nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒09‒20
eleven papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Is altruism bad for cooperation? By Sung Ha Hwang; Samuel Bowles
  2. Firms' financial choices and thin capitalization rules under corporate tax competition By Andreas Haufler; Marco Runkel
  3. The Social Multiplier of Tax Evasion: Evidence from Italian Audit Data By Roberto Galbiati; Giulio Zanella
  4. Political accountability, incentives, and Contractual design of public private partnerships By Athias, Laure
  5. A Framed Field Experiment on Collective Enforcement Mechanisms with Ethiopian Farmers By Reichhuber, Anke; Camacho, Eva; Requate, Till
  6. The Efficacy of Parochial Politics: Caste, Commitment, and Competence in Indian Local Governments By Kaivan Munshi; Mark Rosenzweig
  7. Debt Bailouts and Constitutions By Emanuel Kohlscheen
  8. Alternative Approaches to Tax Risk and Tax Avoidance: analysis of a face-to-face corporate survey By Judith Freedman; Geoffrey Loomer; John Vella
  9. Intergovernmental grants and bureaucratic power By Dahlberg, Matz; Lundqvist, Heléne; Mörk, Eva
  10. Auctioning Public Office By Costas Roumanias
  11. Crowding Out Public Service Motivation By Yannis Georgellis; Elisabetta Iossa; Vurain Tabvuma

  1. By: Sung Ha Hwang (University of Massachusetts, Amherst); Samuel Bowles (Santa Fe Institute, University of Siena and University of Massachusetts)
    Abstract: Some philosophers and social scientists have stressed the importance for good government of an altruistic citizenry that values the well being of one another. Others have emphasized the need for incentives that induce even the self interested to contribute to the public good. Implicitly most have assumed that these two approaches are complementary or at worst additive. But this need not be the case. Behavioral experiments find that if reciprocity-minded subjects feel hostility towards free riders and enjoy inflicting harm on them, near efficient levels of contributions to a public good may be supported when group members have opportunities to punish low contributors. Cooperation may also be supported if individuals are sufficiently altruistic that they internalize the group benefits that their contributions produce. Using a utility function embodying both reciprocity and altruism we show that unconditional altruism towards other members attenuates the punishment motive and thus may reduce the level of punishment inflicted on defectors, resulting in lower rather than higher levels of contributions. Increases in altruism may also reduce the level of benefits from the public project net of contribution costs and punishment costs. The negative effect of altruism on cooperation and material payoffs is greater the stronger is the reciprocity motive among the members. JEL Categories: D64 (altruism); H41 (public goods)
    Keywords: public goods, altruism, spite, reciprocity, punishment, cooperation
    Date: 2008–09
  2. By: Andreas Haufler (University of Munich); Marco Runkel (University of Magdeburg)
    Abstract: Thin capitalization rules have become an important element in the corporate tax systems of developed countries. This paper sets up a model where national and multinational firms choose tax-efficient financial structures and countries compete for multinational firms through statutory tax rates and thin capitalization rules that limit the tax-deductibility of internal debt flows. In a symmetric tax competition equilibrium each country chooses inefficiently low tax rates and inefficiently lax thin capitalization rules. We show that a coordinated tightening of thin capitalization rules benefits both countries, even though it intensifies competition via tax rates. When countries differ in size, the smaller country not only chooses the lower tax rate but also the more lenient thin capitalization rule.
    Date: 2008
  3. By: Roberto Galbiati; Giulio Zanella
    Abstract: We investigate the role of individual interdependencies in tax evasion, arising from congestion on the auditing resources available to local tax authorities. Identification exploits a novel method based on comparison of the variance of individual behavior — concealed income in this case — at different levels of aggregation, within different subpopulations (Graham, 2008). This method allows us to mitigate some of the most severe problems that surround identification of neighbourhood effects, at the cost of identifying restrictions that arise naturally from our model. We employ a unique dataset of tax audits to about 75,000 self-employed individuals in Italy. Surprisingly, this sample is not statistically different from a random sample of taxpayers. We find a social multiplier of about 3, meaning that the equilibrium response to a shock that induces an exogenous variation in mean concealed income — such as tougher or looser tax enforcement — is about three times the initial average response
    Keywords: social interactions, social multiplier, tax evasion, tax compliance, excess variance
    JEL: H26 C31 Z13 Z19
    Date: 2008–08
  4. By: Athias, Laure
    Abstract: Service adaptations, when there is changing demand or problems regarding the service provision, constitute a major issue in Public Private Partnerships (PPPs). So far, studies have explained the ex post adaptation problems by the distorted incentives for the private public-service provider to invest in adaptation efforts. However, as any PPP is between a public authority and a private public-service provider (no market price), public authorities have also an important role to play in the adaptation of the private public-service provision over time. This paper studies how the contractual design of PPPs affects accountability and incentives for contractually unanticipated service adaptations. More specifically, we observe worldwide two main different contracting out procedures: the concession contract and the availability contract. The main difference between these two contractual practices concerns the demand risk, which is borne by private providers in the first case and by public authorities in the second case. This paper shows that there are two main effects of the contractual design on accountability. (1) Concession contracts, compared to availability contracts, motivate more public authorities from investigating and responding to public demands. This is due to the fact that under a concession contract consumers are empowered, i.e. have the possibility to oust the private provider, which provides public authorities with more credibility in side-trading. (2) Concession contracts can give greater adaptation effort incentives to private providers than availability contracts, since, if private providers bear the demand risk, they can receive private gains from implementing the adaptation. The striking policy implication of this paper is then that the trend towards a greater resort to contracts where private providers bear little or no demand risk may not be optimal in terms of allocative efficiency.
    Keywords: Political accountabiliy; Public services provision; Public Private Partnerships; Incomplete contracts; Consumers empowerment.
    JEL: D86 D23 H10 L51 O17
    Date: 2007–12–02
  5. By: Reichhuber, Anke; Camacho, Eva; Requate, Till
    Abstract: We present the results of a framed field experiment with Ethiopian farmers that use the mountain rain forest as a common pool resource. Harvesting honey causes damage to the forest, and open access leads to overharvesting. We test different mechanisms for mitigating excessive harvesting: a collective tax with low and high tax rates, and a tax/subsidy system. We find that the high-tax scheme works best in inducing the desired level of harvesting while the tax-subsidy scheme may trigger tacit collusion. Via a panel data analysis we further investigate which variables influence the subjects’ decisions during the treatments.
    Keywords: common pool resources, collective tax, framed field experiment
    Date: 2008
  6. By: Kaivan Munshi; Mark Rosenzweig
    Abstract: Parochial politics is typically associated with poor leadership and low levels of public good provision. This paper explores the possibility that community involvement in politics need not necessarily worsen governance and, indeed, can be efficiency-enhancing when the context is appropriate. Complementing the new literature on the role of community networks in solving market problems, we test the hypothesis that strong traditional social institutions can discipline the leaders they put forward, successfully substituting for secular political institutions when they are ineffective. Using new data on Indian local governments at the ward level over multiple terms, and exploiting the randomized election reservation system, we find that the presence of a numerically dominant sub-caste (caste equilibrium) is associated with the selection of leaders with superior observed characteristics and with greater public good provision. This improvement in leadership competence occurs without apparently diminishing leaders' responsiveness to their constituency.
    JEL: D72 H1 O12
    Date: 2008–09
  7. By: Emanuel Kohlscheen (Economics Department, University of Warwick.)
    Abstract: A demand based theory of sub-national debt bailouts is presented. It is shown that revenue sharing (RS) arrangements alter the demand for bailouts among politicians with regional constituencies as a bailout usually implies a shift of taxation to the federal tier. Automatic RS may lead to the formation of pro-bailout coalitions formed by indebted states and states that are net recipients of the RS arrangement. Also, RS can act as a commitment device for compensating payments among state representatives, making a bailout politically rational. The model shows that the state debt bailouts approved by the Brazilian Senate prior to the enactment of the Fiscal Responsibility Act were fully consistent with politicians that maximize the proceeds accruing to their constituencies.
    Keywords: bailout ; commitment ; Constitutions ; debt ; federalism revenue sharing; soft budget constraints
    JEL: H70
    Date: 2008
  8. By: Judith Freedman (University of Oxford); Geoffrey Loomer (Oxford University Centre for Business Taxation); John Vella (University of Oxford)
    Abstract: This paper analyzes the results of a survey of views of large businesses regarding recent UK Government initiatives aimed at modifying taxpayer behaviour and tackling what is perceived by the tax authorities acting on behalf of Government to be unacceptable/aggressive tax avoidance. Specifically, it examines the views of tax directors obtained from face-to-face interviews conducted in spring 2008 with representatives of 30 corporate groups regarding alternative approaches to tax risk and tax avoidance. The paper first describes the experiences and opinions of large business representatives with respect to the Risk Rating Approach, a key feature of the HMRC links with large business programme (Varney Programme), as well as the status of relationships between HMRC and large business more generally. It next considers the respondents’ views on the practical implications of two developing legislative approaches – targeted anti-avoidance rules (TAARs) and principles-based legislation (PBL) – and how these approaches impact upon and are influenced by relationships between HMRC and large businesses.
    Date: 2008
  9. By: Dahlberg, Matz (IFAU - Institute for Labour Market Policy Evaluation); Lundqvist, Heléne (Uppsala University, Department of Economics); Mörk, Eva (Institute for Labour Market Policy Evaluation)
    Abstract: In their role as agenda setters and implementers of political decisions, bureaucrats potentially have the power to influence decisions in their own favor. It is however difficult to empirically test whether bureaucrats actually are involved in such actions. In this paper we suggest and apply a new way of testing the hypothesis that bureaucrats can and do in fact affect policy to their own benefit. Making use of a discontinuity in the Swedish grant system, we estimate causal effects of intergovernmental grants on different types of personnel employed by the local governments. On the margin, we find a large, positive effect of grants on the number of bureaucrats in the central administration, but no effects on the number of personnel in other important sectors run by the local government (child care, schools and elderly care). These results support the view that bureaucrats are able to, and do indeed, affect the allocation of grants within municipalities to support own goals.
    Keywords: Fiscal federalism; grants; bureaucrats; rent seeking; discontinuity analysis
    JEL: C33 H11 H70 H83 J45
    Date: 2008–08–21
  10. By: Costas Roumanias (Department of Economics, University of Macedonia)
    Abstract: Campaign promises and campaign spending are modelled as integral parts of a signaling mechanism that transmits information about can- didates' abilities and proposed policies to the voters. We suggest that viewing promises and spending as inseparable parts of the same mechanism is essential in moving towards providing a microfoundation framework of political campaigns. Political competition in spending and promising is modeled as an auction which enables us to derive results about the laws governing political campaigns. The degree of commitment is crucial to the mixture of signaling used by candidates.
    Keywords: Auctions, Elections, Political Competition, Political Campaigns, Campaign Promises, Campaign Spending.
    JEL: D02 D44 D72 D86
    Date: 2008–09
  11. By: Yannis Georgellis; Elisabetta Iossa; Vurain Tabvuma
    Abstract: Employing workers with Public Service Motivation (PSM) has been proposed as a means of improving performance in the public sector. There is, however, no conclusive evidence showing PSM among individuals. In this paper we attempt to firstly find evidence of PSM by investigating why people change jobs from the private to the public sector. Secondly we attempt to identify factors that crowd out PSM and thus hinder individuals with PSM from joining the public sector.
    Date: 2008–06

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