nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒05‒17
thirteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Optimal Democratic Mechanisms for Taxation and Public Good Provision By Felix Bierbrauer; Marco Sahm
  2. Apportionment, Fiscal Equalization and Decentralized Tax Enforcement By Christian Traxler; Andreas Reutter
  3. Testing the tax competition theory: How elastic are national tax bases in Western Europe? By Aleksandra Riedl; Silvia Rocha-Akis
  4. Learning, public good provision, and the information trap By Aleksander Berentsen; Esther Bruegger; Simon Loertscher
  5. The Unequal Geographic Burden of Federal Taxation By David Y. Albouy
  6. Voting the public expenditure: an experiment By Carla Marchese; Marcello Montefiori
  7. The private and fiscal returns to schooling and the effect of public policies on private incentives to invest in education: a general framework and some results for the EU By Angel de la Fuente; Juan Francisco Jimeno
  8. Unionisation triggers tax incentives to attract foreign direct investment By Haufler, Andreas; Mittermaier, Ferdinand
  9. Private operation with public supervision: evidence of hybrid modes of governance in brazilian prisons By Cabral, Sandro; Lazzarini, Sergio G.; Azevedo, Paulo F.
  10. Success in the University Admission Process in Germany : Regional Provenance Matters By Sebastian Braun; Nadja Dwenger
  12. Optimal penalty for investment delay in public procurement contracts By Chiara D'Alpaos; Michele Moretto; Paola Valbonesi
  13. How are Preferences Revealed? By John Beshears; James J. Choi; David Laibson; Brigitte C. Madrian

  1. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn); Marco Sahm (University of Munich)
    Abstract: We study the interdependence of optimal tax and expenditure policies. An optimal policy requires that information on preferences is made available. We first study this problem from a general mechanism design perspective and show that efficiency is possible only if the individuals who decide on public good provision face an own incentive scheme that differs from the tax system. We then study democratic mechanisms with the property that tax payers vote over public goods. Under such a mechanism, efficiency cannot be reached and welfare from public good provision declines as the inequality between rich and poor individuals increases.
    Keywords: Public goods, optimal taxation, two-dimensional heterogeneity, asymmetric information
    JEL: H41 D71 D72 D82
    Date: 2008–03
  2. By: Christian Traxler (Max Planck Institute for Research on Collective Goods, Bonn); Andreas Reutter (University of Konstanz)
    Abstract: We study tax evasion and decentralized tax enforcement in a federal economy with mobile capital and the endogenous formation of multiregional companies. Regions use their enforcement policy as a strategic instrument to engage in fiscal competition. Within this framework, we analyze the uncoordinated policy choice under formula apportionment (FA) and compare it to the incentives which derive from fiscal equalization (FE). As both systems redistribute collected revenues but not enforcement costs, they distort the regions' incentives to enforce taxes. At the same time, jurisdictions partially internalize the fiscal externalities caused by their enforcement policy. We show that the tradeoff between these two opposing effects differs between FA and FE, and crucially depends on the degree of interregional firm integration under FA. We discuss conditions under which FA, FE or a joint system of FA cum FE provides the ‘best’ incentives for decentralized tax enforcement.
    Keywords: Tax Enforcement, Tax Evasion, Formula Apportionment, Fiscal Equalization, Tax Revenue Sharing
    JEL: H77 H71 H26
    Date: 2008–04
  3. By: Aleksandra Riedl (Institute for Economic Geography and GIScience, Vienna University of Economics and Business Administration,); Silvia Rocha-Akis (Department of Economics, Vienna University of Economics and Business Administration,)
    Abstract: In this paper, we test one of the fundamental assumptions in the tax competition literature, namely, that a country's taxable income depends on the tax policies pursued in the domestic and in neighbouring countries. Based on a panel of annual data of 14 Western European countries spanning the period 1982 to 2004, we show that the common trend in falling corporate income tax (CIT) rates can in part be explained by the existence of fiscal externalities in the form of international resource flows. Our results confirm the presumption put forward in recent empirical tax reaction function studies, that interdependent tax setting behaviour is evidence of tax competition. However, taxable corporate income is shown to react inelastically to domestic and to foreign tax rates. Thus, the observed rise in CIT revenues in Europe between 1982 and 2004 cannot be explained by the trend in falling CIT rates. Moreover, we find that large countries' tax bases are more responsive to neighbouring countries' tax policies, which is in contrast to the classic asymmetric tax competition literature.
    Keywords: tax competition, corporate income tax base elasticity, asymmetric countries,instrumental variables, spatial econometrics.
    JEL: H71 H72 H77 H87 C21 C23
    Date: 2008–04–28
  4. By: Aleksander Berentsen; Esther Bruegger; Simon Loertscher
    Abstract: We consider an economy where decision maker(s) do not know the true production function for a public good. By using Bayes rule they can learn from experience. We show that the economy may learn the truth, but that it may also converge to an inefficient policy where no further inference is possible so that the economy is stuck in an information trap. We also show that our results are robust with respect to experimentation.
    Keywords: Public economics, learning, size of government
    JEL: D72 H10 D83
    Date: 2008–05
  5. By: David Y. Albouy
    Abstract: In the United States, workers in cities offering above-average nominal wages – cities with high productivity, low quality-of-life, or inefficient housing sectors – pay 30 percent more in federal taxes than otherwise identical workers in cities offering below-average wages. According to simulation results, federal taxes lower long-run employment levels in high-wage areas by 15 percent and land and housing prices by 25 and 4 percent, leading to locational inefficiencies costing 0.28 percent of income, or $34 billion in 2005. Indexing taxes to local wage-levels eliminates these locational inefficiencies. Tax deductions index taxes partially to local cost-of-living and improve locational efficiency.
    JEL: H24 H5 H77 J61 R1
    Date: 2008–05
  6. By: Carla Marchese; Marcello Montefiori
    Abstract: This paper considers the problem of voting about the quantity of a public good. An experiment has been run in order to test the extent of the strategic bias that arises in the individual vote when the social choice rule is to select the mean of the quantities voted for; conflicting theoretical predictions are available in the literature on this purpose. The political implications of the mean rule and its effects upon efficiency are also discussed.
    Keywords: experiment, voting rule, public good
    JEL: C91 D72
    Date: 2008–05
  7. By: Angel de la Fuente; Juan Francisco Jimeno
    Abstract: This paper develops a comprehensive framework for the quantitative analysis of the private and fiscal returns to schooling and of the effect of public policies on private incentives to invest in education. This framework is applied to 14 member states of the European Union. For each of these countries, we construct estimates of the private return to an additional year of schooling for an individual of average attainment, taking into account the effects of education on wages and employment probabilities after allowing for academic failure rates, the direct and opportunity costs of schooling, and the impact of personal taxes, social security contributions and unemployment and pension benefits on net incomes. We also construct a set of effective tax and subsidy rates that measure the effects of different public policies on the private returns to education, and measures of the fiscal returns to schooling that capture the long-term effects of a marginal increase in attainment on public finances under conditions that approximate general equilibrium.
    Keywords: returns to schooling
    JEL: I20 J31 H60
    Date: 2008–03–15
  8. By: Haufler, Andreas; Mittermaier, Ferdinand
    Abstract: This paper analyses tax competition between a unionised and a non-unionised country for the location of an outside firm. We show that unionisation offers an extra incentive for the government to attract a foreign competitor to a concentrated domestic market, in order to affect the behaviour of the domestic union. This results in the unionised country's government offering a tax discount (or a subsidy premium) to the outside firm in excess of what is needed to compensate the investor for the higher union wage. In equilibrium, therefore, the unionised country can attract the outside firm even if it has other location disadvantages, such as a smaller home market.
    Keywords: tax competition; trade unions; foreign direct investment
    JEL: H H J
    Date: 2008–05
  9. By: Cabral, Sandro; Lazzarini, Sergio G.; Azevedo, Paulo F.
    Date: 2007–10
  10. By: Sebastian Braun; Nadja Dwenger
    Abstract: School education in Germany is under the responsibility of the federal states and as a consequence average grades differ widely across regions. Since school leavers apply nationwide for admission to university, regional provenance may thus matter a lot for the success probability in the admission process. Using a comprehensive dataset of the German central clearing house for university admissions in 2006/2007, we show that success rates indeed differ dramatically between federal states, provided that grades are not made comparable across state boundaries. Most of the variation in success can be explained by state-level differences in grading. By defining quotas for federal states and restricting competition among applicants to the state-level, the link between state-level grading and success rates in the university admission process can be broken.
    Keywords: Admission to university, central clearing house, federalism, federal education system
    JEL: C21 I23 H77
    Date: 2008
  11. By: Antonio Estache (World Bank and, the European Centre for Advanced Research in Economics and Statistics at the Free University of Brussels); Jean-François Perrault (GREDI, Faculte d'administration, Université de Sherbrooke); Luc Savard (GREDI, Faculte d'administration, Université de Sherbrooke)
    Abstract: In this paper we construct an archetype CGE model and apply it to six sub-Saharan African countries to explore the impact of scaling up infrastructure in African countries. As part of the debate on the importance of scaling up infrastructure to stimulate growth and provide a push to African economies, some analysts have raised concerns on providing massive financing for the construction of these infrastructures as the process can create major distortion in the economies and have a negative impact by creating Dutch disease symptoms (Adam and Bevan 2006). This study aims to provide some insight into this debate. It draws from the infrastructure productivity literature to postulate positive productive externalities of new infrastructure and Fay and Yepes (2003) for operating cost associated with new infrastructure. We compare various infrastructure investment funded with different fiscal tools. These investments scenarios are compared to non productive investment that can be interpreted as a business as usual scenario. Our results show that increase in infrastructure investment does produce slight Dutch disease effects but the negative impacts are strongly dependent on the type of investments performed and type of financing scheme used. Moreover, the growth effects we introduced contribute to attenuate the negative effects.
    Keywords: Investment externalities, foreign aid, exchange rate, fiscal reforms
    JEL: C68 E62 F35 H54
    Date: 2008
  12. By: Chiara D'Alpaos (Universita' di Padova); Michele Moretto (Universita' di Padova); Paola Valbonesi (Universita' di Padova)
    Abstract: Our aim in this paper is to provide a general framework in which to determine the optimal penalty fee inducing the contractor to respect the contracted delivery date in public procurement contracts (PPCs). We do this by developing a real option model that enables us to investigate the contractor's value of investment timing flexibility which the penalty rule - de facto - introduces. We then apply this setting in order to evaluate the range of penalty fees in the Italian legislation on PPCs: according to our calibration analysis, there is no evidence that the substantial delays recorded in the execution times of Italian investments are to be due to incorrectly set penalty fees. This result opens the way for other explanations of delays in PPCs: we thus extend our model to include the probability that the penalty is ineffectively enforced and study how calibration results are accordingly affected. We finally show how our model can be used to investigate both the case of a penalty/premium rule and the one of an optimal penalty fee in a concession contract.
    Keywords: public procurement contracts, penalty fee, investment timing flexibility, investment irreversibility, contract incompleteness, enforceability of rules.
    JEL: L33 H57 D81
    Date: 2008–05
  13. By: John Beshears; James J. Choi; David Laibson; Brigitte C. Madrian
    Abstract: Revealed preferences are tastes that rationalize an economic agent’s observed actions. Normative preferences represent the agent's actual interests. It sometimes makes sense to assume that revealed preferences are identical to normative preferences. But there are many cases where this assumption is violated. We identify five factors that increase the likelihood of a disparity between revealed preferences and normative preferences: passive choice, complexity, limited personal experience, third- party marketing, and intertemporal choice. We then discuss six approaches that jointly contribute to the identification of normative preferences: structural estimation, active decisions, asymptotic choice, aggregated revealed preferences, reported preferences, and informed preferences. Each of these approaches uses consumer behavior to infer some property of normative preferences without equating revealed and normative preferences. We illustrate these issues with evidence from savings and investment outcomes.
    JEL: A11 B4 D01 D60 G11 H1
    Date: 2008–05

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