heavily influential ‘Cleavage Structures…’ was first published. Current research has still made little effort to explain why the ‘freezing’ of party systems these authors observed actually took place. The purpose here is to contribute to this field by elucidating the individual-level mechanisms that make party system stability more intelligible. The argument put forward here is that three interrelated factors give us deeper insights into the mechanics of the so called ‘freezing process’. Firstly, the ‘problem of collective action among potential party-entrepreneurs’ makes it puzzling that new political parties emerge at all. Secondly, even if the original collective-action problem somehow is overcome, the ‘principal-agent problem’ and the ‘problem of voter coordination’ make it hard for new parties to attract voters. Finally, well-established and powerful competitors have the incentives and instruments to fight newcomers and steer them away from the political arena. I reach the conclusion that it is not surprising at all that Lipset and Rokkan made their empirical observations. Instead, what is really puzzling is why new political parties emerge and gain support at all.
    Keywords: Party systems; 'freezing hypothesis'; party formation
    JEL: D01 D71 D72 H41
    Date: 2007–05–24
  23. By: Stenberg, Anders (Swedish Institute for Social Research, Stockholm University)
    Abstract: This study is the first to explore the earnings effects of credits attained in adult education at upper secondary level (AE) in Sweden. It is also investigated whether individuals with and without AE prior to enrolment in higher studies differ in their achievements at university and/or in their subsequent earnings. The analyses are based on register data of the cohort born in 1970 of which more than one third at some point has been registered in AE. In the preferred specification, credits equal to one year of AE are found to increase annual wage earnings by 4.1 per cent for males and 3.6 per cent for females. The results are mainly driven by course credits with an element of specific knowledge such as health related subjects and computer science, while more general subjects such as Mathematics, Swedish or English are linked with zero returns. Concerning higher education, the results indicate a lower payoff for AE individuals if higher studies are limited to less than two years. There is also evidence of a lower probability of completing four years of higher studies, in particular among females.
    Keywords: Adult education; wage earnings
    JEL: H52 J68
    Date: 2007–05–23

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