nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒02‒16
thirteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Toward an Efficiency Rationale for the Public Provision of Private Goods By Hanming Fang; Peter Norman
  2. Optimal Provision of Multiple Excludable Public Goods By Hanming Fang; Peter Norman
  3. Institutions, Motivations and Public Goods: Theory, Evidence and Implications for Environmental Policy By Andrew Reeson
  4. Decentralisation and Political Business Cycle: Fund Utilization of the MP-LADS in India By Pal, Rupayan; Das, Aparajita
  5. Governance of Decentralised Pay Setting in Selected OECD Countries By Knut Rexed; Chris Moll; Nick Manning; Jennifer Allain
  6. Tax Loss Offset Restrictions - Last Resort for the Treasury? : An Empirical Evaluation of Tax Loss Offset Restrictions Based on Micro Data By Nadja Dwenger
  7. An Analysis of Effective Marginal Tax Rates in Quebec By Jean-Yves Duclos; Bernard Fortin; Andrée-Anne Fournier
  8. Contributing or Free-Riding?  A Theory of Endogenous Lobby Formation By Taiji Furusawa; Hideo Konishi
  9. The tax treatment of homeowners and landlords and the progressivity of income taxation By Matthew Chambers; Carlos Garriga; Don Schlagenhauf
  10. Should Continued Family Firms Face Lower Taxes Than Other Estates? By Grossmann, Volker; Strulik, Holger
  11. Do High Oil Prices Justify an Increase in Taxation in a Mature Oil Province? The Case of the UK Continental Shelf By Carole Nakhle
  12. Towards Government at a Glance: Identification of Core Data and Issue related to Public Sector Efficiency By Zsuzsanna Lonti; Matt Woods
  13. Public Investment and Growth: The Role of Corruption' By M. Emranul Haque; Richard Kneller

  1. By: Hanming Fang; Peter Norman
    Abstract: This paper shows that public provision of private goods may be justified on pure efficiency grounds in an environment where individuals consume both public and private goods. The government's involvement in the provision of private goods provides it with information about individuals' private good purchases that facilitates more efficient revenue extraction for the provision of public goods. We show that public provision of the private good improves economic efficiency under a condition that is always fulfilled under stochastic independence and satisfied for an open set of joint distributions. Our model is an example where there is efficiency loss from separating revenue and expenditure problems in public finance, and is therefore of more general interest for the study of optimal taxation.
    JEL: D61 D82 H21 H42
    Date: 2008–02
  2. By: Hanming Fang; Peter Norman
    Abstract: This paper studies the optimal provision mechanism for multiple excludable public goods when agents' valuations are private information. For a parametric class of problems with binary valuations, we demonstrate that the optimal mechanism involves bundling if a regularity condition, akin to a hazard rate condition, on the distribution of valuations is satisfied. Bundling alleviates the free riding problem in large economies in two ways: first, it may increase the asymptotic provision probability of socially efficient public goods from zero to one; second, it decreases the extent of use exclusions. If the regularity condition is violated, then the optimal solution replicates the separate provision outcome.
    JEL: H41
    Date: 2008–02
  3. By: Andrew Reeson (CSIRO Sustainable Ecosystems, Australia)
    Abstract: In economic terms, the environment is largely a public good. Contributing to a public good is costly to an individual, while the benefits are enjoyed by all. Despite this, many people voluntarily contribute to public goods, both in laboratory economic experiments and through day-to-day environmental decisions. These voluntary contributions are largely motivated intrinsically, that is satisfaction comes from the act itself rather than external rewards. Policy interventions are often required to increase the provision of public goods to the socially optimal level, which usually take the form of extrinsic incentives such as payments or regulations. Theoretical and empirical evidence from psychology and economics suggests that such extrinsic incentives can crowd out the intrinsic motivations which underlie voluntary contributions. As a result, a policy may have less than the anticipated impact. It is even possible for a costly policy intervention to lead to a decrease in overall public good provision, as individuals cease to contribute voluntarily. This paper argues that environmental policy design should proceed with caution in the presence of intrinsic motivations. Weak regulations and small, competitive financial incentives have the greatest potential for negative effects. Recognising and supporting existing efforts can crowd in, rather than crowd out, voluntary contributions. With careful design and implementation, there is the potential to maintain and support intrinsic motivations while also providing robust extrinsic incentives.
    Keywords: public goods; environmental policy; intrinsic motivation; crowding out
    JEL: H4 Q0
    Date: 2008–01
  4. By: Pal, Rupayan; Das, Aparajita
    Abstract: The Members of Parliament Local Area Development Scheme (MP-LADS) came in effect in 1993, closely followed by the 73rd Amendment to the Constitution, along with the wave of democratic decentralisation process in India. The MP-LADS allows for a fixed amount, non-lapsable Rs. 2 crores per year for each Member of the Parliament (MP), at the discretion of the MPs to carry out developmental works of capital nature in their respective constituencies. In last 14 years, more than 8 times of the annual expenditure on higher education by the central government has been spent on the MP-LADS. This paper examines whether there is any political business cycle in spending funds under the MP-LADS, its extent, and determinants. We find that there are political business cycles in spending by the MPs, and its extent varies across Lok Sabha constituencies. The extent of political business cycle is lower in case of leftist MPs compared to that in case of centrist and rightist MPs. Higher degree of competition faced in the last election by an MP induces him/her to misuse the scheme more severely, and younger MPs seems to be less inclined to generate political business cycle in spending. We also find that higher level of awareness of general citizens and better law and order conditions in states restricts MPs from misusing funds to gain political mileage.
    Keywords: Decentralisation; Political Business Cycle; Local Area Development; Members of Parliament
    JEL: D7 O53 H7
    Date: 2008–02–01
  5. By: Knut Rexed; Chris Moll; Nick Manning; Jennifer Allain
    Abstract: The need for more differentiated pay setting in the public sector is probably the most important driver behind decentralisation. Both the labour market and the public activities have become less homogeneous, and public administrations need – just like any other employer – to develop pay-setting arrangements that are sufficiently flexible to enable an adaptation of pay systems and pay structures.
    Date: 2007–04
  6. By: Nadja Dwenger
    Abstract: In Germany, the tax loss carry-forward of corporations significantly increased over the last decade. At the same time only a small percentage of losses have been effectively offset in the following periods. One potential reason for this puzzle is that stricter loss offset restrictions have been introduced in recent years. I use a newly developed micro simulation model for the corporate sector in Germany to evaluate the fiscal effects of these restrictions. Additionally, distributional breakdowns concerning the amounts of tax loss carry-forward and the effects of loss offset restrictions are provided. I find that the restrictions on the use of tax loss carryback are rather ineffective while the newly introduced minimum taxation considerably increases yearly tax revenue by 1.1 billion €.
    Keywords: Micro simulation, loss offset restrictions, corporate taxation, tax loss carryforward, tax loss carry-back, tax reform
    JEL: H25 C8
    Date: 2008
  7. By: Jean-Yves Duclos; Bernard Fortin; Andrée-Anne Fournier
    Abstract: This article draws up a portrait of effective marginal tax rates (EMTRs) on labour income in Quebec. It aims at allowing a better understanding of the impact of tax policy on the behavior of economic agents. Using an accounting microsimulation model that reproduces the system of taxes and transfers in 2002 Quebec, we measure the EMTRs that result from the interaction of the mechanisms of income taxation and redistribution. Moreover, we evaluate the distribution of EMTRs in the population. The analysis of EMTRs shows, inter alia, that family policy, whose assistance is targeted towards low-income families, generates high levels of EMTRs ascribable to the generally fast reduction of transfers as income increases. More than a quarter of heads of single-parent households face an EMTR which can reach, and even exceed, 80%. As for the two-parent families, they mostly face EMTRs of around 50%. We show the importance of accounting for EMTR heterogeneity, both with respect to types of families and levels of incomes, as well as evaluating the variability of EMTRs in the population.
    Keywords: Effective tax rates, taxation, microsimulation, family policy
    JEL: D31 D63 H21 H24 I38
    Date: 2007
  8. By: Taiji Furusawa (Hitotsubashi University); Hideo Konishi (Boston College)
    Abstract: We consider a two-stage public goods provision game: In the first stage, players simultaneously decide if they will join a contribution group or not. In the second stage, players in the contribution group simultaneously offer contribution schemes in order to influence the government's choice on the level of provision of public goods. Using perfectly coalition-proof Nash equilibrium (Bernheim, Peleg and Whinston, 1987 JET), we show that the set of equilibrium outcomes is equivalent to an "intuitive" hybrid solution concept, the free-riding-proof core, which is always nonempty but does not necessarily achieve global efficiency. It is not necessarily true that an equilibrium lobby group is formed by the players with highest willingness-to-pay, nor is it a consecutive group with respect to their willingnesses-to-pay. We also show that the equilibrium level of public goods provision shrinks to zero as the economy is replicated.
    Keywords: common agency, public good, free rider, core, lobby, coalition formation, coalition-proof Nash equilibrium
    JEL: C71 C72 F13 H41
    Date: 2008–02–11
  9. By: Matthew Chambers; Carlos Garriga; Don Schlagenhauf
    Abstract: This paper analyzes the connection between the asymmetric tax treatment of homeowners and landlords and the progressivity of income taxation using a quantitative overlapping generations general equilibrium model with housing and rental markets. Our model emphasizes the determinants of tenure choice (owning versus renting) and the household decision to supply housing services to the rental market. This formulation breaks the link between the rental price and the equilibrium interest rate. Hence, the aggregate supply of rental property responds differently to the direction of rental price changes, marginal tax rate changes, and maintenance cost changes. We show that the model replicates the key factors and the distributional patterns of ownership, house size, and landlords. The degree of progressivity in the income tax code has important implications for housing tenure and housing consumption. We find that a movement toward a less progressive income tax code can generate sizable increases in homeownership and welfare that result from the equilibrium effects and a portfolio reallocation mechanism absent in economies with single assets (e.g., Conesa and Krueger 2006). We find that the removal of existing asymmetries in the tax code has effects on housing that differ from those reported in the literature. We show that housing policy can increase the ownership rate of a particular segment of the population but generate nontrivial distributional costs. The welfare increases are no larger than those found when the progressivity of the tax code is reduced.
    Date: 2008
  10. By: Grossmann, Volker; Strulik, Holger
    Abstract: Inheritance taxes may induce heirs to discontinue family firms. Because firm dissolution incurs transaction costs, a preferential tax treatment of transferred family businesses seems to be desirable from a macroeconomic viewpoint. The support of dynastic succession, however, entails also a cost on the economy if firm continuation by less able heirs prevents entry into entrepreneurship. Here, we investigate analytically and quantitatively the trade-off between transaction costs saved and creative destruction prevented. We find that a unique general equilibrium exists at which, depending on the institutional setup, low-ability heirs either abandon (Type 1) or continue (Type 2) a family business. A calibration of the model with German data suggests that preferential tax treatment of family firms has severe negative consequences on macroeconomic performance if it causes a threshold crossing from Type 1 to Type 2 equilibrium. It also reveals that the targeted persons, i.e. the entrepreneurs that are caused to continue a business, always lose relative to their status in an economy without continuation-friendly tax policy.
    Keywords: Bequest Taxation, Creative Destruction, Entrepreneurship, Family Firms, Preferential Tax Treatment.
    JEL: H25 L26 J24
    Date: 2008–02
  11. By: Carole Nakhle (Surrey Energy Economics Centre (SEEC), Department of Economics, University of Surrey)
    Abstract: In response to the structural shift in oil price coupled with greater import dependency, concerns about security of supply have once again emerged as a major policy issue. The UK, the largest producer of oil and natural gas in the European Union, became a net importer of natural gas in 2004, and, according to Government estimates, will become a net importer of oil by the end of the decade. A weakened North Sea performance means extra reliance, both for the UK and Europe as a whole, on global oil and gas network and imports. In 2002, the UK Government introduced a 10 per cent supplementary charge and in 2005, doubled the charge to 20 per cent in an attempt to capture more revenues from the oil industry because of the increase in the price of crude oil. However, higher tax rates do not necessarily generate higher fiscal revenue and in the long term may result in materially lower revenues if investment is discouraged. It is therefore argued that the increase in the fiscal take came at the wrong time for the UK Continental Shelf and that the UK Government’s concern should have been to encourage more oil production from its declining province, especially in the light of the rising concern surrounding the security of supply.
    Keywords: Petroleum Taxation, Energy Security, Oil Price
    Date: 2007–02
  12. By: Zsuzsanna Lonti; Matt Woods
    Abstract: This is the second in a series of three annual papers that the OECD is publishing in preparation for its major biennial publication, Government at a Glance. This paper focuses on two main themes: (1) the identification of core data for Government at a Glance, and (2) the publication of existing data that help assess the efficiency of government. It recommends that the main focus of the future publication should be on public administration. Core data to be included in “Government at a Glance” entails indicators on government revenue and expenditure structures; employment and compensation in the public domain; executive governance outcomes; and institutional arrangements such as budget procedures, HRM practices, performance management, and e government, including the quality aspects of them, called machinery of public administration outputs and outcomes (i.e. intermediate outputs and outcomes). Information on the structure of government is also suggested for inclusion since this is an antecedent to and/or constraint on government action
    Date: 2008–01
  13. By: M. Emranul Haque; Richard Kneller
    Abstract: In this paper, we examine the growth effects of public investment in the presence of corruption. Our methodology improves on previous research on this topic by explicitly recognizing the role of simultaneity between public investment, corruption and growth and the possible biases arising from omission of correlated variables from the single reduced form equation based analysis. We use three-stage least squares method in a panel set up for a system of four equations on growth, public investment, corruption and private investment. Our primary results are twofold. First, corruption increases public investment. Second, corruption reduces the returns to public investment and makes it ineffective in raising economic growth.
    Date: 2008

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