nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒09‒13
nineteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Does urban sprawl increase the costs of providing local public services? Evidence from Spanish municipalities By Albert Solé-Ollé; Miriam Hortas Rico
  2. Devolution, accountability, and service delivery : some insights from Pakistan By Hasnain, Zahid
  3. Corporate Taxation and the Welfare State By Christian Keuschnigg
  4. Fiscal policy instruments for reducing congestion and atmospheric emissions in the transport sector : a review By Timilsina, Govinda R.; Dulal, Hari B.
  5. The Framing of Games and the Psychology of Play By Heike Hennig-Schmidt
  6. Anticipating Tax Changes: Evidence from the Finnish Corporate Income Tax Reform of 2005 By Seppo Kari; Hanna Karikallio; Pirttilä; Jukka
  7. Imputed Rental Income, Taxation and Income Distribution in Finland By Saarimaa; Tuukka
  8. Use of simulation models for the tax reform in Slovenia By Cok, Mitja; Majcen, Boris; Verbic, Miroslav; Kosak, Marko
  9. Public Spending Patterns: the regional allocation of public investment in Greece by political period. By Yannis Psycharis
  10. The Impact of Intergovernmental Grants on Cost Efficiency: Theory and Evidence from German Municipalities By Kalb, Alexander
  11. Designing an electricity tax system in presence of international regulations and multiple public goals: An empirical assessment By Geir H. Bjertnæs, Taran Fæhn, Jørgen Aasness
  12. Financing rural development for a harmonious society in China : recent reforms in public finance and their prospects By Fock, Achim; Wong, Christine
  13. Anticipated Tax Reforms and Temporary Tax Cuts: A General Equilibrium Analysis By Strulik, Holger; Trimborn, Timo
  14. Multidimensionality and renegotiation : evidence from transport-sector public-private-partnership transactions in Latin America By Estache, Antonio; Guasch, Jose-Luis; Iimi, Atsushi; Trujillo, Lourdes
  15. Persistent Ideology and the Determination of Public Policies over Time By Song, Zheng
  16. Latin America and the social contract : patterns of social spending and taxation By Breceda, Karla; Rigolini, Jamele; Saavedra, Jaime
  17. Governance matters VII : aggregate and individual governance indicators 1996-2007 By Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
  18. Joint bidding in infrastructure procurement By Estache, Antonio; Iimi, Atsushi
  19. It's the Media, Stupid - How Media Activity Shapes Public Spending By Bruns, Christian; Himmler, Oliver

  1. By: Albert Solé-Ollé (Universitat de Barcelona & IEB); Miriam Hortas Rico (Universitat de Barcelona & IEB)
    Abstract: This paper examines the impact of urban sprawl, a phenomenon of particular interest in Spain, which is currently experiencing this process of rapid, low-density urban expansion. Many adverse consequences are attributed to urban sprawl (e.g., traffic congestion, air pollution and social segregation), though here we are concerned primarily with the rising costs of providing local public services. Our initial aim is to develop an accurate measure of urban sprawl so that we might empirically test its impact on municipal budgets. Then, we undertake an empirical analysis using a cross-sectional data set of 2,500 Spanish municipalities for the year 2003 and a piecewise linear function to account for the potentially nonlinear relationship between sprawl and local costs. The estimations derived from the expenditure equations for both aggregate and six disaggregated spending categories indicate that low-density development patterns lead to greater provision costs of local public services.
    Keywords: Urban sprawl, local public spending.
    JEL: H1 H72 R51
    Date: 2008
  2. By: Hasnain, Zahid
    Abstract: This paper studies the relationship between devolution, accountability, and service delivery in Pakistan. It examines the degree of accessibility of local policy-makers and the level of competition in local elections, the expenditure patterns of local governments to gauge their sector priorities, and the extent to which local governments are focused on patronage or the provision of targeted benefits to a few as opposed to providing public goods. The main findings of the paper are three-fold. First, the accessibility of policy-makers to citizens in Pakistan is unequivocally greater after devolution, and local government elections are, with some notable exceptions, as competitive as national and provincial elections. Second, local government sector priorities are heavily tilted toward the provision of physical infrastructure - specifically, roads, water and sanitation, and rural electrification - at the expense of education and health. Third, this sector prioritization is in part a dutiful response to the relatively greater citizen demands for physical infrastructure; in part a reflection of the local government electoral structure that gives primacy to village and neighborhood-specific issues, and in part a reaction to provincial initiatives in education and health that have taken the political space away from local governments in the social sectors, thereby encouraging them to focus more toward physical infrastructure.
    Keywords: E-Government,Public Sector Corruption&Anticorruption Measures,E-Government,Public Sector Economics&Finance,Transport Economics Policy&Planning
    Date: 2008–04–01
  3. By: Christian Keuschnigg
    Abstract: The paper compares the impact of corporate taxation and social insurance on foreign direct investment (FDI) and unemployment. Four main results are derived: (i) the optimal size of the welfare state depends on the degree of risk-aversion and the unemployment rate as a measure of labor income risk. The unemployment rate partly reflects the country's exposure to globalization; (ii) corporate taxation and social insurance have equivalent effects on unemployment and outbound FDI; (iii) while an increase in the corporate tax can raise corporate tax revenue, it is rather likely to worsen the government's total fiscal stance. A corporate tax cut can thus be self-financing due to fiscal increasing returns in the presence of a large public sector; (iv) a corporate tax should be used to contribute to welfare state financing only in exceptional cases when job creation is excessive and the unemployment rate is inefficiently low. These conditions are probably unlikely to hold in Europe's generous welfare states with high structural unemployment rates.
    Keywords: Corporate tax, foreign direct investment, unemployment, welfare state
    JEL: F21 H21 H53 J64 J65
    Date: 2008–08
  4. By: Timilsina, Govinda R.; Dulal, Hari B.
    Abstract: This paper reviews the literature on the fiscal policy instruments commonly used to reduce transport sector externalities. The findings show that congestion charges would reduce vehicle traffic by 9 to 12 percent and significantly improve environmental quality. The vehicle tax literature suggests that every 1 percent increase in vehicle taxes would reduce vehicle miles by 0.22 to 0.45 percent and CO2 emissions by 0.19 percent. The fuel tax is the most common fiscal policy instrument; however its primary objective is to raise government revenues rather than to reduce emissions and traffic congestion. Although subsidizing public transportation is a common practice, reducing emissions has not been the primary objective of such subsidies. Nevertheless, it is shown that transport sector emissions would be higher in the absence of both public transportation subsidies and fuel taxation. Subsidies are also the main policy tool for the promotion of clean fuels and vehicles. Although some studies are very critical of biofuel subsidies, the literature is mostly supportive of clean vehicle subsidies.
    Keywords: Transport Economics Policy&Planning,Environmental Economics&Policies,Transport and Environment,Taxation&Subsidies,Transport in Urban Areas
    Date: 2008–06–01
  5. By: Heike Hennig-Schmidt
    Abstract: Psychological game theory can help provide a rational choice explanation of framing effects; frames influence beliefs, beliefs influence motivations. We explain this theoretically, and explore the empirical relevance experimentally. In a 2×2 design of one-shot public good games we show that frames affect subject’s first- and second-order beliefs, and contributions. From a psychological game-theoretic framework we derive two mutually compatible hypotheses about guilt aversion and reciprocity under which contributions are related to second- and first-order beliefs, respectively. Our results are consistent with either.
    Keywords: Framing, psychological games, guilt aversion, reciprocity, public good games, voluntary cooperation
    JEL: C91 C72 D64 Z13
    Date: 2008–07
  6. By: Seppo Kari; Hanna Karikallio; Pirttilä; Jukka
    Abstract: Using register-based panel data covering all Finnish firms in 1999?2004, we examine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous vexamine how corporations anticipated the 2005 dividend tax increase via changes in their dividend and investment policies. The Finnish capital and corporate income tax reform of 2005 creates a useful opportunity to measure this behaviour, since it involves exogenous variation in the tax treatment of different types of firms. The estimation results reveal that those firms that anticipated a dividend tax hike increased their dividend payouts in a statistically significant way. This increase was not accompanied by a reduction in investment activities, but rather was associated with increased indebtedness in non-listed firms. The results also suggest that the timing of dividend distributions probably offsets much of the potential for increased dividend tax revenue following the reform. JEL Classification: H25, H32
    Keywords: Corporate income taxation, dividends, tax reform, anticipation effects
    Date: 2008–07–02
  7. By: Saarimaa; Tuukka
    Abstract: This paper analyses the effects of imputed rental income from owner-occupied housing and its taxation on income distribution in Finland. Using micro-data from the 2004 Wealth Survey produced by Statistics Finland we find that owner-occupied housing has a significant impact on the well-being of many households. In 2004 imputed rental income constituted on average about 10 percent of homeowner households? disposable income. Furthermore, including imputed rental income to household disposable income decreased overall inequality measured by the Gini index. The estimated tax revenue forgone in 2004 was 1.9 billion euros amounting to almost 15 percent of the total government income and wealth tax revenue collected that year. On the other hand, the tax subsidy resulting from non-taxation of imputed rental income is skewed toward high-income households who are more likely to be homeowners and also more likely to own outright. The paper also made a comparison of the current tax system where imputed rental income is untaxed to two alternative tenure neutral tax systems where imputed rental income is taxed. The results indicate that the effects on overall inequality depend vitally on the way the increased tax revenue is transferred back to the households. The calculations in this paper ignore any behavioural responses by the households. JEL Codes: H23, H24, R21.
    Keywords: Imputed rental income, tax subsidy, income distribution
    Date: 2008–07–02
  8. By: Cok, Mitja; Majcen, Boris; Verbic, Miroslav; Kosak, Marko
    Abstract: In 2007 Slovenia launched a comprehensive reform of its tax system. To estimate the different proposals (including a flat-tax proposal) and their overall effect on individual taxpayers and government budget a static micro-simulation model was constructed and combined with a computable general equilibrium model. It uses a large, comprehensive database (6% of the population) provided by relevant ministries and government agencies and proved to be a reliable tool during implementation of the reform. In the paper, the main characteristics of both models are presented along with the results of different reform scenarios, including those which finally passed the parliament and now form part of the Slovenian tax system.
    Keywords: tax reform; personal income tax; income inequality; microsimulation; CGE
    JEL: D63 D31 H24 H30 E60
    Date: 2008–01
  9. By: Yannis Psycharis
    Abstract: The spatial dispersion of public investment constitutes one of the principal elements and also one of the key issues concerning a country’s strategic regional development. Public investment expenditure represents in part the ‘social wage’ citizens receive, while at the same time it generates external economies for the productive sectors of the economy. Using a dataset that includes total outlays by all central, regional and local authorities, this paper traces the distribution of public investment in Greek prefectures (NUTS 3) over the period 1976-2005. It seeks to highlight the spending pattern governments of that period had followed, to compare the changes (if any) between different periods, and to explain whether redistribution of national wealth or other factors, including political ones, could be contributing to explaining the pattern and its temporal changes.
    Keywords: Public investment, regional analysis, territorial public expenditure.
    Date: 2008–05
  10. By: Kalb, Alexander
    Abstract: In this paper we use a simple bureaucracy model of fiscal illusion to analyze the impact of intergovernmental grants on the cost efficiency of local jurisdictions. We find that a higher degree of redistribution within a system of fiscal equalization or an increase in the amount of grants received by a local jurisdiction leads to an extension of organizational slack or X-inefficiency in that jurisdiction. This theoretical prediction is tested by conducting an empirical analysis using a broad panel of German municipalities. The results of the empirical analysis are consistent with the theoretical findings and therefore support the existence of a negative incentive effect of intergovernmental grants on local authorities' cost efficiency.
    Keywords: Cost efficiency, Fiscal equalisation, Intergovernmental grants, Bureaucracy, Stochastic frontier analysis, German municipalities
    JEL: H11 H77
    Date: 2008
  11. By: Geir H. Bjertnæs, Taran Fæhn, Jørgen Aasness (Statistics Norway)
    Abstract: The European competition rules restrict governments’ opportunity to differentiate terms of energy accessibility among firms and industries. This easily runs counter with regional and industrial goals of national energy policies. Norway levies a tax on use of electricity, but exempts main industrial usages. This analysis assesses alternative, internationally legal, designs of the system in terms of their effects on efficiency and distribution, including industrial objectives. Among the reforms we explore, removing the exemptions would be the most effective way of raising revenue, but it would be politically costly by deteriorating the competitiveness of today's favoured industries. An entire abolishment of the electricity tax, and replacing revenue by increased VAT, would generate a more equal distribution of standard of living and, at the same time, avoid the trade-off between efficiency and competitiveness.
    Keywords: Tax reform; Multiple policy goals; Computable general equilibrium model
    JEL: D31 D58 F15 H21 H23 J68 L52
    Date: 2008–09
  12. By: Fock, Achim; Wong, Christine
    Abstract: The Government of China has placed strong emphasis on addressing problems related to agriculture, farmers, and rural society, with the development of a"new socialist countryside"designated as a top priority for the Eleventh Five-Year Plan (2006-2010). The financing of public services in rural areas will be a key determinant of the Plan's success. This report analyzes the performance of the intergovernmental fiscal system - the financing of rural development through counties, townships, and villages - and the impact of recent reforms. The authors show that achieving the government's objectives will require channeling substantial new resources to rural areas. In addition, ensuring the effective transfer of resources and their efficient utilization will require fundamental reforms to a wide range of public institutions, including budget and planning processes, personnel management systems, and the organization of government agencies. The authors argue that a comprehensive reform strategy is needed to address fundamental vertical and horizontal imbalances in the intergovernmental fiscal system The reforms must reach beyond the fiscal system to build improved accountability mechanisms to improve public service delivery at the grassroots level. And, given China's size and diversity, reform efforts must focus on improving incentive structures at the county, township, and village levels.
    Keywords: Public Sector Economics&Finance,Access to Finance,Banks&Banking Reform,Debt Markets,
    Date: 2008–08–01
  13. By: Strulik, Holger; Trimborn, Timo
    Abstract: Macroeconomic studies of tax policy in dynamic general equilibrium usually assume that reforms hit the economy unexpectedly and last forever. Here, we explore how previous results change when we allow policy changes to be pre-announced and of finite duration and when these facts are anticipated by households and firms. Quantitatively we demonstrate a headstart advantage from pre-announcement that is never caught up by a surprising reform. The welfare gain from announcement of a corporate tax cut, for example, is estimated to be around 10 percent of the total gain from the reform. We show that adjustment dynamics of important variables like firm value, dividend payout, and investment differs qualitatively depending on whether the reform comes expected or not. We are also able to demonstrate a genuine welfare gain from temporary tax cuts. Impulse responses generated by our numerical method can be retraced by phase diagram analysis which facilitates explanation and interpretation of the produced results.
    Keywords: tax reform, anticipation effects, investment, economic growth, welfare, corporate finance, capital taxation
    JEL: H20 H30 E62 O40
    Date: 2008–08
  14. By: Estache, Antonio; Guasch, Jose-Luis; Iimi, Atsushi; Trujillo, Lourdes
    Abstract: Multidimensional auctions are a natural and practical solution when auctioneers pursue more than one objective in their public-private-partnership transactions. However, it is difficult to achieve auction efficiency with multiple award criteria. Using auction data from road and railway concessions in Latin America, the probability of renegotiation this paper estimates by a two-stage least squares technique with a binary selection in the first-stage regression. The findings show that auctioneers tend to adopt the multidimensional format when the need for social considerations, such as alleviation of unemployment, is high. This implies that such political considerations could hinder efficiency and transparency in auctions. The analysis also shows that the renegotiation risk in infrastructure concessions increases when multidimensional auctions are used. Rather, good governance, particularly anti-corruption policies, can mitigate the renegotiation problem.
    Keywords: Transport Economics Policy&Planning,Debt Markets,Infrastructure Economics,E-Business,Emerging Markets
    Date: 2008–07–01
  15. By: Song, Zheng
    Abstract: This paper investigates how public policy responds to persistent ideological shifts in dynamic politico-economic equilibria. To this end, we develop a tractable model to analyze the dynamic interactions among public policy, individuals' intertemporal choice and the evolution of political constituency. Analytical solutions are obtained to characterize Markov perfect equilibria. Our main finding is that a right-wing ideology may increase the size of government. Data from a panel of 18 OECD countries confirm that after controlling for the partisan effect, there is a positive relationship between the right-wing political constituency and the government size. This is consistent with our theoretical prediction, but hard to explain by existing theories.
    JEL: E62 D72
    Date: 2008–03–08
  16. By: Breceda, Karla; Rigolini, Jamele; Saavedra, Jaime
    Abstract: This paper presents an incidence analysis of both social spending and taxation for seven Latin American countries, the United Kingdom, and the United States. The analysis shows that Latin American countries are headed de facto toward a minimalist welfare state similar to the one in the United States, rather than toward a stronger, European-like welfare state. Specifically, both in Latin America and in the United States, social spending remains fairly flat across income quintiles. On the taxation side, high income inequality causes the rich to bear most of the taxation burden. This causes a vicious cycle where the rich oppose the expansion of the welfare state (as they bear most of its burden without receiving much back), which in turn maintains long-term inequalities. The recent increased socioeconomic instability in many Latin American countries shows nonetheless a real need for a stronger welfare state, which, if unanswered, may degenerate into short-term and unsustainable policies. The case of Chile suggests that a way out from this apparent dead end can be found, as elites may be willing to raise their contribution to social spending if this can lead to a more stable social contract.
    Keywords: ,Public Sector Economics&Finance,Taxation&Subsidies,Economic Theory&Research,Services&Transfers to Poor
    Date: 2008–04–01
  17. By: Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
    Abstract: This paper reports on the latest update of the Worldwide Governance Indicators (WGI) research project, covering 212 countries and territories and measuring six dimensions of governance between 1996 and 2007: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. The latest aggregate indicators are based on hundreds of specific and disaggregated individual variables measuring various dimensions of governance, taken from 35 data sources provided by 32 different organizations. The data reflect the views on governance of public sector, private sector and NGO experts, as well as thousands of citizen and firm survey respondents worldwide. The authors also explicitly report the margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. The authors also briefly describe the evolution of the WGI since its inception, and show that the margins of error on the aggregate governance indicators have declined over the years, even though they still remain non-trivial. The authors find that even after taking margins of error into account, the WGI permit meaningful cross-country comparisons as well as monitoring progress over time. In less than a decade, a substantial number of countries exhibit statistically significant improvements in at least one dimension of governance, while other countries exhibit deterioration in some dimensions. These aggregate indicators, spanning more than a decade, together with the disaggregated individual indicators, are available at
    Keywords: Governance Indicators,National Governance,Public Sector Corruption&Anticorruption Measures,Economic Policy, Institutions and Governance,Banks&Banking Reform
    Date: 2008–06–01
  18. By: Estache, Antonio; Iimi, Atsushi
    Abstract: To utilize public resources efficiently, it is required to take full advantage of competition in public procurement auctions. Joint bidding practices are one of the possible ways of facilitating auction competition. In theory, there are pros and cons. It may enable firms to pool their financial and experiential resources and remove barriers to entry. On the other hand, it may reduce the degree of competition and can be used as a cover for collusive behavior. The paper empirically addresses whether joint bidding is pro- or anti-competitive in Official Development Assistance procurement auctions for infrastructure projects. It reveals the possible risk of relying too much on a foreign bidding coalition and may suggest the necessity of overseeing it. The data reveal no strong evidence that joint bidding practices are compatible with competition policy, except for a few cases. In road procurements, coalitional bidding involving both local and foreign firms has been found pro-competitive. In the water and sewage sector, local joint bidding may be useful to draw out better offers from potential contractors. Joint bidding composed of only foreign companies is mostly considered anti-competitive.
    Keywords: Investment and Investment Climate,ICT Policy and Strategies,Markets and Market Access,Public Sector Corruption&Anticorruption Measures,Access to Markets
    Date: 2008–07–01
  19. By: Bruns, Christian; Himmler, Oliver
    Abstract: Politicians seeking reelection need voters to know what they have done for them. Thus, incentives may arise to spend more money where media coverage is higher. We present a simple model to explain the allocation of public spending across jurisdictions contingent on media activity. An incumbent seeking to maximize the probability of reelection will shift more money to jurisdictions where an extra dollar gains more votes because a larger share of the electorate is informed about his policy. This prediction is tested using US data on county-level public spending, Designated Market Areas (DMAs) and location of licensed television stations. Instrumenting for the possible endogeneity of media activity to public spending, 2SLS results confirm a positive effect of media coverage on county-level public spending. Spatial regression rules out the possibility of confounding media effects with spatial autocorrelation.
    Keywords: public spending, information, television, elections
    JEL: D7 H7 D8
    Date: 2007–07

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