nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒06‒18
nineteen papers chosen by
Peren Arin
Massey University

  1. Democracy, Technology, and Growth By Philippe Aghion; Alberto Alesina; Francesco Trebbi
  2. Breaking the stability pact: was it predictable? By Luigi Bonatti; Annalisa Cristini
  3. Corporate tax policy and incorporation in the EU. By Ruud A. de Mooij; Gaëtan Nicodème
  4. The Impact of Referendums on the Centralisation of Public Goods Provision: A Political Economy Approach By Jan Schnellenbach; Lars Feld; Christoph schaltegger
  5. Do tax distortions lead to more indeterminacy? A New Keynesian perspective By Di Bartolomeo, Giovanni; Manzo, Marco
  6. Inefficient centralization of imperfect complements By Martin Gregor; Lenka Gregorová
  7. Optimale Eigenfinanzierung der Personenunternehmen nach der Unternehmensteuerreform 2008/2009 By Homburg, Stefan; Houben, Henriette; Maiterth, Ralf
  8. Public Education Expenditure, Growth and Welfare By Konstantinos Angelopoulos; Jim Malley; Apostolis Philippopoulos
  9. Evaluating the impact of public subsidies on a firm?s performance: A quasi-experimental approach By Nestor Duch Brown; Daniel Montolio; Mauro Mediavilla
  10. Choosing Electoral Rules in the Presence of Corruption By Tavares, Samia
  11. The Usury Doctrine and Urban Public Finances in Late-Medieval Flanders: Annuities, Excise Taxes, and Income Transfers from the Poor to the Rich By John H. Munro
  12. Rational ignorance is not bliss: When do lazy voters learn from decentralised policy experiments? By Jan Schnellenbach
  13. Should Finland Introduce an R&D Tax Credit? Reflections Based on Norwegian R&D Tax Policy By Jarle Møen
  14. Pension Reform in China: Progress and Prospects By Felix Salditt; Peter Whiteford; Willem Adema
  15. Optimal public policy and endogenous preferences: an application to an economy with for-profit and non-profit enterprises By Luigi Bonatti
  16. An Analysis of the Performance of Federal Indigent Defense Counsel By Radha Iyengar
  17. Improving the Efficiency of Health Care Spending: Selected Evidence on Hospital Performance By Espen Erlandsen
  18. Collective Action and Common Agricultural Policy Lobbying: Evidence of Euro-Group Influence, 1986-2003 By Jonsson, Thomas
  19. The Tennessee Education Lottery Scholarship: A Reward for Past Achievement or Motivator for Future Performance? By David A. Penn; Reuben Kyle

  1. By: Philippe Aghion; Alberto Alesina; Francesco Trebbi
    Abstract: We explore the question of how political institutions and particularly democracy affect economic growth. Although empirical evidence of a positive effect of democracy on economic performance in the aggregate is weak, we provide evidence that democracy influences productivity growth in different sectors differently and that this differential effect may be one of the reasons of the ambiguity of the aggregate results. We provide evidence that political rights are conducive to growth in more advanced sectors of an economy, while they do not matter or have a negative effect on growth in sectors far away from the technological frontier. One channel of explanation goes through the beneficial effects of democracy and political rights on the freedom of entry in markets. Overall, democracies tend to have much lower entry barriers than autocracies, because political accountability reduces the protection of vested interests, and entry in turn is known to be generally more growth-enhancing in sectors that are closer to the technological frontier. We present empirical evidence that supports this entry explanation.
    JEL: H7
    Date: 2007–06
  2. By: Luigi Bonatti; Annalisa Cristini
    Abstract: We show analytically that the credibility problem which has affected the European Stability Pact originates from the insufficient distinction between two reasons for having binding fiscal constraints. The first reason deals with the governments’ tendency to neglect the effects of their fiscal policy on foreign governments (fiscal free-riding). The second reason follows from the governments’ tendency to raise debt by lowering taxes or increasing expenditures, and then to leave it to their successors (fiscal short-termism). An enforcement mechanism relying on governments’ collusion works if the fiscal constraints are not calibrated for curing fiscal short-termism but only for preventing fiscal free-riding.
    Keywords: Fiscal policy, Policy coordination, Capital formation, Free-riding, Short-termism.
    JEL: E6 H3 H7 O4
    Date: 2007
  3. By: Ruud A. de Mooij (CPB Netherlands Bureau for Economic Policy Analysis, Erasmus University Rotterdam, CESifo and Tinbergen Institute.); Gaëtan Nicodème (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and European Commission.)
    Abstract: In Europe, declining corporate tax rates have come along with rising tax-to-GDP ratios. This paper explores to what extent income shifting from the personal to the corporate tax base can explain these diverging developments. We exploit a panel of European data on legal form of business to analyze income shifting via incorporation. The results suggest that the effect is significant and large. It implies that the revenue effects of lower corporate tax rates – possibly induced by tax competition -- will partly show up in lower personal tax revenues rather than lower corporate tax revenues. Simulations suggest that between 10% and 17% of corporate tax revenue can be attributed to income shifting. Income shifting is found to have raised the corporate tax-to-GDP ratio by some 0.2%-points since the early 1990s.
    Keywords: Corporate tax; Personal tax; Incorporation; Income shifting.
    JEL: H25 L26
    Date: 2007–06
  4. By: Jan Schnellenbach (University of Heidelberg, Department of Economics); Lars Feld (University of Heidelberg, Department of Economics); Christoph schaltegger (Eidgenössisches Finanzdepartement, Bern, Switzerland)
    Abstract: The paper compares decision-making on the centralisation of public goods provision in the presence of regional externalities under representative and direct democratic institutions. A model with two regions, two public goods and regional spillovers is developed in which uncertainty over the true preferences of candidates makes strategic delegation impossible. Instead, it is shown that the existence of rent extraction by delegates alone suffices to make cooperative centralisation more likely through representative democracy. In the non-cooperative case, the more extensive possibilities for institutional design under representative democracy increase the likelihood of centralisation. Direct democracy may thus be interpreted as a federalism-preserving institution.
    Keywords: centralisation; direct democracy; representative democracy; public good provision.
    JEL: H11 H77 H72 H73
    Date: 2007–05
  5. By: Di Bartolomeo, Giovanni; Manzo, Marco
    Abstract: Following the recent developments of the literature on stabilization policies, this paper investigates the effect of tax distortions on equilibrium determinacy in a New Keynesian economy with rule-of-thumb consumers and capital accumulation. In particular, we focus on the inter-action between monetary policy and tax distortions in supporting the saddle-path equilibrium under the assumptions of balanced budget and monetary policy satisfying a Taylor rule.
    Keywords: Rule-of-thumb consumers; equilibrium determinacy; fiscal and monetary policy inter-actions; and tax distortions.
    JEL: E61 E63
    Date: 2007–05
  6. By: Martin Gregor (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic); Lenka Gregorová (Institute of Economic Studies, Faculty of Social Sciences, Charles University, Prague, Czech Republic)
    Abstract: If local public goods exhibit spillovers and regions are sufficiently symmetric, decentralization implies underprovision, whereas cooperative centralization is associated with strict Pareto-improvement. This classic inference rests on two assumptions: local politicians are delegated sincerely and never provide voluntary transfers to the other regions. We abandon these assumptions in a setup of two symmetric regions with imperfect complementarity between local public goods. For this particular aggregation, non-cooperative decentralization can achieve the social optimum, whereas cooperative centralization cannot.
    Keywords: centralization; public goods; strategic delegation; weakest-link; voluntary transfers
    JEL: C72 D72 H40 H70 H73
    Date: 2007–06
  7. By: Homburg, Stefan; Houben, Henriette; Maiterth, Ralf
    Abstract: Effective from 2008, Germany's top marginal income tax rate rises from 42 to 45 per cent. However, sole proprietorships and partnerships can opt for a preferential tax rate of 28.25 per cent for retained profits (§ 34a EStG-E). If they do so, profits are taxed again upon distribution. Using corporate finance tools, we analyse in detail whether or not the option is favourable. However, these tools do not suffice since the new tax regime is too complicated. Costs of capital cannot be calculated explicitly any more, but we derive exact implicit characterizations. Concrete numerical examples are also provided.
    Keywords: Business Taxes, German Income Tax
    JEL: H25 M10 D92
    Date: 2007–05
  8. By: Konstantinos Angelopoulos; Jim Malley; Apostolis Philippopoulos
    Abstract: In this paper we study the quantitative macroeconomic effects of public education spending in USA for the post-war period. Using comparable measures of human and physical capital, from Jorgenson and Fraumeni (1989, 1992a,b), we calibrate a standard dynamic general equilibrium model where human capital is the engine of long-run endogenous growth and government education spending is justified by externalities in human capital. Our base calibration, based on moderate sized human capital externalities, suggests that public spending on education is both growth and welfare promoting. However, given that pubic education spending crowds-out private consumption, the welfare maximising size of the government is less than the growth maximising one. Our results further suggest that welfare gains, as high as four percent of consumption, are obtainable if the composition of public spending can be altered in favour of education spending relative to the other components of total government spending.
    Date: 2007–06
  9. By: Nestor Duch Brown (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)); Daniel Montolio (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB)); Mauro Mediavilla (Institut d'Economia de Barcelona (IEB); Universitat de Barcelona (UB))
    Abstract: Many regional governments in developed countries design programs to improve the competitiveness of local firms. In this paper, we evaluate the effectiveness of public programs whose aim is to enhance the performance of firms located in Catalonia (Spain). We compare the performance of publicly subsidised companies (treated) with that of similar, but unsubsidised companies (non-treated). We use the Propensity Score Matching (PSM) methodology to construct a control group which, with respect to its observable characteristics, is as similar as possible to the treated group, and that allows us to identify firms which retain the same propensity to receive public subsidies. Once a valid comparison group has been established, we compare the respective performance of each firm. As a result, we find that recipient firms, on average, change their business practices, improve their performance, and increase their value added as a direct result of public subsidy programs.
    Keywords: Evaluation studies, Firm performance, Propensity Score Matching, Public policy
    JEL: H25 H32 L25 L53
  10. By: Tavares, Samia
    Abstract: Corruption is a problem that has been shown to adversely affect a country’s development. Recent studies have shown that a country’s electoral system can affect its corruption level. But if that is the case, then electoral rules could be chosen to maximize opportunities for corruption. This paper uses the recent wave of democratization and the resulting writing of new constitutions, which entailed in many cases the adoption of a new electoral system, to analyze the choice of electoral rules. Results suggest that more corrupt countries are more likely to adopt a plurality system than less corrupt ones.
    Keywords: corruption; electoral system; government; democracy
    JEL: D73 H77 D72 H11
    Date: 2007–02–06
  11. By: John H. Munro
    Abstract: The objectives of this paper are three-fold. The first is to rebut Charles Kindleberger’s famous dictum that usury ‘belongs less to economic history than to the history of ideas’; and in particular to demonstrate that the resuscitation of the anti-usury campaign from the early 13th century led to a veritable financial revolution in late-medieval French and Flemish towns: one that became the ‘norm’ in modern European states from the 16th century (in England, from 1693): a shift in public borrowing from interest-bearing loans to the sale of annuities, usually called rentes or renten. That anti-usury campaign had two major features: (1) the decrees of the Fourth Lateran Council of 1215, which provided harsh punishments – excommunication -- for both unrepentant usurers and princes who failed to suppress them; and (2) the establishment of the two mendicant preaching orders: the Franciscans (1210) and the Dominicans (1216), whose monks preached hellfire and eternal damnation against all presumed usurers – including, of course, anyone who received any interest on government loans. There is much evidence that from the 1220s, many financiers in many French and Flemish towns, fearing for their immortal souls, preferred to accept far lower returns on buying rentes than the interest they would have earned on loans. These rentes, based on 8th-century Carolingian census contracts, had two basic forms: (1) life-annuities, by which a citizen purchased from the government, with a lump sum of capital, an annual income stream lasting a lifetime, or the lifetime of his wife as well; (2) perpetual annuities, by which the annual income stream was indeed perpetual, or until such time as the government chose to redeem the rentes, at par. Initially, some theologians opposed sales of rentes as subterfuges to cloak evasion of the usury doctrine. But in 1250-1, Pope Innocent IV declared them to be non-usurious contracts, essentially because they were not loans. Subsequent popes in the 15th century confirmed his views and the non-usurious character of rentes, on two conditions: (1) that the buyer of the rente could never demand redemption or repayment, and (2) that the annual annuity payments (and any ultimate redemptions) be in accordance with actual rent contracts: i.e., that the funds be derived from the products of the land. Ecclesiastical authorities soon agreed that taxes on the consumption of the products of the land (and sea) met this test: i.e., taxes on beer and wine (which always accounted for the largest share), bread, textiles, fish, meat, dairy products, etc. The second objective of this paper is to measure the importance of renten in the civic finances of Flemish towns, in terms of both revenues and expenditures: from the annual town accounts Ghent (14th century only), and Aalst (1395-1550), where they had far greater importance. The related third objective is to measure the burden of the excise taxes for master building craftsmen in Aalst, in tables that measure the values of the excise tax revenues expressed in real terms: first, in the equivalent number of ‘baskets of consumables’ (which form of the base of the Consumer Price Index), and second their value in terms of the annual money-wage incomes of master masons (for 210 days). This provides an entirely new look at the late-medieval ‘standard of living’ controversy – with indications that this consumption-tax burden sometimes rose from about 13,200 to almost 30,000 days’ wage income, for a town of perhaps 3600 inhabitants (but obviously less dramatic on a per capita basis). That tax burden rose the most strongly when, by other indications, real wages (RWI = NWI/CPI) were also finally rising; and thus possibly these real wage gains were largely eliminated. That per capita tax burden would have been all the greater if, in the course of the 15th century, Aalst had experienced the same decline as did small towns of Brabant, to the east, on the order of 25%, and some other Flemish towns, in which the population decline varied from 9% to 28 %. In earlier publications I had challenged the widespread view that the era following the Black Death, with a radical change in the land:labour ratio, came to be a ‘Golden Age’ of the artisan and labourer. I contended instead that frequent inflations eroded or eliminated wage gains, and thus that periodic rises in real wages were due essentially to steep deflations combined with pronounced wage-stickiness. As I also calculated, English artisans in the 1340s had earned real wages that were about 50% of the Flemish; but by the 1480s, they had narrowed that gap (with much less inflation) to about 80%. That gap was probably even smaller, until the 1640s, when England’s Parliament finally imposed similar excise taxes on consumption.
    Keywords: Flanders, warfare, urban public finances, building craftsmen, annuities (rentes), excise taxes, consumption, living standards, income transfers
    JEL: B11 D31 E25 E31 E42 E62 H2 H31 H71 J10 J31 J45 J81 N93
    Date: 2007–06–11
  12. By: Jan Schnellenbach (University of Heidelberg, Department of Economics)
    Abstract: A popular argument about economic policy under uncertainty states that decentralisation offers the possibility to learn from local or regional policy experiments. We argue that such learning processes are not trivial and do not occur frictionlessly: Voters have an inherent tendency to retain a given stock of policy-related knowledge which was costly to accumulate, so that yardstick competition is improbable to function well particularly for complex issues if representatives’ actions are tightly controlled by the electorate. Decentralisation provides improved learning processes compared to unitary systems, but the results we can expect are far from the ideal mechanisms of producing and utilising knowledge often described in the literature.
    Keywords: Policy decentralisation; fiscal competition; model uncertainty; collective learning.
    JEL: H73 O31 D83
    Date: 2007–05
  13. By: Jarle Møen
    Abstract: Subsidies to commercial R&D can be given as R&D tax credits or through direct grants. Tax incentives have become an increasingly popular policy tool over the last decades. In this note I discuss the pros and cons of the two forms of subsidies in light of Norway’s experience with R&D policy. I review an ongoing evaluation of the Norwegian R&D tax credit introduced in 2002 and reflect on whether it is desirable for Finland to introduce a similar scheme. I suggest that this is not desirable. If Finland introduces an R&D tax credit, I argue that it should be limited to small and medium sized companies. PITÄISIKÖ SUOMEN OTTAA KÄYTTÖÖN T&K :N VEROKANNUSTIMET? POHDINTAA NORJAN TEKNOLOGIAPOLITIIKASTA SAATUIHIN KOKEMUKSIIN PERUSTUEN
    JEL: H25 O38
    Date: 2007–06–12
  14. By: Felix Salditt; Peter Whiteford; Willem Adema
    Abstract: China is currently in the process of developing the largest pension system in the world, and it is doing this at a time of unparalleled economic and demographic transition. The central government has followed a step-by-step approach to develop a system that can accommodate a rapidly aging society within a rapidly growing, but still largely underdeveloped economy. This paper analyses how far the process of creating a national old age insurance system had proceeded by the end of 2006. It provides a detailed description of this system and an assessment of to what degree it has so far achieved ?its primary goal of social security for more people? (Chinese Government, September 2006)... <BR>La Chine est en train de mettre en place le plus grand système de retraite au monde, ceci à une époque de transition économique et démographique sans précédent. Le gouvernement central a suivi une approche graduelle pour créer un système qui puisse faire face à une société vieillissante dans une économie galopante et encore pour une bonne part sous-développée. Ce document montre jusqu'où le processus de création d'un système d'assurance national pour les personnes âgées a pu aller jusqu'à la fin de 2006. Il présente une description détaillée de ce système et évalue dans quelle mesure il a atteint au jour d'aujourd'hui « son objectif premier qui est la sécurité sociale pour plus de personnes » (Gouvernement chinois, septembre 2006)...
    JEL: H55 J11 P36
    Date: 2007–06–07
  15. By: Luigi Bonatti
    Abstract: We present a general equilibrium model where profit-maximizing firms and non-profit organizations coexist, and the people’s propensity to devote efforts to non-profit activities increases with the stock of social capital. In its turn, the formation of social capital is stimulated by an increase in the aggregate volume of non-profit activities. Therefore, a public policy subsidizing the nonprofits has an indirect effect on people’s preferences concerning the effort to devote to these organizations via its positive impact on the accumulation of social capital. Within this framework, we analyze the optimal policies of a government facing myopic or rational agents.
    Keywords: Myopic behavior, Work effort, Social capital, Altruism, Third sector.
    JEL: D11 D60 H20 J30 L31
    Date: 2007
  16. By: Radha Iyengar
    Abstract: The right to an equal and fair trial regardless of wealth is a hallmark of American jurisprudence. To ensure this right, the government pays attorneys to represent financially needy clients. In the U.S. federal court system, indigent defendants are represented by either public defenders who are salaried employees of the court or private attorneys, known as Criminal Justice Act (CJA) attorneys, who are compensated on an hourly basis. This study measures differences in performance of these types of attorneys and explores some potential causes for these differences. Exploiting the use of random case assignment between the two types of attorneys, an analysis of federal criminal case level data from 1997-2001 from 51 districts indicates that public defenders perform significantly better than CJA panel attorneys in terms of lower conviction rates and sentence lengths. An analysis of data from three districts linking attorney experience, wages, law school quality and average caseload suggests that these variables account for over half of the overall difference in performance. These systematic differences in performance disproportionately affect minority and immigrant communities and as such may constitute a civil rights violation under Title VI of the Civil Rights Act.
    JEL: H4 J3 K4
    Date: 2007–06
  17. By: Espen Erlandsen
    Abstract: There are no ready-made data on hospital outputs and inputs which would allow comprehensive international comparisons of hospital efficiency to be carried out. This paper, therefore, relies on selected evidence to compare hospital efficiency in a subset of OECD countries, based on three different approaches relying on, respectively: i) unit costs for standard hospital treatments; ii) overall efficiency levels in a set of paired countries; iii) within-country dispersion in individual hospital efficiency. The analysis suggests substantial cross-country differences in hospital performance. Although country coverage varies between the different approaches, making it difficult to assess the extent to which comparisons provide a consistent picture of national efficiency levels, cross-checks between the different indicator sets tend to support the robustness of the country rankings. <P>Améliorer l’efficacité des dépenses de santé : Indicateurs sélectifs de la performance des hôpitaux <BR>Il n’existe pas de données toutes faites sur les services fournis par les hôpitaux et les ressources qu’ils consomment qui permettraient d’effectuer des comparaisons internationales d’ensemble de l’efficacité des hôpitaux. Ce document s’appuie donc sur des indicateurs sélectifs pour comparer l’efficacité des hôpitaux dans un échantillon de pays de l’OCDE, sur la base de trois approches différentes, à savoir : i) les coûts unitaires pour des interventions hospitalières types ; ii) les niveaux d’efficacité globale entre pays pris deux à deux ; iii) la variabilité de l’efficacité entre hôpitaux d’un même pays. L’analyse montre des différences substantielles de performance entre pays. S’il est difficile d’évaluer dans quelle mesure ces comparaisons donnent une image cohérente des niveaux d’efficacité nationaux, car le nombre de pays couverts varie d’une approche à l’autre, des vérifications par recoupement des différents jeux d’indicateurs tendent à confirmer la robustesse du classement des pays.
    Keywords: health care, services de santé, méthodes non paramétriques, hospital efficiency, efficacité des hôpitaux, unit costs, coûts unitaires, diagnosis related groups, groupes homogènes de malades, non-parametric methods
    JEL: C14 D24 H41 H51 I11 I12 I18
    Date: 2007–06–11
  18. By: Jonsson, Thomas (Department of Economics, Umeå University)
    Abstract: This paper attempts to explain Common Agricultural Policy (CAP) subsidies to farmers by the in.uence of farmer interest-groups with an EU-wide membership (so called Euro-groups). The analysis is based on panel-data for .fteen commodities over the period 1986-2003. Because the CAP is set as an overall EU policy, e¤ective lobbying presents a collective action problem to the farmers in the EU as a whole. Indicators of lobbying, which are based on this perception, are found to explain part of the variation in agricultural support, suggesting that farmer Euro-groups in.uence agricultural policy within the EU.
    Keywords: Agricultural policy; political economy; lobbying
    JEL: H43 Q18
    Date: 2007–06–07
  19. By: David A. Penn; Reuben Kyle
    Abstract: The Tennessee lottery scholarship (TELS) program is intended to make college more affordable for young people in Tennessee, with the aim of increasing higher education enrollment and retention rates. One way to evaluate the effectiveness of TELS is to determine to what extent did the scholarship change student behavior? That is, does TELS induce desirable behavior that would not otherwise occur? Using a logit model to predict year-over-year college retention, we conclude that TELS has a positive, but small, effect on student behavior in Tennessee. The biggest impact of TELS occurs among continuing students, with no effect for first-time students.
    Keywords: lottery, scholarship
    JEL: H75 H7 I21

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