nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒06‒11
33 papers chosen by
Peren Arin
Massey University

  1. In Search of the Transmission Mechanism of Fiscal Policy By Roberto Perotti
  2. Fiscal Shocks, the Trade Balance, and the Exchange Rate By Faik Koray; W. Douglas McMillin
  3. Self-enforcing Norms and the Efficient Non-cooperative Organization of Clans By Konrad, Kai A; Leininger, Wolfgang
  4. Strategic Tax Collection and Fiscal Decentralisation: The Case of Russia By Alexander Libman; Lars P. Feld
  5. Twenty years of Perspectives on Public Expenditures By Mourao, Paulo; Rodrigues, Carlos
  6. Estate Taxation, Entrepreneurship, and Wealth By Marco Cagetti; Mariacristina De Nardi
  7. Decentralization, Corruption, and the Unofficial Economy By Michael Alexeev; Luba Habodaszova
  8. The Value Added Tax : Its Causes and Consequences By Keen, Michael; Lockwood, Ben
  9. The Impact of Changing Skill Levels on Optimal Nonlinear Income Taxes By Craig Brett; John Weymark
  10. Considerations regarding the Romanian fiscal and budgetary reform in accordance with the E.U. requirements By Comaniciu, Carmen
  11. Why Are Mothers Working Longer Hours in Austria than in Germany? : A Comparative Micro Simulation Analysis By Helene Dearing; Helmut Hofer; Christine Lietz; Rudolf Winter-Ebmer; Katharina Wrohlich
  12. Capital Structure and International Debt Shifting. By Harry Huizinga; Luc Laeven; Gaëtan Nicodème
  13. What Promotes Fiscal Consolidation: OECD Country Experiences By Stéphanie Guichard; Mike Kennedy; Eckhard Wurzel; Christophe André
  14. Fiscal deficits in the U.S. and Europe: Revisiting the link with interest rates By Andrea Terzi
  15. Bribes and local fiscal autonomy in Russia By Haaparanta , Pertti; Juurikkala, Tuuli
  16. Military Spending and the Growth-Maximizing Allocation of Public Capital: A Cross-Country Empirical Analysis By Pantelis Kalaitzidakis; Vangelis Tzouvelekas
  17. Bundesstaatsreform und Zukunft der Finanzverfassung By Kitterer, Wolfgang
  18. The size and effectiveness of automatic fiscal stabilizers in Latin America By Suescun, Rodrigo
  19. Altruism Spillovers: Are Behaviors in Context-Free Experiments Predictive of Altruism Toward a Naturally Occurring Public Good? By Susan K. Laury; Laura O. Taylor
  20. Loyalty and competence: Empirical evidence from public agencies By Alexander F. Wagner
  21. Foreign Exchange, Interest and the Dynamics of Public Debt in Latin America By Carlos E. Schonerwald da Silva; Matías Vernengo
  22. On Modeling Voluntary Contributions to Public Goods By James C. Cox; Vjollca Sadiraj
  23. On Keynesian effects of (apparent) non-Keynesian fiscal policies By Canale, Rosaria Rita; Foresti, Pasquale; Marani, Ugo; Napolitano, Oreste
  24. Domestic versus External Borrowing and Fiscal Policy in Emerging Markets By Garima Vasishtha
  25. Are EU budget deficits sustainable? By Mark J. Holmes; Jesus Otero; Theodore Panagiotidis
  26. Are Firms That Received R&D Subsidies More Innovative? By Mohnen, Pierre; Bérubé, Charles
  27. Stability and Growth Pact II? Let’s Move On to SGP III: “À la carte” By Thierry Warin
  28. Understanding Production in the Performing Arts: A Production Function for German Public Theatres By Marta Zieba; Carol Newman
  29. Overprotected Politicians By Bruno S. Frey
  30. Revisiting the Supply-Side Effects of Government Spending Under Incomplete Markets By George-Marios Angeletos; Vasia Panousi
  31. An Update on Bridge Jobs: The HRS War Babies By Michael D. Giandrea; Kevin E. Cahill; Joseph F. Quinn
  32. School To Work Transitions And The Impact Of Public Expenditure On Education By Blázquez Cuesta, Maite; García Pérez, José Ignacio
  33. An assessment of government funding of business angel networks: a regional study By Collewaert, V.; Manigart, S.; Rudy Aernoudt

  1. By: Roberto Perotti
    Abstract: Most economists would agree that a hike in the federal funds rate will cause some slowdown in growth and inflation, and that the bulk of the empirical evidence is consistent with this statement. But perfectly reasonable economists can and do disagree even on the basic effects of a shock to government spending on goods and services: neoclassical models predict that private consumption and the real wage will fall, while some neo-keyenesian models predict the opposite. This paper discusses alternative time series methodologies to identify government spending shocks and to estimate their effects. Applying these methodologies to data from the US and three other OECD countries provides little evidence in favor of the neoclassical predictions. Using the US input-output tables, the paper then turns to industry-level evidence around two major military buildups to shed light on the effects of government spending shocks.
    JEL: E2 E6 E62
    Date: 2007–06
  2. By: Faik Koray; W. Douglas McMillin
    Abstract: This paper investigates empirically, using a VAR model, the response of the exchange rate and the trade balance to fiscal policy shocks for the U.S. economy during the period 1981:3-2006:3. The results indicate that positive shocks to real government purchases generate a persistent increase in the budget deficit, a transitory expansionary effect on output, and a long-lived positive effect on the price level, but reduce the real interest rate. Simultaneously, and consistent with interest parity, the real exchange rate depreciates, and the trade balance improves. Negative shocks to net taxes also generate a persistent increase in the budget deficit, and the effects on the model variables are generally in the same direction, but are almost never significant. Our results indicate it is inappropriate to attribute rising trade balance deficits to expansionary fiscal policy shocks, even though these shocks generate long-lived increases in the budget deficit.
  3. By: Konrad, Kai A; Leininger, Wolfgang
    Abstract: We study how norms can solve distributional conflict inside a clan and the efficient coordination of collective action in a conflict with an external enemy. We characterize a fully non-cooperative equilibrium in a finite game in which a self-enforcing norm coordinates the members on efficient collective action and on a peaceful distribution of the returns of collective action.
    Keywords: collective action; defence; distributional conflict; free-riding; norms; war
    JEL: D72 D74 H11 H41
    Date: 2007–06
  4. By: Alexander Libman; Lars P. Feld
    Abstract: In a centralized federation, where tax rates and taxation rules are set by the federal govern-ment, manipulating the thoroughness of tax auditing and the effectiveness of tax collection could be attractive for regional authorities because of a variety of reasons. These range from tax competition to principal-agent problems, state capture and benefits of fiscal equalisation. In this paper we discuss strategic tax auditing and collection from the perspective of fiscal federalism and test for strategic tax collection empirically using data of the Russian Federa-tion. Russia’s regional authorities in the 1990s have always been suspect of tax auditing ma-nipulations in their favour. However, in the 2000s increasing bargaining power of the centre seems to induce tax collection bodies in the regions to manipulate tax auditing in favour of the federation. We find partial evidence in favour of both of these hypotheses.
    Keywords: fiscal federalism; tax arrears; transition economies
    JEL: H26 H77
    Date: 2007–05
  5. By: Mourao, Paulo; Rodrigues, Carlos
    Abstract: This paper synthesises some of the (New) Public Expenditures Theories. It also focuses on the Fiscal Adjustments theme. We analysed public expenditures evolution in a sample composed by seventeen OCDE countries observed between 1870 and 1990. Our conclusion recognizes the heterogeneity of the most recent Public Expenditure Theories and the different growth rates assumed by the evaluated outlays.
    Keywords: Fiscal Policy; Public Expenditures; Outlays elasticities; Budget rules
    JEL: H50 H11
    Date: 2007–01
  6. By: Marco Cagetti; Mariacristina De Nardi
    Abstract: We study the effects of abolishing estate taxation in a quantitative and realistic framework that includes the key features that policy makers are worried about: business investment, borrowing constraints, estate transmission, and wealth inequality. We use our model to estimate effective estate taxation. We consider various tax instruments to reestablish fiscal balance when abolishing estate taxation. We find that abolishing estate taxation would not generate large increases in inequality, and would, in some cases, generate increases in aggregate output and capital accumulation. If, however, the resulting revenue shortfall were financed through increased income or consumption taxation, the immensely rich, and the old among those in particular, would experience a welfare gain, at the cost of welfare losses for the vast majority of the population.
    JEL: D31 E21 H2
    Date: 2007–06
  7. By: Michael Alexeev (Indiana University Bloomington); Luba Habodaszova (City University/VSM, Bratislava, Slovakia)
    Abstract: We analyze the implications of decentralization for the incentives of local governments to provide productivity enhancing local public goods and extort bribes from local entrepreneurs. We show that an increase in the share of locally raised tax revenue left with the local government raises its incentives to provide public goods and brings more entrepreneurs into the official economy. Corruption, measured by the size of bribes that local officials charge entrepreneurs for issuing licenses for operating officially, may increase or decrease, depending on the extent to which public goods enhance the entrepreneur’s productivity. The tests using cross-sectional country-level data support the model’s implications.
    Keywords: decentralization, local public goods, corruption, unofficial economy
    JEL: H77 D73 O17
    Date: 2007–05
  8. By: Keen, Michael (IMF Institute, International Monetary Fund); Lockwood, Ben (University of Warwick)
    Abstract: Almost unknown in 1960, the value added tax (VAT) is now found in more than 130 countries, raises around 20 percent of the world’s tax revenue, and has been the centerpiece of tax reform in many developing countries. This paper explores the causes and consequences of the remarkable rise of the VAT. A key question is whether it has indeed proved, as its proponents claim, an especially effective form of taxation. To address this, it is first shown that a tax innovation—such as the introduction of a VAT—reduces the marginal cost of public funds if and only if it also leads an optimizing government to increase the tax ratio. This observation leads to the estimation, on a panel of 143 countries for 25 years, of a system of equations describing both the probability of VAT adoption and the revenue impact of the VAT. The results point to a rich set of determinants of VAT adoption, this being more likely, for example, if a country has a program with the IMF and the less open it is to international trade. In the revenue equation, the presence of a VAT does indeed have a significant impact, but also a complex one, with a negative intercept effect counteracted by positive effects that are greater the higher are per capita income and, more tentatively, openness. While the sign of the revenue impact of the VAT is thus in general ambiguous, most countries that have adopted a VAT seem to have gained a more effective tax instrument in doing so (though this is less apparent in sub-Saharan Africa), and most without it seem likely to gain from its adoption.
    Keywords: Value added tax ; tax reform
    JEL: H20 H21
    Date: 2007
  9. By: Craig Brett (Mount Allison University); John Weymark (Department of Economics, Vanderbilt University)
    Abstract: The impact of changing an individual's skill level on the solution to a finite population version of the Mirrlees optimal nonlinear income tax problem with quasilinear-in-leisure preferences is investigated. It is shown that it is possible to sign the directions of change in everyone's optimal consumptions and optimal marginal tax rates in response to such a change.
    Keywords: Optimal income taxation, comparative statics
    JEL: D82 H21
    Date: 2007–05
  10. By: Comaniciu, Carmen
    Abstract: The paper starts with the role of the Romanian fiscal and budgetary reform in the development and economical growth and has as purpose to emphasize the essential problems: the harmonization and fiscal coordination from the E.U. perspective; the Romanian fiscal and budgetary perspectives for period 2007-2009.
    Keywords: fiscal; budgetary; reform; period transition; harmonization; coordination
    JEL: H2 H6 E6
    Date: 2006–11–23
  11. By: Helene Dearing; Helmut Hofer; Christine Lietz; Rudolf Winter-Ebmer; Katharina Wrohlich
    Abstract: Labor force participation rates of mothers in Austria and Germany are similar, however full-time employment rates are much higher among Austrian mothers. In order to find out to what extent these differences can be attributed to differences in the tax transfersystem, we perform a comparative micro simulation exercise. After estimating structural labor supply models of both countries, we interchange two important institutional characteristics of the two countries, namely (i) the definition of the tax unit within the personal income tax and (ii) the parental leave benefit scheme. As our analysis shows, differences in mothers' employment patterns can partly be explained by the different tax systems: While Germany has a system of joint taxation with income splitting for married couples, Austria taxes everyone individually, which leads to lower marginal tax rates for secondary earners than the German system.
    Keywords: Labor supply, micro simulation, family policy, income taxation, Austria, Germany
    JEL: J22 H31 H24
    Date: 2007
  12. By: Harry Huizinga (Tilburg University and CEPR.); Luc Laeven (International Monetary Fund and CEPR.); Gaëtan Nicodème (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and European Commission.)
    Abstract: This paper presents a model of a multinational firm’s optimal debt policy that incorporates international taxation factors. The model yields the prediction that a multinational firm’s indebtedness in a country depends on a weighted average of national tax rates and differences between national and foreign tax rates. These differences matter as multinationals have an incentive to shift debt to high-tax countries. The predictions of the model are tested using a novel firm-level dataset for European multinationals and their subsidiaries, combined with newly collected data on the international tax treatment of dividend and interest streams. Our empirical results show that a foreign subsidiary’s capital structure reflects local corporate tax rates as well as tax rate differences vis-à-vis the parent firm and other foreign subsidiaries, although the overall economic effect of taxes on leverage appears to be small. Ignoring the international debt shifting arising from differences in national tax rates woudunderstate the impact of national taxes on debt policies by about 25%.
    Keywords: corporate taxation, financial structure, debt shifting
    JEL: F23 G32 H25
    Date: 2007–06
  13. By: Stéphanie Guichard; Mike Kennedy; Eckhard Wurzel; Christophe André
    Abstract: Fiscal consolidation is required in most OECD countries. This is especially so in view of mediumand long-term spending pressures on public finances, related, inter alia, to ageing. Based on a dataset covering a large number of OECD fiscal consolidation episodes starting in the late 1970s, the paper presents evidence, both descriptive and econometric, on macroeconomic conditions and policy set-ups that have been effective in triggering and sustaining fiscal consolidation. Main findings include: Large initial deficits and high interest rates have been important in prompting fiscal adjustment and also in boosting the overall size and duration of consolidation. Concerning the quality of fiscal policies, an emphasis on cutting current expenditures has been associated with overall larger consolidation. Fiscal rules with embedded expenditure targets tended to be associated with larger and longer adjustments, pointing to institutional features playing a potentially important role in generating successful consolation efforts. Experience across countries also shows that certain design features such as transparency, flexibility to face shocks and effective enforcement mechanisms seem important for the effectiveness of fiscal rules. <P>Qu’est-ce qui favorise la consolidation budgétaire : L’expérience des pays de l’OCDE <BR>La plupart des pays de l’OCDE doivent consolider leurs finances publiques. C’est particulièrement le cas en raison des pressions de dépenses à moyen et long terme sur les finances publiques, liées entre autres au vieillissement des populations. Sur la base de données couvrant un grand nombre d’épisodes de consolidation budgétaire dans les pays de l’OCDE depuis la fin des années 70, le papier met en évidence, á la fois de manière descriptive et économétrique, les conditions macroéconomiques et les politiques qui ont été efficaces pour initier et supporter la consolidation budgétaire. Il montre en particulier que lorsque le déficit budgétaire et les taux de grand intérêt sont élevés la consolidation est non seulement plus probable mais aussi plus importante et plus longue. Concernant la qualité de l'ajustement budgétaire, des efforts concentrés sur la réduction des dépenses courantes sont associés à des consolidations plus importantes. La présence de règles budgétaires incluant des cibles de dépenses a été généralement associée à des ajustements plus important et plus longs, soulignant ainsi que les dispositifs institutionnels jouent un rôle potentiellement important pour le succès des consolidations budgétaires. L’expérience des différents pays montre aussi que certaines caractéristiques telles que la transparence, la flexibilité face à des chocs et les mécanismes d’application efficaces semblent importantes pour l?efficacité des règles budgétaires.
    Keywords: public debt, dette publique, dépenses publiques, fiscal rules, règles budgétaires, fiscal consolidation, government revenue, consolidation budgétaire, deficit, déficit, government spending, recettes budgétaires
    JEL: H11 H62 H63
    Date: 2007–05–28
  14. By: Andrea Terzi (Universita Cattolica, Milan, Italy)
    Keywords: deficits; fiscal deficit; interest rates; inflation
    Date: 2007–05–14
  15. By: Haaparanta , Pertti (BOFIT); Juurikkala, Tuuli (BOFIT)
    Abstract: Russian industrial enterprises inherited from the Soviet era a tradition of producing welfare and infrastructure services within the firm, also for outside users. Despite the massive restructuring of the economy that took place since, many firms are still active in service provision. At the same time, opaque fiscal federalism is a problem for municipalities whereas rent extraction by public sector officials is a problem for firms. In this paper we examine whether there is a link between these phenomena. We propose a model on local fiscal incentives, service provision by firms and the municipality-firm relationship in the form of bribes. Using survey data from 404 medium and large industrial enterprises in 40 regions of Russia, we find that the higher the share of own revenues in the local budget, the more likely the firms are to report bribes. In the case of infrastructure services, the data also support the hypothesis that the channel is through service provision: the less fiscal autonomy, the more service provision and the less likely the firms are to report bribes.
    Keywords: local fiscal incentives; corruption; service provision; Russia; firm survey
    JEL: H77 M14 P31
    Date: 2007–05–31
  16. By: Pantelis Kalaitzidakis (Dept of Economics, University of Crete, Greece); Vangelis Tzouvelekas (Department of Economics, University of Crete, Greece)
    Abstract: In this paper drawing from the theoretical framework developed by Shieh et al., (2002), we present an endogenous growth model to empirical analyze the growth maximizing allocation of public capital among military spending and investment in infrastructure. Using this general model of public capital formation, we derive the growth-maximizing values of the shares of public capital allocated to it’s two different types, as well as the growth-maximizing tax rate (amount of total public capital as a share of GDP). Then we proceed with an empirical investigation of the theoretical implication of the model that both the effects of the shares of public capital and the tax rate on the long-run growth rate are non-linear, following an inverse U-shaped pattern. Using data of public investment in infrastructure and military capital formation, we investigate the long run relationship between economic growth and the allocation of public capital using panel cointegration analysis in a sample of 55 developed and developing countries. Our empirical results confirm the theoretical implications of the model for the majority of the countries in the sample. This finding is more consistent for the OECD countries although the same result can be drawn for a large part of the developing countries.
    Keywords: public capital, military spending, economic growth, panel unit root tests, panel cointegration
    JEL: E62 H56 O40 C23
    Date: 2007–05–29
  17. By: Kitterer, Wolfgang
    Abstract: Die Finanzreform des Jahres 2006 war im Wesentlichen darauf gerichtet, die Entscheidungsblockaden zwischen Bund und Ländern durch die Reduzierung zustimmungsbedürftiger Gesetzte aufzubrechen. Die Föderalismuskommission II diskutiert nunmehr weitere Reformen der Finanzverfassung. In der vorliegenden Arbeit wird eine stärker an der Wirtschaftskraft orientierte Steuerverteilung und die Stärkung der Steuerautonomie der Länder durch die Einführung eines Trennsystems diskutiert. Darüber hinaus wird ein vereinfachter Finanzausgleich (ohne Umsatzsteuer-Vorwegausgleich und Bundesergänzungszuweisungen) mit einem linearen Ausgleichstarif vorgeschlagen. In Anbetracht der Tatsache, dass die verfassungsmäßigen Schuldengrenzen nicht wirksam sind und eine dezentralisierte föderale Stabilisierungspolitik nicht sinnvoll ist, sollte für die Länder ein Verschuldungsverbot eingeführt werden. Ihre konjunkturelle Flexibilität könnte durch Konjunkturausgleichsrücklagen gewährleistet werden, während die Verantwortung für eine aktive Stabilitätspolitik alleine dem Bund überlassen bleiben sollte. The reform of fiscal federalism in Germany enacted in 2006 has focussed on separating the joint legislation process between the federal government and the States (Laender). The German commission on the reform of federalism is now disputing about further reforms in order to establish a more competitive fiscal system. In this paper we discuss some institutional arrangements minimizing tax sharing between different layers of government and strengthening tax autonomy of the sub-central governments. Furthermore, a reform of the inter-state tax equalization system is proposed which provides more transparency and more incentives to the States to raise their own economic performance and tax base. Finally, as the constitutional borrowing constraints provide no credible enforcement mechanism and as decentralized fiscal policy cannot be effective the States should be bound to balanced budgets and rainy day funds. Only central government should be responsible for stabilization policy.
    Keywords: Finanzverfassung, Finanzausgleich, Finanzreform, Steuerautonomie, Schuldengrenzen, fiscal constitution, fiscal equalization, tax autonomy, borrowing constraints
    JEL: H6 H7
    Date: 2007
  18. By: Suescun, Rodrigo
    Abstract: This paper measures the size of automatic fiscal revenue stabilizers and evaluates their role in Latin America. It introduces a relatively rich tax structure into a dynamic, stochastic, multi-sector small open economy inhabited by rule-of-thumb consumers (who consume their wages and do not save or borrow) and Ricardian households to study the stabilizing properties of different parameters of the tax code. The economy faces multiple sources of business cycle fluctuations: (1) world capital market shocks; (2) world business cycle shocks; (3) terms of trade shocks; (4) government spending shocks; and (5) nontradable and (6) tradable sector technology innovations. Calibrating the model economy to a typical Latin American economy allows the evaluation of its ability to mimic the region ' s observed business cycle frequency properties and the assessment of the quantitative relationship between tax code parameters, business cycle forcing variables, and business cycle behavior. The model captures many of the salient features of Latin America ' s business cycle facts and finds that the degree of smoothing provided by the automatic revenue stabilizers-described by various properties of the tax system-is negligible. Simulation results seem to suggest an invariance property for middle-income countries: the amplitude of the business cycle is independent of the tax structure. And government size-measured by the GDP ratio of government spending-plays the role of an automatic stabilizer, but its smoothing effect is very weak.
    Keywords: Economic Theory & Research,Fiscal Adjustment,Economic Stabilization,Intergovernmental Fiscal Relations and Local Finance Management,Inequality
    Date: 2007–06–01
  19. By: Susan K. Laury; Laura O. Taylor
    Abstract: This paper addresses the external validity of experiments investigating the characteristics of altruism in the voluntary provision of public goods. We conduct two related experiments that allow us to examine whether individuals who act more altruistically in the context-free environment are also more likely to act altruistically toward a naturally-occurring public good. We find that laboratory behavior can be predictive of contributions toward naturally-occurring goods, but not in a uniform way. In fact, parametric measures of altruism do a poor job of predicting which subjects are most likely to contribute to a naturally-occurring public good.
    JEL: C91 D64 H41
  20. By: Alexander F. Wagner (University of Zurich and swiss Finance Institute)
    Abstract: Recent organizational theories suggest that there is a tradeoff between loyalty and competence. This paper tests several such theories in the context of public agencies. Prime ministers, chancellors, and kings alike need to secure the (efficient or inefficient) loyalty of their agencies, such as support in important policy proposals or low corruption. They are also interested in agencies’ levels of competence. I find that governments have highly competent officials in their agencies (1) where officials have few private sector contacts, (2) where officials can extract few bribes, (3) where careers in agencies are expected to be long-lasting, and (4) where the agencies are powerful, i.e., where their loyalty is important. This set of findings fits best with a theory of loyalty as a noncontractible behavior, implying that too competent staff cannot be induced to loyalty unless loyalty is highly valued by the government. Other theories are either rejected or are less plausible because they cannot explain the complete set of observed regularities.
    Keywords: Loyalty, self-enforcing contracts, public agencies, corporate finance
    JEL: D86 H1 P16
    Date: 2005–06
  21. By: Carlos E. Schonerwald da Silva; Matías Vernengo
    Abstract: The relationship between the exchange rate and public debt is intermediated by two mechanisms. On the one hand, exchange rate devaluation implies higher payment on local currency over the debt denominated in foreign currency. On the other hand, the rise of public debt leads a perception of higher default risk, forcing capital outflows and a devaluation of the exchange rate. The present paper develops a simple model where the exchange is crucial to analyze public debt dynamics. The paper also discusses the recent trajectory of the public debt in Latin America. The dynamics of the exchange rate is important for developing countries that do not have strong currencies and have a significant portion of public debt denominated in US dollars (original sin). Also, primary budget surpluses were crucial for the consistent and significant reduction of the public debt-to-GDP ratio. Hence, the economic expansion has created a larger fiscal space for Latin American economies to expand infrastructure and social spending, and reduce unemployment levels.
    Keywords: Exchange Rate, Public Debt, Latin America
    JEL: F31 H60 O54
    Date: 2007–02
  22. By: James C. Cox; Vjollca Sadiraj
    Abstract: This paper addresses four "stylized facts" that summarize data from experimental studies of voluntary contributions to provision of public goods. Theoretical propositions and testable hypotheses for voluntary contributions are derived from two models of social preferences, the inequity aversion model and the egocentric other-regarding preferences model. We find that the egocentric other-regarding preferences model with classical regularity properties can better account for the stylized facts than the inequity aversion model with non-classical properties.
    JEL: C70 C91 D64 H41
    Date: 2006–10
  23. By: Canale, Rosaria Rita; Foresti, Pasquale; Marani, Ugo; Napolitano, Oreste
    Abstract: The aim of the paper is to evaluate the robustness of the theory that claims for restrictive effects of expansionary fiscal policy. It shows that such so-called “non-Keynesian effects” may arise as a consequence of a synchronous and opposite monetary policy intervention. The paper demonstrate this conclusion through a stylized model – supported by an empirical investigation on ECB and FED reaction functions - in which Central Banks take into account deficit spending as an element that generate inflation expectations. The econometric analysis shows also that the ECB reacts asymmetrically to deficit spending variations while the FED has a linear reaction to this indicator.
    Keywords: Fiscal policy; Monetary policy; Central Banks Policy strategies
    JEL: E63 E52 E62 E58
    Date: 2007–05–30
  24. By: Garima Vasishtha
    Abstract: Domestic public debt issued by emerging markets has risen significantly relative to international debt in recent years. Some recent empirical evidence also suggests that sovereigns have defaulted differentially on debt held by domestic and external creditors. Standard models of sovereign debt, however, mainly focus on how the actions of foreign creditors influence default decisions of sovereigns. Contrasting this one-sided focus, this paper adds to a new theoretical literature that points at the possibility of default on domestic debt and the consequences of doing so. It presents a model of an emerging market economy in which the government can selectively default on its domestic or external debt obligations. The model shows that the differential ability of domestic and foreign creditors to punish the government creates a gap in the expected default costs to the sovereign, and hence a differential in its propensity to default on its domestic versus foreign debt. The extent to which the possibility of differential treatment of creditors affects the composition of debt is explored. It shows that a country characterized by volatile output, sovereign risk, and costly tax collection will want to borrow in domestic markets as well as in international capital markets. The optimal allocation of debt between domestic and foreign creditors can thus be viewed as the government's purchase of insurance against macroeconomic shocks that affect its budget.
    Keywords: Debt management; International topics
    JEL: F30 H21 H63
    Date: 2007
  25. By: Mark J. Holmes (Dept of Economics, Waikato University); Jesus Otero (Facultad de Economia, Universidad del Rosario); Theodore Panagiotidis (Department of Economics, Loughborough University)
    Abstract: In this paper, we test for the stationarity and sustainability of European Union budget deficits over the period 1971 to 2006, using a panel of thirteen member countries. Our testing strategy addresses two key concerns with regard to unit root panel data testing, namely (i) the identication of which members-states are stationary, and (ii) the presence of cross-sectional dependence. We employ a moving block bootstrap approach to the Hadri (2000) procedure that tests the null of joint stationarity. In contrast to the existing literature, we find that the EU countries considered are characterised by fiscal sustainability over the full sample period. This conclusion also holds when analysing sub-periods based on before and after the Maastricht treaty.
    Keywords: Heterogeneous dynamic panels, fiscal sustainability, mean reversion, panel stationarity test.
    JEL: C33 F32 F41
    Date: 2007–05
  26. By: Mohnen, Pierre (UNU-MERIT and Maastricht University); Bérubé, Charles (Industry Canada)
    Abstract: This paper looks at the effectiveness of R&D grants for Canadian plants that already benefit from R&D tax credits. Using a non-parametric matching estimator, we find that firms that benefited from both policy measures introduced more new products than their counterparts that only benefited from R&D tax incentives. They also made more world-first product innovations and were more successful in commercializing their innovations.
    Keywords: Innovations, R&D, Matching Estimators, Mahalanobis, Innovation Survey, Tax Credits, Grants
    JEL: O31 O32 O38 C13 H25
    Date: 2007
  27. By: Thierry Warin
    Abstract: After the fuzziness in Europe that surrounded the implementation of the excessive deficit procedure foreseen by the Stability and Growth Pact (SGP), the European Union had to restore the credibility of the weakened fiscal rule. On March 2005, the 25 members amended the SGP. The constraint was to keep alive the Treaty of Amsterdam, which instituted the SGP. Indeed, an attempt to make major changes to the SGP would have necessitated a new Treaty, and hence a ratification by the 25 countries. This could have meant no more Europe-wide fiscal rule. But are minor changes enough? This paper addresses this question by deciphering the amended version of the SGP, and finds that, in the case countries still breach the SGP, another minor change is possible: an “à la carte” version of the SGP.
    Keywords: Europe, Fiscal rule, Stability and Growth Pact
    Date: 2007–02
  28. By: Marta Zieba (Department of Economics, Trinity College Dublin); Carol Newman (Department of Economics, Trinity College Dublin)
    Abstract: The production structure for the performing arts is complicated by a number of factors making it difficult to estimate production technologies using a theoretical framework built for standard applications. However, understanding the nature of production and the way in which decisions are made by performing arts firms is particularly important given that many performing arts organisations are funded by government. Public funding of performing arts organisations is justified where socially desirable objectives are fulfilled. The public good component of output makes an important dimension of firms’ production decisions unobservable while the principal-agent problem reduces the incentive for firms to behave as cost minimisers. Both may result in an observed production structure which is uneconomic. In this paper we re-visit these issues using a new and extensive dataset for German public theatre. We aim to explore the extent to which the standard laws of production that apply in other sectors of the economy hold for performing arts institutions.
    Keywords: Production technology, Performing Arts, Nonprofit, Germany
    JEL: Z11 L32 L82 H44
    Date: 2007–06
  29. By: Bruno S. Frey
    Abstract: This paper argues that politicians are overprotected. The costs of political assassination differ systematically depending on whether a private or a public point of view is taken. A politician attributes a very high (if not infinite) cost to his or her survival. The social cost of political assassination is much smaller as politicians are replaceable. Conversely, the private cost of the security measures is low for politicians, its bulk – including time loss and inconvenience – is imposed on taxpayers and the general public. The extent of overprotection is larger in dictatorial than in democratic countries.
    Keywords: Politicians; rational choice; assassination; security; democracy; dictatorship
    JEL: D01 D70 H50 J28 Z10
    Date: 2007–05
  30. By: George-Marios Angeletos; Vasia Panousi
    Abstract: This paper revisits the macroeconomic effects of government consumption in the neoclassical growth model augmented with idiosyncratic investment (or entrepreneurial) risk. Under complete markets, a permanent increase in government consumption has no long-run effect on the interest rate, the capital-labor ratio, and labor productivity, while it increases work hours due to the familiar negative wealth effect. These results are upset once we allow for incomplete markets. The very same negative wealth effect now causes a reduction in risk taking and investment. This in turn leads to a lower risk-free rate and, under certain conditions, also to a lower capital-labor ratio, lower productivity and lower wages.
    JEL: E13 E6 H3
    Date: 2007–05
  31. By: Michael D. Giandrea (U.S. Bureau of Labor Statistics); Kevin E. Cahill (Analysis Group, Inc.); Joseph F. Quinn (Boston College)
    Abstract: Are today’s youngest retirees following in the footsteps of their older peers with respect to gradual retirement? Recent evidence from the Health and Retirement Study (HRS) suggests that most older Americans with full-time career jobs later in life transitioned to another job prior to complete labor force withdrawal. This paper explores the retirement patterns of a younger cohort of individuals from the HRS known as the “War Babies.” These survey respondents were born between 1942 and 1947 and were 57 to 62 years of age at the time of their fourth bi-annual HRS interview in 2004. We compare the War Babies to an older cohort of HRS respondents and find that, for the most part, the War Babies have followed the gradual-retirement trends of their slightly older predecessors. Traditional one-time, permanent retirements appear to be fading, a sign that the impact of changes in the retirement income landscape since the 1980s continues to unfold.
    Keywords: Economics of Aging, Partial Retirement, Gradual Retirement
    JEL: J26 J14 J32 H55
    Date: 2007–05
  32. By: Blázquez Cuesta, Maite (Departamento de Análisis Económico (Teoría e Historia Económica). Universidad Autónoma de Madrid.); García Pérez, José Ignacio (Universidad Pablo Olavide, FCEA & FEDEA)
    Abstract: In this paper we analyse how the decentralization process of the Spanish educational system has affected the school-to-work transition of youths over the last years. Using individual data from the Spanish Labor Force Survey for the period 1993-2002, we estimate a simultaneous equation model for the unemployment and employment hazard rates of these workers. We include public expenditure on education, at the regional level, as an explanatory factor in both hazards. Furthermore we account for cross-regional differences regarding the decision-making authority over education. Our results reveal that for both, university and non-university levels, public expenditure on education significantly improves the chances of Spanish youths in finding the first job after completing the educational system. However, it seems that the decentralization of university education has negative effects on youths’ labor market prospects in terms of exiting from unemployment, while no effects are observed for the case of non-university education.
    Keywords: connections, educational expenditure, decentralization, unemployment hazard, employment hazard
    JEL: I20 I22 I28
    Date: 2007–05
  33. By: Collewaert, V.; Manigart, S.; Rudy Aernoudt
    Abstract: In this paper we evaluate whether government intervention through the public funding of business angel networks is warranted. Based on a regional study of four BANs, we find that these subsidies reach their goals in terms of contribution to economic development and reducing financing and information problems entrepreneurial companies face. However, they are partly based on the wrong assumptions as these companies are not (yet) value creating. Therefore, we advise caution in using the market failure argument as grounds for government intervention in the informal risk capital market.
    Keywords: risk capital; business angels; policy; economic development; market failure
    JEL: G24 H71 M13 R58
    Date: 2007–06–05

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