nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒08‒08
twenty-one papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Predatory States and Failing States: An Agency Perspective By Avinash Dixit
  2. Fiscal Federalism in the European Union: How Far Are We? By Rui Henrique Alves; Óscar Afonso
  3. Fiscal sustainability across government tiers: an assessment of soft budget constraints. By Peter Claeys; Raúl Ramos; Jordi Suriñach
  4. The dynamic behaviour of budget components and output By Antonio Afonso; Peter Claeys
  5. The Dutch fiscal framework; history, current practice and the role of the CPB By Frits Bos
  6. The allocation of competences between the European Union and the Member States: an analysis of the determinants of Europeans’ preferences By Floriana Cerniglia; Laura Pagani
  7. Public Goods Provision and Sanctioning in Privileged Groups By Ernesto Reuben; Arno Riedl
  8. Decentralization of territorial policy in Italy - the coherence with the model of multi-level governance and the effects on responsibilities of public spending By Bagarani, Massimo; Bonetti, Antonio; Zampino, Simona
  9. Rules versus discretion in fiscal policy By C. Bianchi; M. Menegatti
  10. The Taxation of Couples By Patricia Apps; Ray Rees
  11. Fiscal Responsibility Framework: International Experience and Implications for Hungary By George Kopits
  12. The Basic Public Finance of Public-Private Partnerships By Eduardo Engel; Ronald Fischer; Alexander Galetovic
  13. A Prize to Give for: An Experiment on Public Good Funding Mechanisms By Lucca Corazzini; Marco Faravelli; Lucca Stanca
  14. Public and private roles in road infrastructure, an exploration of market failure, public instruments and government failure By Mark Lijesen; Victoria Shestalova
  15. Size and Development of the Shadow Economy in Germany and Austria: Some preliminary findings By Friedrich Schneider
  16. Fiscal Space and Public Sector Investments in Infrastructure: A Brazilian Case-Study By José Roberto Rodrigues Afonso; Erika Amorim Araújo; Geraldo Biasoto Júnior
  17. Public Goods Provision and Sanctioning in Priveleged Groups By Reuben Ernesto; Riedl Arno
  18. Tax Effort: The Impact of Corruption, Voice and Accountability By Richard M. Bird; Jorge Martinez-Vazquez; Benno Torgler
  19. The Important Thing Is not (Always) Winning but Taking Part: Funding Public Goods with Contests By Marco Faravelli
  20. Encouraging Sub-National government Efficiency in Hungary By Alessandro Goglio
  21. Public-Private Partnerships By Federico Etro

  1. By: Avinash Dixit (Princeton University)
    Abstract: In any non-trivial state, policies decided at the top levels of government are administered by middle-level bureaucrats. I examine whether this agency problem can contribute to explaining state failure in matters of provision of public goods. I find some theoretical arguments to support the view that failure is more likely in states whose top rulers have predatory motives. When the bureaucrats’ cost of providing the public good is their private information, rulers must give them incentive rents to achieve truthful revelation. Predatory rulers are less willing to part with such rents; therefore they tolerate more downward distortion in the provision of public goods to reduce the required rent-sharing. When the bureaucrats’ actions are also unobservable, there is a synergistic interaction between more benevolent rulers and more caring or professional bureaucrats. However, these effects manifest themselves differently and to different degrees under different conditions of information. Therefore precise explanations or predictions in individual instances require context-specific analyses.
    Date: 2006–06
  2. By: Rui Henrique Alves (CEMPRE and Faculdade de Economia da Universidade do Porto, Portugal); Óscar Afonso (CEMPRE and Faculdade de Economia da Universidade do Porto, Portugal)
    Abstract: In this paper, we compare the present process of definition and implementation of fiscal policies in the European Union with the main conclusions of the “fiscal federalism” theory. This is done in order to draw possible lessons for future evolution, particularly taking into account the possibility of creating a European “Federation of Nation-States”, which we supported in a previous work. We argue that these main conclusions are easily compatible with the emergence of a largely decentralised “Federation”, but are still far distant from the present situation. In this context, we argue for several important lines of change in the short-run, namely an effective change in the process of coordinating fiscal policies and a credible reform of the Stability and Growth Pact, and in the medium-long-run, namely an important increase in the size of the European budget.
    Keywords: Fiscal federalism, fiscal policy, European budget, fiscal discipline
    JEL: E62 H77 H61
    Date: 2007–07
  3. By: Peter Claeys (Faculty of Economics, University of Barcelona.); Raúl Ramos (Faculty of Economics, University of Barcelona.); Jordi Suriñach (Faculty of Economics, University of Barcelona.)
    Abstract: This paper analyses how fiscal adjustment comes about when both central and sub-national governments are involved in consolidation. We test sustainability of public debt with a fiscal rule for both the federal and regional government. Results for the German Länder show that lower tier governments bear a relatively smaller part of the burden of adjustment, if they consolidate at all. Most of the fiscal adjustment occurs via central government debt. In contrast, both the US federal and state levels contribute to consolidation of public finances.
    Keywords: fiscal policy, fiscal rules, EMU, SGP, fiscal federalism
    JEL: E61 E62 H11 H72 H77
    Date: 2007–07
  4. By: Antonio Afonso (European Central Bank, Kaiserstrasse 29, D-60311, Frankfurt am Main, Germany.); Peter Claeys (European University Institute, Via della Piazzuola, 43, I-50133 Firenze, Italy.)
    Abstract: The main focus of this paper is the relation between the cyclical components of total revenues and expenditures and the budget balance in France, Germany, Portugal, and Spain. We try to uncover past trends behind the development of public finances that contribute to explaining the current stance of fiscal policy. The disaggregate analysis of fiscal policy in an SVAR that mixes long and short-term constraints allows us to look into the transmission channels of fiscal policy and to derive a model-based indicator of structural balance. The main conclusions are that fiscal slippages are mainly due to reversals in tax policies, which are unmatched by expenditure adjustments. As a consequence, deficits rise when economic conditions worsen but cause a ‘ratcheting up’ in the size of government in economic booms. The Stability and Growth Pact has not eradicated these procyclical policies. Bad policies in good times also contribute to aggregate macroeconomic instability. JEL Classification: E62, E65, E66, H61, H62.
    Keywords: Fiscal indicator, structural balance, SGP, SVAR, short and long-term restrictions.
    Date: 2007–07
  5. By: Frits Bos
    Abstract: According to the IMF and OECD, the Dutch fiscal framework is rather unique, and its design and implementation are highly recommendable. This paper describes this framework, its role in managing Dutch public expenditure, its history since 1814, the most recent national discussions and the role of the CPB. Major features of the Dutch fiscal framework are the trend-based fiscal framework with real net expenditure ceilings for the whole term of government, the role of independent organisations, like the CPB, Statistics Netherlands and the Netherlands Court of Audit, and the intermediary role of the national advisory group on budgetary principles. The framework reflects a long learning process, e.g. how to reconcile sound public finance, political pressures and the detailed requirements for managing public expenditure. There was not only progress, but also regression (e.g. the budgetary process became hectic and short-sighted in the seventies and early eighties) and old ideas becoming relevant again, e.g. taxes should be low and stable, each generation should bear its own burden and the reintroduction of cost-benefit analysis in public decision-making.
    Keywords: National fiscal rules and institutions; CPB, Advisory group on budgetary principles; Dutch fiscal framework; history of Dutch public finance since 1814; public expenditure; budgetary policy; expenditure ceilings; independent fiscal council; Drees jr; Duisenberg; Lieftinck; Pierson; Tinbergen; Zalm; Zijlstra
    JEL: B1 B2 H5 H6 N44
    Date: 2007–07
  6. By: Floriana Cerniglia (Department of Economics, University of Milan-Bicocca); Laura Pagani (Department of Economics, University of Milan-Bicocca)
    Abstract: In this paper we empirically study the preferences of European citizens concerning the allocation of powers between EU and the member States. To this aim, we use various issues of the Eurobarometer survey from year 1995 to year 2003. In the first part of the paper we present descriptive results regarding preferences of EU citizens by country and by policy domains and we find interesting results pointing out a ranking of countries according to their level of Europeanism, and a quite clear pattern of preferences relative to the allocation of competences for specific policy domains. In the second part of the paper we turn to econometric analysis; first, we regress a measure of “Europeanism” of EU citizens on a number of individual characteristics including demographic information and various indicators of the attitude towards EU. Next, we select a certain number of policy domains and, for each of these, we investigate which individual characteristics make European citizens more prone to prefer centralisation of competences. Also econometric analysis reveals interesting patterns regarding EU citizens’ preferences for allocation of powers.
    JEL: H11 H77
    Date: 2007
  7. By: Ernesto Reuben (Northwestern University); Arno Riedl (Maastricht University, CESifo and IZA)
    Abstract: In public good provision, privileged groups enjoy the advantage that some of its members find it optimal to supply a positive amount of the public good. However, their inherent asymmetric nature may make the enforcement of cooperative behavior through informal sanctioning harder to accomplish. In this paper we experimentally investigate public good provision in normal and privileged groups with and without decentralized punishment. We find that compared to normal groups, privileged groups are relatively ineffective in using costly sanctions to increase everyone's contributions. Punishment is less targeted towards strong free-riders and they exhibit a weaker increase in contributions after being punished. Thus, we show that privileged groups are not as privileged as they initially seem.
    Keywords: privileged groups, public goods, punishment, cooperation, collective action
    JEL: H41 D01 C92 Z13
    Date: 2007–07
  8. By: Bagarani, Massimo; Bonetti, Antonio; Zampino, Simona
    Abstract: The past twenty years have seen the communitarian system of multi level governance (MLG) being established as a model of territorial policies governance. In the MLG, several levels of jurisdiction participate to decision making and Regions assume a relevant role in managing policies of development. This article highlights how such a system, mostly led by Public Institutions, cuts transaction costs being based on principles aimed at increasing the number of decision makers, as well as at making all governing levels and the processes of institutional coordination more effective. The article investigates two issues: a) to what extent the reorganization of the Italian system is compatible with the main characteristics of Communitarian MLG system in the governance of territorial policies; b) to what extent the decentralization in programming policies of development has gone with a transfer of capital expenses from a central (Central Administration) to local (Regional and Local Bodies) jurisdictions. The hypotheses to be tested refer to the decentralization process so far recorded in Italy: the first hypothesis is that such a process would not be fully shareable, neither with regard to the characteristics of the Communitarian MLG model, nor to the general considerations deriving by the theory of fiscal federalism; secondly, the process wouldn’t seem suitably supported by a symmetrical transfer of the expenses from the Central Government’s jurisdiction to local bodies’.
    Keywords: Territorial policy, Multi Level Governance, institutional decentralization, OLS panel fixed-effects models
    JEL: H7 R5 R58
    Date: 2007–07–19
  9. By: C. Bianchi; M. Menegatti
    Abstract: This paper purports to apply the Kydland-Prescott framework of dynamic inconsistency to the case of fiscal policy, by considering the trade-off between output and debt stabilization. The Government budget constraint provides the link between debt dynamics and the level of activity, influenced by fiscal policy. Contrary to what happens in the monetary policy framework, however, a commitment is not always superior to discretion, even in the absence of uncertainty, but only when the public debt-GDP ratio is sufficiently large. The introduction of uncertainty, as usual, implies a reduction in the net benefit generated by the adoption of a fixed rule.
    Keywords: rules, discretion, time inconsistency, fiscal policy
    JEL: E61 E62 H62 H63 H68
    Date: 2007
  10. By: Patricia Apps (University of Sydney and IZA); Ray Rees (University of Munich)
    Abstract: This paper is concerned with the question of how couples should be taxed. One reason for the importance of this issue is simply that the overwhelming majority of individuals live in households formed around couples, and so it could be argued that empirically, this is the single most important problem in personal income taxation. A second reason is that the economic theory of optimal taxation and tax reform, at least as it is presented in the mainstream literature, provides little guidance on this issue, resting as it does on models of the single person household. An old insight in the earlier public finance literature is that any discussion of the taxation of two-person households necessarily involves the recognition of the importance of household production. In this paper we try to show how a simple model of household production can be used to help the analysis of optimal taxation and tax reform, and to put the "conventional wisdom", which says that it is optimal to tax women on a separate, lower tax schedule than men, on a firmer basis. What emerges clearly from the analysis is how centrally important the relationship between productivity in household production and female labour supply really is, and how little we know about it empirically.
    Keywords: optimal taxation, household production, labour supply
    JEL: H21 D13 J22
    Date: 2007–07
  11. By: George Kopits (Magyar Nemzeti Bank)
    Abstract: In an effort to correct worrisome trends in discretionary fiscal policy (deficit bias, procyclicality, and structural distortions), an increasing number of countries introduced a rules-based fiscal responsibility framework (FRF), characterized by fiscal policy rules, procedural rules, transparency standards, and a surveillance and enforcement mechanism. Preliminary evidence suggests that compliance with a well-designed FRF contributes to building policy credibility, to reducing risk premia, to boosting economic growth, and to lowering output volatility. Faced with large and persistent fiscal imbalances and a sharp buildup of public indebtedness, Hungary would benefit from exploring the adoption a FRF along the following lines. The FRF should encompass the entire public sector, fully accounting for contingent liabilities, and including prudent fiscal projections. Second, it is necessary to strengthen procedural rules, including implementation of the pay-go approach to budget legislation and preparat on of a rolling three-year budget program, setting annual limits on the nominal level of primary expenditures. Third, phasing in of a primary surplus rule, calibrated to the path of desired debt reduction, should be seriously considered. Fourth, a current balance rule should be adopted for local self-governments. Finally, compliance with the FRF would need to be monitored by an independent authority.
    Keywords: public finances, macroeconomics.
    JEL: E61 E62 H6
    Date: 2007
  12. By: Eduardo Engel (Dept. of Economics, Yale University); Ronald Fischer; Alexander Galetovic
    Abstract: Public-private partnerships (PPPs) cannot be justified because they free public funds. When PPPs are desirable because the private sector is more efficient, the contract that optimally trades demand risk, user-fee distortions and the opportunity cost of public funds is characterized by a minimum revenue guarantee and a cap on the firm's revenues. Yet income guarantees and revenue sharing arrangements observed in practice differ fundamentally from those suggested by the optimal contract. The optimal contract can be implemented via a competitive auction with realistic informational requirements; and risk allocation under the optimal contract suggests that PPPs are closer to public provision than to privatization.
    Keywords: Bundling, Cost of public funds, Subsidies, Minimum revenue guarantees, Revenue and profit caps, Demsetz auctions
    JEL: H21 H54 L51 R42
    Date: 2007–07
  13. By: Lucca Corazzini; Marco Faravelli; Lucca Stanca
    Abstract: This paper investigates fund-raising mechanisms based on a prize as a way to overcome free riding in the private provision of public goods, under the assumptions of income heterogeneity and incomplete information about income levels. We compare experimentally the performance of a lottery, an all-pay auction and a benchmark voluntary contribution mechanism. We find that prize-based mechanisms perform better than voluntary contribution in terms of public good provision after accounting for the cost of the prize. Comparing the prize-based mechanisms, total contributions are significantly higher in the lottery than in the all-pay auction. Focusing on individual income types, the lottery outperforms voluntary contributions and the all-pay auction throughout the income distribution.
    Keywords: Auctions, Lotteries, Public Goods, Laboratory Experiments
    JEL: C91 D44 H4
  14. By: Mark Lijesen; Victoria Shestalova
    Abstract: Starting with a ‘greenfield’ situation, we discuss reasons for market failure in road infrastructure provision. We show why it may not be optimal from a welfare perspective to leave road provision fully to the market and government intervention in this sector can improve welfare. Government intervention comes in different forms, such as financial intervention (taxation, subsidies), regulation (price, quality, environmental), and public provision of roads or road services. The analysis of the literature regarding government instruments allows us to establish a correspondence between different forms of market failure and instruments. Several case studies of particular road infrastructure projects are included to illustrate the use of government instruments.
    Keywords: road infrastructure; government policy; public-private partnership (PPP)
    JEL: L92 L98 H4
    Date: 2007–06
  15. By: Friedrich Schneider
    Abstract: The size and development of the shadow economy of Germany and Austria is estimated, us-ing various estimation procedures. An increased burden of taxation and social security pay-ments, combined with intensive labor market regulation, quality of state institutions and the tax morale are the driving forces for the shadow economy. Moreover, the results of recent surveys for Germany and Austria demonstrate, that the readiness to undertake illicit employ-ment as well as its acceptance are high in both countries. Finally, conclusions are made about the effect of the shadow economy on the official one and incentive oriented policy means are presented, so that the “black” value added can be transformed into official value added.
    JEL: O17 O5 D78 H2 H26
    Date: 2007–06
  16. By: José Roberto Rodrigues Afonso; Erika Amorim Araújo; Geraldo Biasoto Júnior
    Abstract: The Brazilian experience is of particular interest as a case study into the fiscal scope for public sector investments, especially in infrastructure. Brazil has one of the highest tax burdens in the world and, at the same time, the public sector has been registering a historic low in investment, even lower than the average levels seen elsewhere in Latin America. The idea of crating adequate fiscal space to allow for increased investment has been largely ignored at national level. The little that national debate has advanced so far on this issue has only produced at best a definition of the challenge. In this context, the paper does not intend to provide a ready-made solution for such large and varied challenges. Instead, it hopes to contribute in a small way to the development of debate, starting by raising and systemizing information and by pointing out possible alternatives, in a preliminary and perhaps somewhat provocative manner.
    Date: 2005–12
  17. By: Reuben Ernesto; Riedl Arno (METEOR)
    Abstract: In public good provision, privileged groups enjoy the advantage that some of its members find it optimal to supply a positive amount of the public good. However, their inherent asymmetric nature may make the enforcement of cooperative behavior through informal sanctioning harder to accomplish. In this paper we experimentally investigate public good provision in normal and privileged groups with and without decentralized punishment. We find that compared to normal groups, privileged groups are relatively ineffective in using costly sanctions to increase everyone''s contributions. Punishment is less targeted towards strong free-riders and they exhibit a weaker increase in contributions after being punished. Thus, we show that privileged groups are not as privileged as they initially seem.
    Keywords: public economics ;
    Date: 2007
  18. By: Richard M. Bird; Jorge Martinez-Vazquez; Benno Torgler
    Abstract: In this paper we argue that a more legitimate and responsive state is an essential factor for a more adequate level of tax effort in developing countries. While at first glance giving such advice to poor countries seeking to increase their tax ratios may not seem more helpful than telling them to find oil, it is presumably more feasible for people to improve their governing institutions than to rearrange nature’s bounty. Improving corruption, voice and accountability may not take longer nor be necessarily more difficult than changing the opportunities for tax handles and economic structure. The key contribution of this paper is to extend the conventional model of tax effort by showing that not only do supply factors matter, but that demand factors such as corruption, voice and accountability also determine tax effort to a significant extent.
    Keywords: Tax effort; tax reforms; developing countries; Latin America; corruption; voice and accountability
    JEL: H11 H20 O17
    Date: 2007–07
  19. By: Marco Faravelli (Department of Economics, University of Milan-Bicocca and Edinburgh School of Economics)
    Abstract: This paper considers a public good game with incomplete information a?ected by extreme free-riding. We overcome this problem through the implementation of a contest in which several prizes can be awarded. For any possible distribution of wealth we identify the necessary and su?cient conditions for the equilibrium allocations to be interior for all players. At interior solutions, it is optimal for the social planner to set the last prize equal to zero, but otherwise the total expected welfare is independent of the distribution of the total prize sum among the prizes. We prove that private provision via a contest Pareto-dominates both public provision and private provision via a lottery.
    Date: 2006–11
  20. By: Alessandro Goglio
    Abstract: Hungary's counties and municipalities face difficult challenges. Participation in cost-cutting structural reforms initiated by the central government means cutbacks to administrative overheads and tough decisions in public services. At the same time, there are also challenges in modernising local infrastructures and in making full use of the EU funds for development projects. This paper first looks at how meeting these challenges can be helped by better budgeting, in particular regarding the transparency and oversight of accounts. Financing arrangements are also examined and this reveals a general problem of complexity. Assessment of spending responsibilities suggests room for improving the roles of counties and regions and a need for cutbacks in central-government influence on service provision and public-sector wages at the local level. <P>Promouvoir l'efficience des administrations infranationales en Hongrie <BR>Les départements et les communes de la Hongrie se trouvent confrontés à une série de problèmes. Leur participation aux réformes structurelles lancées par l’administration centrale les oblige à trancher dans les dépenses administratives et à prendre des décisions délicates en ce qui concerne les services publics. Dans le même temps, il faut mener une action permanente de modernisation des infrastructures locales et tirer pleinement parti des financements de l’UE pour les projets de développement. On verra tout d’abord comment une meilleure budgétisation, surtout pour ce qui est de la transparence et du contrôle des comptes, faciliterait cette action. On examinera également les modalités de financement, qui posent un problème général, celui d’une trop grande complexité. Une évaluation des compétences en matière de dépenses montre qu’il serait possible de mieux définir les missions des comtés et des régions et que l’administration centrale devrait exercer moins d’influence sur la prestation des services et sur les rémunérations dans le secteur public.
    Keywords: Hungary, Hongrie, public procurement, marchés publics, sub-national government, public services, autorités infranationales, budgétisation, services publics, contrôle des comptes, économies d'échelle, partage des impôts, fiscalité locale
    JEL: H7
    Date: 2007–07–04
  21. By: Federico Etro (Department of Economics, University of Milan-Bicocca)
    Abstract: I study Public-Private Partnerships (PPP) as investments in public infrastructures that are alternative compared to direct public investments. I consider different forms of PPP, discussing their relative advantages from the point of view of incomplete contract theory and principal-agent relations. I also provide an empirical investigation concerning recent PPP projects in Europe and Italy.
    Date: 2007

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