nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒10‒06
eighteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. General Income Taxation, Public Goods and Decentralized Leadership By Aronsson, Thomas
  2. Optimal income taxation in the presence of tax evasion: Expected utility versus prospect theory By Sanjit Dhami; Ali al-Nowaihi
  3. Structural Fiscal Rules and The Business Cycle By Montoro Carlos; Moreno Eduardo
  4. The Causes of Excessive Deficits in the European Union By Vítor Castro
  5. Individual Responsibility and the Funding of Collective Goods By Louis Lévy-Garboua; Claude Montmarquette; Marie-Claire Villeval
  6. The Fiscal Impact of Aid Flows: Evidence from Ethiopia By Pedro M. G. Martins
  7. Measuring the Effectiveness of R&D Tax Credits in the Netherlands By Lokshin, Boris; Mohnen, Pierre
  8. Permanent vs Temporary Fiscal Expansion in a Two-Sector Small Open Economy Model By Olivier Cardi; Romain Restout
  9. Towards a Fiscal Illusion Index By Mourao, Paulo
  10. Public debt and aggregate risk. By Audrey Desbonnet; Sumudu Kankanamge
  11. Local Distributional Effects of Government Cash Transfers in Chile By Claudio A. Agostini; Philip Brown;
  12. Creating the Canada/Quebec Pension Plans: An Historical and Political Analysis By Kristina Babich; Daniel Béland
  13. Why is Economic Policy Different in New Democracies? Affecting Attitudes About Democracy By Adi Brender; Allan Drazen
  14. Local Government Finances: The link between Intergovernmental Transfers and Net Worth By Luiz de Mello
  15. A Characterization of Strategy-Proof Rules over the Condorcet Domain with an Even Number of Individuals By Lauren N. Merrill
  16. Explaining differences in environmental governance patterns between Canada, Italy and the United States. By Breton, Albert; Scott, Anthony; Fraschini, Angela
  17. Where Are the Real Bottlenecks? Evidence from 20,000 Firms in 60 Countries about the Shadow Costs of Constraints to Firm Performance By Wendy Carlin; Mark Schaffer; Paul Seabright
  18. Institutional Aspects of Police and Judicial Cooperation in Criminal Matters within the Area of Freedom, Justice and Security of the European Union By Jovanoski, Aleksandar

  1. By: Aronsson, Thomas (Department of Economics, Umeå University)
    Abstract: This paper concerns redistribution and public good provision under asymmetric information, which are here ingredients of a policy-problem facing each member state (nation) of an economic federation with decentralized leadership. Each member state is assumed to have its own redistributive policy and pattern of public consumption, whereas the federal level redistributes (ex-post) between the member states. The results show how and why federal ex-post redistribution may modify the use of income taxation and public good provision at the national level, relative to the policy outcome in the absence of a federal government, as well as how the national policy incentives depend on whether or not the federal government uses distortionary taxes.
    Keywords: Income taxation; redistribution; public goods; fiscal federalism; decentralized leadership
    JEL: D31 D60 D82 H21
    Date: 2007–08–31
  2. By: Sanjit Dhami; Ali al-Nowaihi
    Abstract: The predictions of expected utility theory (EUT) applied to tax evasion are flawed on two counts: (i) They are quantitatively in error by huge orders of magnitude. (ii) Higher taxation is predicted to lower evasion, which is at variance with the evidence. An emerging literature in behavioral economics, most notably based on prospect theory (PT), has shown that behavioral economics is much better at explaining tax evasion. We extend this literature to incorporate issues of optimal taxation. As a benchmark for a successful theory, we require that it should explain, jointly, the facts on the tax rate, tax gap and the level of government expenditure. We find that when taxpayers use EUT (respectively, PT) and the optimal tax is derived from a social welfare function that also uses EUT (respectively, PT), then, the calibration results are completely at odds with the facts. However, when taxpayers use PT but the social welfare function uses standard EUT, there is a very close match between the predictions and the facts. This has important implications for context dependent preferences but also for the newly emerging literature on liberalism versus paternalism in behavioral economics.
    Keywords: Prospect theory; Expected utility theory; Tax evasion; Optimal taxation; Normative versus positive economics; Context dependent preferences; Liberalism; Paternalism
    JEL: D81 H26 K42
    Date: 2007–09
  3. By: Montoro Carlos (Banco Central de Reserva del Perú and LSE); Moreno Eduardo (Banco Central de Reserva del Perú)
    Abstract: In this paper we extend the neoclassical model presented by Baxter and King (1993) to evaluate the effects of two alternative fiscal policy rules on the business cycle. The rules we analyze are similar to those implemented in practice by some countries, such as: limits to the structural fiscal deficit (which eliminates the effects of the business cycle on the government revenues) and limits to conventional fiscal deficit. We focus our analysis in a model calibrated to mimic Peruvian data to evaluate the short run dynamics and the conditions for the stability of the equilibrium. We find that the rule based on the structural balance generates a counter cyclical fiscal policy, which reduces significantly output volatility. Moreover, we find that a condition for a determinate equilibrium in the model endowed with the structural rule is that non-financial government expenditures react more than one–to-one to changes in interest expenditures.
    Keywords: Reglas Fiscales, Política fiscal, Volatilidad del Producto
    JEL: E62 H30 H60
    Date: 2007–08
  4. By: Vítor Castro (Universidade do Minho - NIPE)
    Abstract: Several studies have identified the factors that cause public deficits in industrial democracies. They consider that economic, political and institutional factors play an important role in the understanding of those deficits. However, the study of the determinants of excessive deficits remains practically unexplored. Since excessive deficits can have large negative spillover effects when countries are forming a monetary union without a centralised budget – as it is the case for a group of European countries – this paper tries to explore that gap in the literature by identifying the main causes of excessive deficits and the ways of avoiding them. Binary choice models are estimated over a panel of 15 European Union countries for the period 1970-2006, where an excessive deficit is defined as a deficit higher than 3% of GDP. Results show that a weak fiscal stance, low economic growth, the timing of parliamentary elections and majority left-wing governments are the main causes of excessive deficits in the EU countries. Moreover, the institutional constraints imposed after Maastricht over the EU countries’ fiscal policy have succeeded in reducing the probability of excessive deficits in Europe, especially in small countries. Therefore, this study concludes that supranational fiscal constraints, national efforts to reduce public debts, growth promoting policies and mechanisms to avoid political opportunism and partisan effects are essential factors for an EU country to avoid excessive deficits. Finally, the results presented in this paper raise the idea that a good strategy for the EU countries to avoid excessive deficits caused by the opportunistic behaviour of their policymakers would be to schedule elections for the beginning or the end of the year.
    Keywords: Excessive public deficits; European Union; Political opportunism; Binary choice models
    JEL: E62 H6 O52
    Date: 2007
  5. By: Louis Lévy-Garboua (Ecole d'économie de Paris - Paris School of Economics - [Université Panthéon-Sorbonne - Paris I]); Claude Montmarquette (Université de Montréal - Département de Sciences Economique - [Université de Montréal]); Marie-Claire Villeval (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: When a deficit occurs in the funding of collective goods, it is usually covered by raising the amount of taxes or by rationing the supply of the goods. This article compares the efficiency of these institutions. We report the results of a 2x2 experiment based on a game in the first stage of which subjects can voluntarily contribute to the funding of a collective good that is being used to compensate the victims of a disaster. In the second stage of the game, in case of a deficit, we introduce either taxation or rationing. Each treatment is subjected to two conditions: the burden of the deficit is either uniform for all the subjects, or individualized according to the first-stage contribution. We show that the individualized treatments favor the provision of the collective good through voluntary cooperation whereas the uniform treatments encourage free-riding. Individualized taxation brings the voluntary contributions closer to the optimum while uniform rationing appears to be the worst system since free-riding restrains the provision of the good.
    Keywords: collective goods; experiment; interior Pareto optimum - rationing; responsibility; taxation
    Date: 2007–09
  6. By: Pedro M. G. Martins (Visiting IPC Researcher, Institute for Development Studies, Sussex)
    Keywords: Fiscal; Impact; Aid; Flows; Evidence; Ethiopia; Poverty
    Date: 2007–09
  7. By: Lokshin, Boris (UNU-MERIT); Mohnen, Pierre (UNU-MERIT)
    Abstract: This paper examines the impact of the Dutch R&D fiscal incentive program, known as WBSO, on R&D capital formation. Taking a factor-demand approach we measure the elasticity of firm R&D capital accumulation to its user cost. An econometric model is estimated using a rich unbalanced panel covering the period 1996-2004 with firm-specific R&D user costs varying with tax incentives. Using the estimated user cost elasticity, we examine the impact of the R&D incentive program. We find evidence that the program of R&D incentives in the Netherlands has been effective in reducing the user cost of R&D and in stimulating firms' investment in R&D.
    Keywords: R&D tax credits, panel data, crowding out, user-cost elasticity, R&D, fiscal incentives
    JEL: O32 O38 H25 H50 C23
    Date: 2007
  8. By: Olivier Cardi (ERMES - Equipe de recherche sur les marches, l'emploi et la simulation - [CNRS : UMR7017] - [Université Panthéon-Assas - Paris II]); Romain Restout (GATE - Groupe d'analyse et de théorie économique - [CNRS : UMR5824] - [Université Lumière - Lyon II] - [Ecole Normale Supérieure Lettres et Sciences Humaines])
    Abstract: This contribution shows that the duration of a fisscal shock together with sectoral capital intensity matter in determining the dynamic and steady-state effects in an intertemporal-optimizing two-sector small open economy model. First, unlike a permanent shock, net foreign asset position always worsens in the long-run after a transitory fiscal expansion. Second, steady-state changes in physical capital depend on sectoral capital-labor ratios but their signs may be reversed compared to the corresponding permanent public policy. Third, investment and the current account may now adjust non monotonically. Fourth, a temporary fiscal shock always crowds-out (crowds-in) investment in the long-run whenever the non traded (traded) sector is more capital intensive.
    Keywords: current account; government spending; nontraded goods; temporary shocks
    Date: 2007–09
  9. By: Mourao, Paulo
    Abstract: In this paper it is built an index of value for Fiscal Illusion in democratic countries. This approach uses a cautioned methodology recurring to a comprehensive database. The index measured the Fiscal Illusion dimensions in 68 countries since 1960. It evidenced that the situation varies greatly around the world. It was verified that the countries with the highest average values are Mali, Pakistan, Russia and Sri Lanka. Conversely, Austria, Luxembourg, Netherlands and New Zealand are some of the countries with the lowest average values. The periods of more significant decrease (roughly, periods of less recurrence to Fiscal Illusion practices) were those between 1980 and 1995. The existence of institutions in each country and in each group of countries that maintain unchangeable the fiscal and political practices leads to the stabilisation of Fiscal Illusion at certain slightly unaltered values.
    Keywords: Fiscal Illusion; Indexes/Indicators; Governance
    JEL: H30 C82 H11
    Date: 2007–09–30
  10. By: Audrey Desbonnet (Centre d'Economie de la Sorbonne); Sumudu Kankanamge (Centre d'Economie de la Sorbonne)
    Abstract: This paper assesses the optimal level of public debt in a new framework where aggregate fluctuations are taken into account. Agents are subject to both aggregate and idiosyncratic shocks and the market structure prevents them from perfectly insuring against the risk. We find that the optimal level of debt is very different when aggregate risk is taken into account : a simple idiosyncratic model generates a quarterly optimal level of debt of 60 % of GDP, our benchmark model embedding aggregate risk finds the quarterly optimal level of debt to be 180 % of GDP, our benchmark model embedding aggregate risk finds the quarterly optimal level of debt to be 180 % of GDP. Thus aggregate fluctuations have a strong positive impact on the level of public debt in the economy. Aggregate fluctuations exacerbate the overall risk level in the economy and households are forced to increase their precautionary saving in response. Public debt and the implied higher interest rate generate a strong effect that helps precautionary saving behavior.
    Keywords: debt, aggregate risk, precautionary saving.
    JEL: E32 E63 H31
    Date: 2007–09
  11. By: Claudio A. Agostini; Philip Brown;
    Abstract: Despite rapid economic growth and poverty reduction, inequality in Chile has remained high and remarkably constant over the last 20 years, prompting academic and public interest in the subject. Due to data limitations, however, research on inequality in Chile has concentrated on the national and regional levels. The impact of cash subsidies to poor households on local inequality is thus not well understood. Using povertymapping methods to asses this impact, we find heterogeneity in the effectiveness of regional and municipal governments in reducing inequality via poverty-reduction transfers, suggesting that alternative targeting regimes may complement current practice in aiding the poor.
    Keywords: Inequality; Poverty Mapping; Subsidies; Targeting; Chile
    JEL: H53 I38 O54
    Date: 2007–05–01
  12. By: Kristina Babich; Daniel Béland
    Abstract: Drawing on recent historical institutionalist scholarship, this paper explores the debates leading to the enactment of the Canada/Quebec Pension Plans (C/Q.P.P.) in 1965. More specifically, this analysis underlines the respective role of and the interaction between political institutions, business and labor power, and changing ideas about the role of public and private pensions in Canada. As argued, although the ideas that guided the enactment of C/Q.P.P. stressed the key role of private benefits, the enduring weight of Canadian-style federalism mitigated the impact of interest groups, especially business organizations, on the legislative process. Overall, the paper suggests that students of social policy should pay closer attention to the interaction between political institutions, interest group mobilization, and changing ideas about the relationship between public and private benefits.
    Keywords: pensions, ideas, institutions, federalism, politics, social policy, business, labor, private benefits, Canada
    JEL: I38 H77
    Date: 2007–08
  13. By: Adi Brender; Allan Drazen
    Abstract: When democracy is new, it is often fragile and not fully consolidated. We investigate how the danger of a collapse of democracy may affect fiscal policy in new democracies in comparison to countries where democracy is older and often more established. We argue that the attitude of the citizenry towards democracy is important in preventing democratic collapse, and expenditures may therefore be used to convince them that "democracy works". We present a model focusing on the inference problem that citizens solve in forming their beliefs about the efficacy of democracy. Our approach differs from much of the literature that concentrates on policy directed towards anti-democratic elites, but our model can encompass that view and allows comparison of different apporoaches. We argue that the implications of the model are broadly consistent with the empirical patterns generally observed, including the existence of political budget cycles in new democracies not observed in established democracies.
    JEL: D72 H30 P16
    Date: 2007–10
  14. By: Luiz de Mello
    Abstract: There is a large literature on how the sharing of revenue between different levels of government and the design of intergovernmental transfer schemes affect sub-national finances. Using a panel of OECD countries during 1980-2005, this paper tests for: i) the presence of a stable long-run statistical association between changes in transfer receipts and sub-national net worth and ii) the direction of causality between changes in transfer receipts and net worth. The main empirical findings are that, first, there is a stable long-term relationship between transfer receipts and local government net worth for the case of current, but not capital, transfers. An increase in intergovernmental transfer receipts is found to be associated with a modest reduction in the recipient jurisdiction’s net worth over the long term, but a fall in net worth is associated with an almost one-to-one subsequent increase in transfer receipts. Second, the direction of causality is sensitive to the technique used to estimate the long-term parameters. One technique suggests that causality runs from transfers to net worth, which lends support to a large literature on the effect of cost-shifting on sub-national budget outcomes. But causality also appears to run from net worth to transfer receipts, suggesting that transfers may be used as a deficitfinancing tool. <P>Finances des administrations territoriales : La relation entre les transferts inter-administrations et les actifs nets des administrations territoriales <BR>Il existe une importante littérature sur la façon dont les finances des administrations territoriales sont affectées par la répartition des revenus entre les différents niveaux d’administration et par la conception des transferts inter-administrations. En utilisant un panel de pays de l’OCDE sur la période 1980-2005, ce document teste :i) l’existence d’une relation statistique stable de long terme entre les variations des transferts reçus et celles de la valeur nette des administrations territoriales, et ii) la direction de la relation de causalité entre les variations des transferts reçus et celles de la valeur nette. Les principaux résultats empiriques suggèrent, en premier lieu, l’existence d’une relation stable de long terme entre les transferts reçus et la valeur nette des administrations locales s’agissant des transferts courants, mais non de ceux en capital. Une augmentation des transferts inter-administration reçus est associée à une faible réduction de la valeur nette des administrations bénéficiaires sur le long terme, mais une baisse de la valeur nette est elle-même associée à une augmentation quasiment équivalente des transferts reçus. Deuxièmement, la direction de la relation de causalité est sensible à la technique utilisée pour estimer les paramètres de long terme. Selon une technique, la direction va des transferts reçus vers la valeur nette, ce qui corrobore une importante littérature sur les effets du transfert des coûts sur les résultats budgétaires des collectivités locales. Cependant selon une autre technique, la direction de la causalité va de la valeur nette vers les transferts reçus suggérant que les transferts peuvent être utilisés pour financer les déficits budgétaires.
    Keywords: transfers, transferts, local government, federalism, fédéralisme, net worth, panel co-integration, valeur nette, actifs nets, administration locale, cointégration en panel
    JEL: C33 H11 H77
    Date: 2007–09–24
  15. By: Lauren N. Merrill (Department of Economics, College of William and Mary)
    Abstract: For an odd number of individuals Campbell and Kelly [2] show that over the set of profiles that admit a strong Condorcet winner, majority rule is the only non-dictatorial strategy-proof social choice function. This paper shows that the situation is quite different in the case of an even number of individuals, and provides a characterization of strategy-proof social choice rules in this case.
    Keywords: majority rule, Condorcet domain, dicatorial rule, stratefy-proof
    JEL: D70 D71
    Date: 2007–10–03
  16. By: Breton, Albert; Scott, Anthony; Fraschini, Angela
    Abstract: The objective of the paper is to formulate a hypothesis that can help explain the different patterns of environmental governance in three countries: Canada and the United States (both federal states) and Italy (a decentralized unitary state). To that effect, we will make use of what is a robust theory of the assignment of powers in federal and decentralized unitary states on the role of competition as a driving force in shaping these assignments. The differing patterns of environmental governance we wish to explain are that most environmental policies are enacted and implemented by the national government in the United States, by provincial governments in Canada, and by both national and regional governments in Italy.
    JEL: H O57 Q5
    Date: 2007–09
  17. By: Wendy Carlin (University College London and CEPR); Mark Schaffer (Heriot-Watt University, CEPR and IZA); Paul Seabright (Toulouse School of Economics and CEPR)
    Abstract: We use data from over 20,000 firms in 60 countries to identify constraints on the growth of firms. We interpret managers’ answers to survey questions on the extent to which various aspects of their external environment inhibit the performance of their firm as measuring the shadow cost of constraints to their activities, not as direct measures of the constraints. These costs can vary with firm characteristics as well as with the magnitude of the constraints themselves. Our model reveals that, contrary to common practice, the importance of an obstacle to performance is not, except under very restrictive assumptions, measured by the coefficient on the reported level of the obstacle in a performance regression. We test the predictions of the model on the large firm-level dataset and show how the importance of different constraints varies across countries and how the cost of a constraint depends on the characteristics of the firm. We find that telecoms are less important, and taxes more important, as constraints on performance than the literature has previously identified.
    Keywords: public goods, constraints on growth, infrastructure, finance, institutions, subjective data
    JEL: H41 O12 O16 O57
    Date: 2007–09
  18. By: Jovanoski, Aleksandar
    Abstract: With the Treaty on the European Union, the previously the Member States of the European Community had agreed to start intergovernmental cooperation in the sphere of Justice and Home Affairs. After Tampere European Summit in 1999, the Member States of the European Union agreed on the creation of a common area of freedom, security and justice in order to ensure security for its citizens and flourishing of the rule of Law. Presently, the judicial and police cooperation in criminal matters is at the very core on the European agenda, still it is highly dependent on the interest aggregation of the Member States and unanimity vote in the JHA Council of Ministers, with limited inclusion of the European Commission and European Parliament, and not under jurisprudence of the European Court of Justice. Therefore, this paper will assess the current institutional aspects of judicial and police cooperation under the JHA Pillar by considering the current method of decision-making in those matters.
    Keywords: European Union; Police and Judicial Cooperation; Area; Freedom; Security; Justice; Institutional; Aspects
    JEL: H41 H40 Y4 Y80 K30 K39 Z00
    Date: 2007–07–01

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