nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒03‒08
ten papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. The Impact of Fiscal Equalization on Local Expenditure Policies: Theory and Evidence from Germany By Hauptmeier, Sebastian
  2. Interregional Disparities in Productivity and the Choice of Fiscal Regime By Kimiko Terai
  3. Public Debt as Private Wealth By Schlicht, Ekkehart
  4. Fiscal policy for growth and development in Tajikistan By Canagarajah, Sudharshan; Brownbridge, Martin
  5. The fiscal impact of foreign aid in Rwanda : a theoretical and empirical analysis By Lahiri, Sajal; Kebede, Ephraim; Ezemenari, Kene
  6. Integrating Income Tax and National Insurance: an interim report By Stuart Adam; Glen Loutzenhiser
  7. Institutions, Motivations and Public Goods: Theory, Evidence and Implications for Environmental Policy By Andrew Reeson
  8. Does partisan alignment affect the electoral reward of intergovernmental transfers? By Albert Solé-Ollé; Pilar Sorribas-Navarro
  9. Governance arrangements for state owned enterprises By Vagliasindi, Maria
  10. Public Finance in China since the Late Qing Dynasty By Krug, B.

  1. By: Hauptmeier, Sebastian
    Abstract: This paper uses a simple model of fiscal competition in taxes and public inputs among local jurisdictions to analyze the incentive effects of fiscal equalization transfers. We find that a budget-compensated increase in the contribution rate to a system of fiscal equalization not only induces higher local tax rates (e.g., Koethenbuerger, 2002; Bucovetsky and Smart, 2006) but also lower budgetary shares of the public input to production. The subsequent empirical analysis is based on a rich data set of German municipalities and provides strong evidence for the existence of an incentive of fiscal equalization transfers on local expenditure policies.
    Keywords: Fiscal competition, Fiscal equalization, Public inputs, Regression discontinuity approach, Germany
    JEL: H72 H77
    Date: 2007
  2. By: Kimiko Terai (Hosei University)
    Abstract: Two districts with divergent productivity levels engage in policy-making on the provision of local public goods that enhance future income and hence create a dynamic linkage across periods. The policy choices of district representatives are derived under alternative fiscal systems, and the problem of system selection is examined. It is shown that a decentralized system is more likely to be selected in a more equal society. On the other hand, when a great deal of benefit spills over from a local public good, or when policy makers are expected to care solely about the immediate effects of their decisions on their districts, a centralized system is more likely to be selected.
    Keywords: Interregional and intergenerational spillovers; Decentralization; Centralization; Disparity in productivity; Dynamic political economy model
    JEL: H23 H41 H73 H77
    Date: 2008–02
  3. By: Schlicht, Ekkehart
    Abstract: Government bonds are interest-bearing assets. Increasing public debt increases income, wealth, and consumption demand. The smaller government expenditure is, the larger consumption demand must be in equilibrium, and the larger must be public debt. Conversely, lower public debt implies higher government spending and taxation. Public debt plays, thus, an important role in establishing equilibrium. It distributes output between consumers and government. In case of insufficient demand, a larger public debt entails higher consumption and less public spending. If upper bounds on public debt are introduced (as in the Maastricht treaty), such constraints place lower bounds on taxation and public spending or may even rule out the existence of macroeconomic equilibrium altogether. Domar(1944) and Gehrels(1957) have discussed similar issues in an unemployment setting. In contrast, this note considers the full employment case and looks at adjustments in debt, taxes and government spending that preserve full employment. The explicit modelling of some adjustment processes that have not been considered in the earlier contributions leads to somewhat different and, in a sense, more "debt-friendly" results.
    Keywords: stabilization policy; government debt; public debt; functional finance; Maastricht treaty; Ricardian equivalence
    JEL: E2 E12 E6 H6
    Date: 2008–02
  4. By: Canagarajah, Sudharshan; Brownbridge, Martin
    Abstract: Tajikistan ' s economy has recovered strongly after the collapse of the 1990s, but sustaining rapid economic growth over the long term and reducing poverty present major challenges for policymakers. This paper contributes to the debate over the strategic role for fiscal policy to play in meeting these challenges, utilizing the " fiscal space " approach to assess the long-term potential for expanding public provision of growth-promoting goods and services and evaluating the priorities for public spending. It also analyzes the long-term risks to fiscal sustainability, from external public debt and the quasi fiscal deficit of the electricity sector. The paper contends that institutional reforms in key areas, notably public financial management, tax administration, and the energy sector, are crucial for generating fiscal space and for ensuring that higher levels of public spending are translated into stronger economic growth and poverty reduction. The priorities for government spending should be education, health, and the maintenance of the core networks of the existing infrastructure for energy and transport, rather than new public investment projects.
    Keywords: Public Sector Expenditure Analysis & Management,Debt Markets,,Banks & Banking Reform,Access to Finance
    Date: 2008–02–01
  5. By: Lahiri, Sajal; Kebede, Ephraim; Ezemenari, Kene
    Abstract: The inflow of large quantities of foreign aid into Rwanda since 1994 can have potential adverse effects such as aid dependency via a significant negative effect on tax efforts and on public investments. This paper carries out a theoretical and empirical study to examine these issues. The theoretical part develops a model in which the recipient government decides on the optimal level of tax and optimally allocates total government revenue between current expenditure and public investment. The theoretical model makes it possible to empirically test whether an increase in aid is likely to reduce the optimal tax rate and the proportion of public expenditure allocated to public investment. The econometric analysis uses time series data on Rwanda to show, in line with other studies in the literature, a negative relationship between increased aid and the tax rate; but the magnitude of the effects are extremely small. In the case of Rwanda, reforms to the tax administration and expansion of the tax base have had mitigating effects. As far as the effect on public investment, the overall effect was negative in the past; however, since 1995 the direction of this effect has changed.
    Keywords: Debt Markets,Economic Theory & Research,Public Sector Economics & Finance,,Access to Finance
    Date: 2008–02–01
  6. By: Stuart Adam (Institute for Fiscal Studies); Glen Loutzenhiser
    Abstract: <p><p><p>Income Tax and National Insurance are now sufficiently similar that merging them appears to be a plausible option, yet still sufficiently different that integration raises significant difficulties. This paper surveys the potential benefits of integration - increased transparency and reduced administrative and compliance costs - and the potential obstacles, assessing the extent to which each of the differences between Income Tax and NICs - in particular the contributory principle, the levying of an employer charge and the differences in tax base - constitute serious barriers to integration. The paper concludes that few of the difficulties look individually prohibitive, but that trying too hard to avoid significant reform of the current policy framework could produce a merged tax so complicated as to nullify much or all of the benefits of integration.</p></p></p>
    Keywords: Taxation, social insurance, administration
    JEL: H24 H25 H83 K34
    Date: 2007–12
  7. 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
  8. By: Albert Solé-Ollé (Universitat de Barcelona (UB); Institut d'Economia de Barcelona (IEB); CESifo); Pilar Sorribas-Navarro (Universitat Barcelona (UB); Institut d'Economia de Barcelona (IEB))
    Abstract: In this paper we test the hypothesis that intergovernmental grants allocated to co-partisans buy more political support than grants allocated to local governments controlled by opposition parties. We use a rich Spanish database containing information about the grants received by 617 municipalities during the period 1993-2003 from two different upper-tier governments (Regional and Upper-local), as well as data of municipal voting behaviour at three electoral contests held at the different layers of government during this period. Therefore, we are able to estimate two different vote equations, analysing the effects of grants given to aligned and unaligned municipalities on the vote share of the incumbent party/parties at the regional and local elections. We account for the endogeneity of grants by instrumenting them with the average amount of grants distributed by upper-layer governments. The results suggest that grants given to co-partisans buy some political support, but that grants given to opposition parties do not bring any votes, suggesting that the grantee reaps as much political credit from intergovernmental grants as the grantor
    Keywords: Voting, parties, grants.
    JEL: C72 D72
    Date: 2008
  9. By: Vagliasindi, Maria
    Abstract: The aim of this paper is to shed new light on key challenges in governance arrangements for state owned enterprises in infrastructure sectors. The paper provides guidelines on how to classify the fuzzy and sometimes conflicting development goals of infrastructure and the governance arrangements needed to reach such goals. Three policy recommendations emerge. First, some of the structures implied by internationally adopted principles of corporate governance for state owned enterprises favoring a centralized ownership function versus a decentralized or dual structure have not yet been sufficiently " tested " in practice and may not suit all developi ng countries. Second, general corporate governance guidelines (and policy recommendations) need to be carefully adapted to infrastructure sectors, particularly in the natural monopoly segments. Because the market structure and regulatory arrangements in which state owned enterprises operate matters, governments may want to distinguish the state owned enterprises operating in potentially competitive sectors from the ones under a natural monopoly structure. Competition provides not only formidable benefits, but also unique opportunities for benchmarking, increasing transparency and accountability. Third, governments may want to avoid partial fixes, by tackling both the internal and external governance factors. Focusing only on one of the governance dimensions is unlikely to improve SOE performance in a sustainable way.
    Keywords: National Governance,Banks & Banking Reform,Public Sector Economics & Finance,Debt Markets,Public Sector Expenditure Analysis & Management
    Date: 2008–03–01
  10. By: Krug, B. (Erasmus Research Institute of Management (ERIM), RSM Erasmus University)
    Abstract: How is “public finance†organized in China? Is China’s public finance system different from that of other countries? Can we detect features which link today’s system to the past? Public finance refers to more than annual state budgets and constitutional procedures. It includes foreign debt, state monopolies or monetary policies, all of which played a crucial role in China’s public finance during the last hundred years. A purely legislative definition obscures the fact that changes in public finance have contributed to the collapse of political regimes such as Imperial China (1911), Republican China (1927), and KMT-China (1945), as well engendered regime changes in 1949, 1961 and 1978. From a more comprehensive economic perspective public finance in China encompasses institutions, organizations and policies.
    Keywords: public finance;China;imperial China;republican China;KMT-China
    Date: 2008–02–05

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