nep-pbe New Economics Papers
on Public Economics
Issue of 2007‒10‒27
eleven papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. A Technical Note on Comparative Dynamics in a Fiscal Competition Model By Daniel Becker
  2. The Costs of Delaying fiscal Consolidation: a Case Study for Greece By Vassiliki Koutsogeorgopoulou; David Turner
  3. Income Heterogeneity and the Flypaper Effect By Witterblad, Mikael
  4. An Agency Theory of Dividend Taxation By Raj Chetty; Emmanuel Saez
  5. Designing economic instruments for the environment in a decentralized fiscal system By Banzhaf, H. Spencer; Alm, James
  6. Strategic competition in Swedish local spending on childcare, schooling and care for the elderly By Edmark, Karin
  7. Group Size and Incentive to Contribute: A Natural Experiment at Chinese Wikipedia By Xiaoquan (Michael) Zhang; Feng Zhu;
  8. The Informal Sector By Aureo de Paula; Jose A. Scheinkman
  9. Footloose capital and productive public services By Pasquale Commendatore; Ingrid Kubin; Carmelo Petraglia
  10. Political Short-termism: A Possible Explanation By Iconio Garrì
  11. Reform Perspectives on Welfare State Models in Global Capitalism By Karl Aiginger; Alois Guger; Thomas Leoni; Ewald Walterskirchen

  1. By: Daniel Becker (University of Rostock)
    Abstract: This note discusses the comparative dynamic analysis in "Fiscal competition in space and time" by David Wildasin (Journal of Public Economics, Vol. 87, 2003) from a technical point of view.
    Keywords: dynamic tax competition, imperfect capital mobility, comparative dynamics, Peano Theorem
    JEL: H21 H77 O40 C61
    Date: 2007
  2. By: Vassiliki Koutsogeorgopoulou; David Turner
    Abstract: Since 2004, the fiscal deficit has been brought down by over 5% of GDP to below the 3% limit in 2006, which is a major achievement. The government plans a more gradual reduction over coming years so that overall balance or surplus is reached no later than 2010. However, fiscal consolidation should continue, possibly at a more rapid pace than planned, given the high level of government debt, favourable outlook for output growth, and long-term fiscal costs of ageing which are estimated to be among the largest in the OECD. There are as yet no specific proposals to reform pensions, which account for most of the prospective ageing-related increase in public expenditure, although the government is expected to announce reforms following the publication of a report from a Committee of Experts. Delaying fiscal consolidation, particularly the urgently needed pension reform, would have substantial longer-term costs in terms of higher taxes and additional debt service costs, including an increase in the risk premium paid on government debt. In addition, this would heavily skew the tax burden towards future generations. Consolidation should focus on reducing primary spending and on enhancing tax revenues. This can be achieved particularly through increased efficiency of public administration and by measures to tackle tax evasion and further broaden the tax base. Ensuring long-run fiscal sustainability will also require the implementation of wide-ranging reforms in the key area of health care, as well as an early decision to introduce a comprehensive reform of the pension system. <P>Les coûts d’un report de la consolidation budgétaire : une étude dans le cas de la Grèce <BR>La réduction du déficit budgétaire, ramené de 5 % du PIB en 2004 à moins de 3 % en 2006, est une réussite majeure. Les autorités prévoient une diminution plus progressive dans les prochaines années jusqu’à ce que le budget soit en équilibre ou excédentaire, au plus tard en 2010. Cependant, l’assainissement budgétaire devrait se poursuivre – peut-être à un rythme plus rapide que prévu - étant donné le niveau élevé de la dette publique, les perspectives favorables à la croissance de la production et les coûts budgétaires à long terme du vieillissement, qui sont parmi les plus élevés de la zone OCDE. Il n’est pas encore prévu d’initiatives spécifiques pour réformer les retraites, principale source de l’accroissement prévisible des dépenses publiques résultant du vieillissement, même si le gouvernement doit annoncer des mesures dans le courant de cette année. Différer l’assainissement des finances publiques, surtout la réforme des retraites qui s’impose d’urgence, entraînerait des coûts à long terme considérables sous forme d’une hausse de la fiscalité et d’un alourdissement du service de la dette, avec notamment une augmentation de la prime de risque appliquée à la dette publique. De surcroît, ceci reviendrait à transférer une lourde charge fiscale aux générations futures. Les efforts d’assainissement devraient tendre surtout à réduire les dépenses primaires et accroître les recettes fiscales. On peut y parvenir par l’amélioration de l’efficacité de l’administration publique en particulier, et en luttant contre la fraude et en prenant d’autres mesures pour élargir la base d’imposition. Pour garantir la viabilité budgétaire à long terme, il faudra aussi engager des réformes d’envergure dans le secteur clé de la santé et décider promptement de lancer une réforme complète du système de retraite.
    Keywords: ageing, pensions, retraites, vieillissement, fiscal consolidation, deficit, déficit
    JEL: H26 H55 H62 H63
    Date: 2007–10–18
  3. By: Witterblad, Mikael (Department of Economics, Umeå University)
    Abstract: The purpose of this paper is to analyze the determinants of the local public expenditures and, in particular, try to explain the so called ’flypaper effect’. The analysis uses a political economy model to relate the existence and size of the flypaper effect to observable municipal characteristics such as the average tax base, income dispersion andwhether or not a change in the average tax base affects the tax share of the majority voter. The empirical part of the study is based on Swedish data on municipal expenditures and revenues for the period 1996-2004. The results show that the size of the flypaper effect varies among municipalities depending on the relative composition of grant and tax base.
    Keywords: Income Dispersion; Local Public Expenditures; Intergovernmental Relations
    JEL: D31 H72 H77
    Date: 2007–10–19
  4. By: Raj Chetty; Emmanuel Saez
    Abstract: Recent empirical studies of dividend taxation have found that: (1) dividend tax cuts cause large, immediate increases in dividend payouts, and (2) the increases are driven by firms with high levels of shareownership among top executives or the board of directors. These findings are inconsistent with existing "old view" and "new view" theories of dividend taxation. We propose a simple alternative theory of dividend taxation in which managers and shareholders have conflicting interests, and show that it can explain the evidence. Using this agency model, we develop an empirically implementable formula for the efficiency cost of dividend taxation. The key determinant of the efficiency cost is the nature of private contracting. If the contract between shareholders and the manager is second-best efficient, deadweight burden follows the standard Harberger formula and is second-order (small) despite the pre-existing distortion of over-investment by the manager. If the contract is second-best inefficient -- as is likely when firms are owned by diffuse shareholders because of incentives to free-ride when monitoring managers -- dividend taxation generates a first-order (large) efficiency cost. An illustrative calibration of the formula using empirical estimates from the 2003 dividend tax reform in the U.S. suggests that the efficiency cost of raising the dividend tax rate could be close to the amount of revenue raised.
    JEL: G3 H20
    Date: 2007–10
  5. By: Banzhaf, H. Spencer; Alm, James
    Abstract: When external effects are important, markets will be inefficient, and economists have considered several broad classes of economic instruments to correct these inefficiencies. However, the standard economic analysis has tended to neglect important distinctions and interactions between the geographic scope of pollutants, the enforcement authority of various levels of government, and the fiscal responsibilities of the levels of government. For example, externalities genera ted in a particular local area may be confined to the local area or may spill over to other jurisdictions. Also, local governments may be well informed about how best to regulate or enforce pollution control within their jurisdiction, but they may not consider the effects of their actions on other jurisdictions. Finally, the existence of locally-generated waste emissions affects the appropriate assignment of both expenditure and tax responsibilities among levels of government. The standard analysis therefore focuses mainly upon an aggregate (or national) perspective, it typically ignores the possibility that the externality may be created and addressed by local governments, and it does not consider the implications of decentralization for the design of economic instruments targeted at environmental problems. This paper examines the implications of decentralization for the design of corrective policies; that is, how does one design economic instruments in a decentralized fiscal system in which externalities exist at the local level and in which subnational governments have the power to provide local public services, as well as to choose tax instruments that can both finance these expenditures and correct the market failures of externalities?
    Keywords: Environmental Economics & Policies,Debt Markets,Taxation & Subsidies,Public Sector Economics & Finance,Emerging Markets
    Date: 2007–10–01
  6. By: Edmark, Karin (IFAU - Institute for Labour Market Policy Evaluation)
    Abstract: This study tests for strategic competition in public spending on childcare and primary education, and care for the elderly, using panel data on Swedish municipalities over 1996-2005. The high degree of decentralization in the organization of the public sector implies that Swedish data is highly suitable for this type of study. The study is not limited to interactions in the same type of expenditure, but also allows for effects across expenditures. The results give no robust support for the hypothesis that municipalities react on the spending policy of neighbouring municipalities in the decision on own spending on care of the elderly, childcare and education.
    Keywords: Strategic interactions; spatial econometrics; decentralization; local public spending
    JEL: C31 H72 H77
    Date: 2007–10–08
  7. By: Xiaoquan (Michael) Zhang (Hong Kong University of Science and Technology); Feng Zhu (Havard Business School);
    Abstract: The literature of private provision of public goods suggests that incentive to contribute is inversely related to group size. This paper empirically tests this relationship using field data from Chinese Wikipedia, an online encyclopedia. We exploit an exogenous reduction in group size as a result of the blocking of Wikipedia in mainland China and examine whether individual contributions increase after the block as predicted in the literature. Our result indicates the opposite: individual contribution of unaffected contributors decreases by 42% on average as a result of the block. We attribute the cause to social effects: contributors care about the number of beneficiaries of their contributions. We build a simple model to illustrate how social effects and group size affect individual incentive to contribute. Consistent with our model prediction, we find that the more a contributor values social recognition, the greater the reduction in her contributions after the block. A series of robustness checks appear to support our explanation.
    Keywords: incentive to contribute; group size; public goods; social effects
    JEL: D85 H44 L14 L31 L86
    Date: 2007–09
  8. By: Aureo de Paula (Department of Economics, University of Pennsylvania); Jose A. Scheinkman (Department of Economics, Princeton University)
    Abstract: This paper investigates the determinants of informal economic activity. We present two equilibrium models of informality and test their implications using a survey of 48,000+ small firms in Brazil. We define informality as tax avoidance; firms in the informal sector avoid tax payments but suffer other limitations. In the first model there is a single industry and informal firms face a higher cost of capital and a limitation on size. As a result informal firms are smaller and have a lower capital labor ratio. When education is an imperfect proxy for ability, we show that the interaction of the manager’s education and formality has a positive correlation with firm size. These implications are supported by our empirical analysis. A novel theoretical contribution in this paper is a model that highlights the role of value added taxes in transmitting informality. It predicts that the informality of a firm is correlated to the informality of firms from which it buys or sells. The model also implies that higher tolerance for informal firms in one production stage increases tax avoidance in downstream and upstream sectors. Empirical analysis shows that, in fact, various measures of formality of suppliers and purchasers (and its enforcement) are correlated with the formality of a firm. Even more interestingly, when we look at sectors where Brazilian firms are not subject to the credit system of value added tax, but instead the value added tax is applied at some stage of production at a rate that is estimated by the State, this chain effect vanishes.
    Keywords: Informal Sector, VAT, Tax Avoidance
    JEL: H2 H3 K4
    Date: 2007–08–27
  9. By: Pasquale Commendatore (University of Naples 'Federico II', Italy); Ingrid Kubin (Department of Economics, Vienna University of Economics & B.A.); Carmelo Petraglia (University of Naples 'Federico II', Italy)
    Abstract: We analyse in a Footloose Capital productive public services provided by a central government aiming at reducing regional disparities. Two countervailing effects occur – one upon productivity and another upon local demand – the relative strength of which depends upon the financing scheme. Only if the “rich” region contributes sufficiently to the financing of the public services in the “poor” region, the poor region will actually gain. In studying these questions we pay particular attention to the dynamic adjustment processes and to the role of trade freeness.
    JEL: H4 R1 R12 F12
    Date: 2007–10
  10. By: Iconio Garrì (DEP, Università Cattolica)
    Abstract: Political short-termism obtains when a politician provides a public good that gives an immediate payoff while it would be optimal for the society that he provided a public good that gives a payoff only in the future. We consider a simple two-period political agency model and study whether reelection concern may give rise to political short-termism when voters are rational. We show that this can indeed be the case when politicians differ in their motivation and are better informed than the citizens: good politicians may (suboptimally) provide a public good that gives an immediate payoff because if they provided a public good that gives a payoff only in the second term, the citizens would consider it sufficiently likely that they are bad politicians and would therefore choose not to reelect them. Reelection concern may therefore reduce social welfare because of the undisciplining effect on the good politicians. Quite surprisingly, short-termism may however also be optimal for the society, because it gives rise to two additional effects on social welfare: (i) it increases the probability that in the future the office will be held by better politicians (selection effect) and (ii) bad politicians may choose to act more in line with the society's interest in order to be reelected (disciplining effect).
    Keywords: Political short-termism, electoral accountability, reputation, public goods
    JEL: D72 D82
    Date: 2007–10
  11. By: Karl Aiginger (WIFO); Alois Guger (WIFO); Thomas Leoni (WIFO); Ewald Walterskirchen (WIFO)
    Abstract: In the tradition of Esping-Andersen a number of welfare state models have been characterised. In this paper we analyse the economic and social performance of these different welfare regimes on an encompassing empirical basis both in the long run and with respect to their adaptability to the challenges of the last decades. While the differences with regard to growth dynamics had been very small in decades after the World War II (1960-1990), growth rates as well as the employment and social policy records have diverged in the past 15 years. The best performance is revealed for the extreme types of the Scandinavian model and for the liberal Anglo-Saxon model, while the continental model produced low growth and increasing unemployment. The reforms primarily in the Scandinavian countries allow us to delineate elements of a "New Welfare State Architecture" which on the one hand upholds important characteristics of a European social model, but on the other hand allows welfare states to be competitive in the globalising economy. The vision of such a European socio-economic model could be the redirection of incentives in such a way that the welfare state is able to shift from a burden (increasing costs and lowering flexibility) to a productive force.
    Keywords: welfare state, social model, economic performance, reform policies
    Date: 2007–10–16

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