nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒11‒25
twenty-one papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Intergovernmental grant rules, the "golden rule" of public finance and local expenditures By Paulo Trigo; João Andrade e Silva
  2. Bargaining over public goods. By Julio Davila; Jan Eeckhout; César Martinelli
  3. Are small countries leaders of the European tax competition ?. By Nicolas Chatelais; Mathilde Peyrat
  4. Similar problems, different solutions: Comparing refuse collection in the Netherlands and Spain By Germà Bel; Elbert Dijkgraaf; Xavier Fageda; Raymond Gradus
  5. Taxes on Tax-Exempt Bonds By Andrew Ang; Vineer Bhansali; Yuhang Xing
  6. Feedback; Punishment and Cooperation in Public Good Experiments By Nikos Nikiforakis
  7. More information isn’t always better: the case of voluntary provision of environmental quality By Owen, Ann L.; Videras, Julio; Wu, Stephen
  8. Corporate Income Tax and Economic Distortions By Gaëtan Nicodème
  9. Tax Policy Design and The Role of a Tax-Free Threshold By John Creedy: Nicolas Herault; Guyonne Kalb
  10. Abolishing the Tax-Free Threshold in Australia: Simulating AlternativeReforms By John Creedy; Nicolas Herault; Guyonne Kalb
  11. Corporation Tax Asymmetries:Effective Tax Rates and Profit Shifting By John Creedy; Norman Gemmell
  12. Regional income disparity and the size of the Public Sector By Giuranno, Michele
  13. Voting over Taxes and Expenditure: The Role of Home Production By John Creedy; Solmaz Moslehi
  14. The Optimal Composition of Government Expenditure withTransfer Payments, Education Expenditure and a Public Good By John Creedy; Solmaz Moshlehi
  15. Privatization and policy competition for FDI By AMERIGHI, Oscar; DE FEO, Giuseppe
  16. Does Broader-Based Local Government affect Expenditure on Public Long-Term Care Insurance? The Case of Japan By Haruaki Hirota; Hideo Yunoue
  17. Assessing the assignation of public subsidies: Do the experts choose the most efficient R&D projects? By Nestor Duch-Brown; Jose Garcia-Quevedo; Daniel Montolio
  18. Bidding for Investment Projects: Smart Public Policy or Corporate Welfare? By Johannes Van Biesebroeck
  19. Optimal export taxes €Ӡthe case of cocoa in Cote d'Ivoire By Burger, Kees
  20. Efficient Supply of Cultural Landscape in a CGE Framework By Rodseth, K.L.
  21. Data games. Sharing public goods with exclusion. By DEHEZ, Pierre; TELLONE, Daniela

  1. By: Paulo Trigo; João Andrade e Silva
    Abstract: The Stability and Growth Pact and the process of fiscal consolidation in several European countries have enhanced the role of fiscal rules at sub-national level. This paper analyzes the combined effect of a rule to allocate capital and current block grants to local governments and the “golden rule” of public finance (surplus of current balance). We argue that the two fiscal rules introduce significant rigidities and distortions in local governments’ expenditures structure since these mimic the structure of revenues. This effect is particularly relevant in municipalities that are more dependent of intergovernmental grants, mainly rural. On the other hand, urban municipalities with greater tax revenues (current revenues) are constrained in their ability to make capital investments because they receive per capita capital grants below what economies of scale would suggest. An empirical analysis of Portuguese local governments shows that it is no longer the median voter, but fiscal rules, that command the broad pattern of expenditure (current versus capital) at a local level. This paper is a contribution to the literature on the perverse effects of fiscal rules.
    Keywords: Intergovernmental block grants; Fiscal Rules; Local Government Expenditure; “Golden Rule”
    JEL: H11 H61 H71 H77
    Date: 2008–07
  2. By: Julio Davila (Centre d'Economie de la Sorbonne - Paris School of Economics); Jan Eeckhout (University of Pennsylvania); César Martinelli (Instituto Technologico Autonomo de Mexico)
    Abstract: In a simple public good economy, we propose a natural bargaining procedure whose equilibria converge to Lindahl allocations as the cost of bargaining vanishes. The procedure splits the decision over the allocation in a decision about personalized prices and a decision about output levels for the public good. Since this procedure does not assume price-taking behavior, it provides a strategic foundation for the personalized taxes inherent to the Lindahl solution to the public goods problem.
    Keywords: Public goods, bargaining, alternating offers.
    JEL: C78 H41
    Date: 2008–06
  3. By: Nicolas Chatelais (Centre d'Economie de la Sorbonne et Institut CDC pour la recherche); Mathilde Peyrat (ESSEC Business School et Centre d'Economie de la Sorbonne)
    Abstract: The aim of this paper is to develop a better understanding of the literature dealing with strategic fiscal behaviours of small EU countries using estimations of tax reaction functions of competing national governments. Deriving a simple model of tax competition in a Nash and Stackelberg game, we use panel data and tools from spatial econometrics to examine the role of small countries in tax competition within the enlarged European Union. We find that interactions are stronger among smaller EU countries than between larges ones and rates set in small countries influence those in big countries. Finally, small countries located in the centre of the EU have more influence on tax policies choices of big countries than small countries located in the periphery of EU.
    Keywords: Strategic interactions, tax behaviours, spatial econometrics, European Union, tax competition, small countries.
    JEL: E62 F21 F22 F23 H30 H32 H73 H77 R12
    Date: 2008–10
  4. By: Germà Bel (Faculty of Economics, University of Barcelona); Elbert Dijkgraaf (Erasmus University Rotterdam); Xavier Fageda (Faculty of Economics, University of Barcelona); Raymond Gradus (Vrije Universiteit Amsterdam)
    Abstract: Local public service provision can vary greatly because of differences in institutional arrangements, public service markets, and national traditions regarding government intervention. In this paper we compare the procedures adopted by the local governments of the Netherlands and Spain in arranging for the provision of solid waste collection. We find that Spain faces a consolidation problem, opting more frequently to implement policies of privatization and cooperation, at the expense of competition. By contrast, the Netherlands has, on average, larger municipalities, resorting somewhat less to privatization and cooperation, and more to competition. The two options - cooperation and competition - have their merits when striving to strike a balance between transaction costs and scale economies. The choices made in organizational reform seem to be related to several factors, among which the nature of the political system and the size of municipalities appear to be relevant.
    Keywords: Local governments, contracting-out, privatization,inter-municipal cooperation.
    Date: 2008–11
  5. By: Andrew Ang; Vineer Bhansali; Yuhang Xing
    Abstract: Implicit tax rates priced in the cross section of municipal bonds are approximately two to three times as high as statutory income tax rates, with implicit tax rates close to 100% using retail trades and above 70% for interdealer trades. These implied tax rates can be identified on the cross section of municipal bonds because a portion of secondary market municipal bond trades involve income taxes. After valuing the tax payments, market discount bonds, which carry income tax liabilities, trade at yields around 25 basis points higher than comparable municipal bonds not subject to any taxes. The high sensitivities of municipal bond prices to tax rates can be traced to individual retail traders dominating dealers and other institutions.
    JEL: G12 G28 H20 H24
    Date: 2008–11
  6. By: Nikos Nikiforakis
    Abstract: A number of studies have shown that peer punishment can sustain cooperation in public good games. This paper shows that the format used to give subjects feedback is critical for the e¢ cacy of punishment. Providing subjects with infor- mation about the earnings of their peers leads to lower contributions and earnings compared to a treatment in which subjects receive information about the contri- butions of their peers even though the feedback format does not a¤ect incentives. The data suggest that this is because the feedback format acts as a coordination device, which in?uences the contribution standards that groups establish
    Keywords: feedback format; peer punishment; public good game; altruistic pun-ishment; cooperation
    JEL: C92 D70 H41
    Date: 2008
  7. By: Owen, Ann L.; Videras, Julio; Wu, Stephen
    Abstract: This paper adds to the literature on the voluntary provision of public goods by showing that the warm glow that individuals gain depends on the perceived relative effectiveness of contributions. We use a new survey on pro-environment behaviors, attitudes, and knowledge and find that individuals act in accordance with their beliefs, regardless of whether or not these beliefs are accurate, and engage more frequently in activities that have a higher perceived impact on environmental quality. We find that low provision of the public good is greater among people who believe they cannot do much for the environment and do not consider themselves environmentalists.
    Keywords: warm glow; environmental quality; public goods contributions
    JEL: Q50 H41
    Date: 2008–09
  8. By: Gaëtan Nicodème (Centre Emile Bernheim, Solvay Business School, Université Libre de Bruxelles, Brussels and European Commission.)
    Abstract: As any non-lump-sum tax, corporate income taxation creates distortions in economic choices, reducing its efficiency. This paper reviews some of these domestic and international distortions and their most recent estimates from the economic literature. Distortions originating from income shifting between capital and labour sources, profit shifting across jurisdictions, the effects of taxation on business location and foreign direct investment are the major sources of distortions.
    Keywords: Corporate taxation, distortions, tax efficiency.
    JEL: H25
    Date: 2008–11
  9. By: John Creedy: Nicolas Herault; Guyonne Kalb
    Abstract: This paper examines the role of the tax-free income tax threshold in a complex tax and transfer system consisting of a range of taxes and benefits, each with their own taper rates and thresholds. Considering a range of tax and benefit systems, particularly those having benefit taper rates whereby some benefits are received by income groups other than those at the bottom of the distribution, it is suggested that a tax-free threshold is not a necessary requirement to achieve redistribution. A policy change involving the elimination of the tax-free threshold in Australia and designed to achieve approximate revenue neutrality is examined using the Melbourne Institute Tax and Transfer Simulator. The results demonstrate that it is possible to eliminate the tax-free threshold under approximate overall revenue and distribution neutrality, but that labour supply incentives cannot be improved at the same time.
    Date: 2008
  10. By: John Creedy; Nicolas Herault; Guyonne Kalb
    Abstract: This paper examines the role of the tax-free income tax threshold in a complex tax and transfer system consisting of a range of taxes and benefits, each with their own taper rates and thresholds. Considering a tax and benefit system with benefit taper rates whereby some benefits are received by income groups other than those at the bottom of the distribution, it is suggested that a tax-free threshold is not a necessary requirement to achieve redistribution. Four alternative policy changes, each involving the elimination of the tax-free threshold in Australia and designed to achieve approximate revenue neutrality, were examined using the Melbourne Institute Tax and Transfer Simulator. A range of implications were examined, including labour supply responses to tax changes, and the effects of policy changes on inequality and social welfare. The results demonstrate that it is possible to eliminate the tax-free threshold under approximate overall revenue and distribution neutrality, but that it is impossible to improve labour supply incentives at the same time. In order to achieve improved incentives, either revenue or distribution neutrality has to be sacrificed.
    Date: 2008
  11. By: John Creedy; Norman Gemmell
    Abstract: This paper examines the way in which the asymmetric treatment of losses within corporate tax codes can be expected to affect behavioural responses to changes in tax rates. The paper introduces the concept of an equivalent tax function, raising the same present value of tax payments as the actual function, in which the effective rate on losses in any period, and thus the degree of asymmetry, is explicit. The influence on the elasticity of tax revenue with respect to the tax rate of this effective rate is then examined, where ‘loss-shifting’ occurs. Results suggest that estimates of the behavioural effect of changes in tax rates on tax revenues can be expected in general to be smaller in regimes that involve greater asymmetries in the tax treatement of losses. As losses vary over the economic cycle, asymmetric treatment also generates effects on tax revenues that are asymmetric (non-linear) between above-trend and below-trend parts of the cycle.
    Keywords: n/a
    Date: 2008
  12. By: Giuranno, Michele
    Abstract: This paper focuses on the question of how income inequality between two jurisdictions impacts upon government decision-making affecting the size of the public sector. We model policy choices as the outcome of regional representatives'negotiations in the legislature. We show that the more unequal inter-regional income distribution is, the greater the under-provision of public goods. Particularly, larger inter-regional income disparity leads to a smaller public sector. A wealthier economy as a result may have a relatively smaller government size when income disparity increases.
    Date: 2008–11
  13. By: John Creedy; Solmaz Moslehi
    Abstract: This paper investigates, first, how allowance for subsistence activities, or home production, affects the standard results in models involving the majority choice of the tax rate in a flat tax—basic income scheme. The paper extends the analysis of home production to choices regarding the composition of government expenditure, in situations where there is a tax-financed pure public good in addition to a transfer payment, conditional on a given tax rate. The effect of home production is to reduce the transfer payment in each model, but the effect is small.
    Keywords: n/a
    Date: 2008
  14. By: John Creedy; Solmaz Moshlehi
    Abstract: This paper examines the optimal allocation of tax revenue among a universal transfer payment, a pure public good and expenditure on education. Using a single-period framework, education expenditure raises the productivity of individuals via a human capital production function. The social welfare function is based on individuals’ (indirect) utilities. Education creates a substantial fiscal spillover whereby the increase in human capital gives rise to higher labour earnings and thus higher income tax revenue, thereby allowing greater government expenditure on all items than would otherwise be possible. A higher inequality of exogenous ability levels is found to increase all types of expenditure, but only the transfer increases in relative terms. Higher inequality aversion leads to an increase in transfer payments in absolute and relative terms, at the expense of the other two components. However, the effects are small so that different judges may display little disagreement concerning optimal expenditure shares. An increase in the elasticity of the wage with respect to basic ability implies that education is less effective in raising the average level of productivity, which leads to the planner reducing education spending which leaves more tax revenue available for spending on transfer payments and the public good.
    Keywords: n/a
    Date: 2008
  15. By: AMERIGHI, Oscar (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); DE FEO, Giuseppe (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE))
    Abstract: In this paper, we provide an explanation of why privatization may attract foreign investors interested in entering a regional market. Privatization turns the formerly-public firm into a less aggressive competitor since profit- maximizing output is lower than the welfare-maximizing one. The drawback is that social welfare generally decreases. We also investigate tax/subsidy competition for FDI before and after privatization. We show that policy competition is irrelevant in the presence of a public firm serving just its domestic market. By contrast, following privatization, it endows the big country with an instrument which can be used either to reduce the negative impact on welfare of an FDI-attracting privatization or to protect the domestic industry from foreign competitors.
    Keywords: foreign direct investment, tax competition, public firm, privatization.
    JEL: F12 F23 H25 H73 L13 L33
    Date: 2008–01
  16. By: Haruaki Hirota (Graduate School of Economics, Osaka University); Hideo Yunoue (Osaka School of International Public Policy, Osaka University)
    Abstract: This paper considers the possible effects of broader-based local government, especially extended associations, in Japanese local public finance. We mainly analyze scale effects in public long-term care insurance expenditure, with our results indicating a U shaped expenditure structure. We also show that expenditures associated with extended associations decrease more rapidly than ordinary municipal expenditures. These findings suggest that expenditure of appropriate population size extended associations larger than single municipality.
    Keywords: local public finance, scale effects, broader-based local government, extended association, long-term care insurance
    JEL: H73 H75 H83
    Date: 2008–09
  17. By: Nestor Duch-Brown; Jose Garcia-Quevedo; Daniel Montolio (Universitat de Barcelona)
    Abstract: The implementation of public programs to support business R&D projects requires the establishment of a selection process. This selection process faces various difficulties, which include the measurement of the impact of the R&D projects as well as selection process optimization among projects with multiple, and sometimes incomparable, performance indicators. To this end, public agencies generally use the peer review method,which, while presenting some advantages, also demonstrates significant drawbacks. Private firms, on the other hand, tend toward more quantitative methods, such as Data Envelopment Analysis (DEA), in their pursuit of R&D investment optimization. In this paper, the performance of a public agency peer review method of project selection is compared with an alternative DEA method.
    Keywords: peer review, dea, subsidies, r&d
    JEL: H25 O32 C61
    Date: 2008
  18. By: Johannes Van Biesebroeck
    Abstract: Recently, several governments in Canada have shown an increased willingness to subsidize private investment projects, especially in the manufacturing sector, to the dismay of tax conservatives. I evaluate under what circumstances these government subsidies make sense, paying particular attention to interjurisdictional competition. I show what governments should expect to pay when they join a bidding war and derive the expected welfare gain. The analysis looks in detail at the efforts of the Ontario and federal governments to attract new investments in the automobile sector.
    Keywords: Foreign Direct Investment; government competition; subsidies; investment incentives; automobile industry; opportunity cost
    JEL: H25 H23 L62 D44
    Date: 2008–11–16
  19. By: Burger, Kees
    Abstract: Export taxes can provide additional welfare to large exporters, an argument for interventions in many primary commodity exporting countries. We investigate the benefits of export taxation for Côte d'Ivoire, the dominant exporter of cocoa. Where many applications treat the formula for optimal export taxes incorrectly as a prescription, we take the endogeneity of the exporter€ٳ share into account. We also distinguish between short-term and long-term effects, relevant for a tree crop like cocoa and we allow for a normal commercial margin between export and farm gate prices. Results are calculated via simulations in a model, in which the age-compositions of the tree stocks of major producing countries are distinguished. Simulations over a period of 15 years show that higher levels of export taxation do not change overall revenues of Côte d'Ivoire on a longer term, but lead to strong redistribution from farmers to the central authorities.
    Keywords: optimal export tax, primary commodities, cocoa, Côte d'Ivoire, vintage model, Crop Production/Industries, International Relations/Trade, Public Economics,
    Date: 2008
  20. By: Rodseth, K.L.
    Abstract: It is often assumed that the agricultural sector produces public goods or positive externalities that benefit the domestic consumers, in addition to its production of private goods. Efficient agricultural support is consequently directed towards resolving market failures caused by the existence of these public goods or externalities. We illustrate how this can be achieved in a Computable General Equilibrium model for one multifunctional aspect of agricultural production, namely the production of cultural landscape. Using a public good modeling framework as point of departure, we develop supply- and willingness to pay functions for cultural landscape. Governmental agricultural support is adjusted to achieve efficient supply of the public good. As an illustration we apply our framework using a general equilibrium model for Norway. We show that efficient supply of cultural landscape can be achieved even with a tremendous reduction in initial overall support of agricultural production.
    Keywords: CGE modeling, Multifunctionality, Public Goods, Land Economics/Use,
    Date: 2008
  21. By: DEHEZ, Pierre (Université catholique de Louvain (UCL). Center for Operations Research and Econometrics (CORE)); TELLONE, Daniela (CEREC, Facultés Universitaires Saint-Louis)
    Abstract: A group of agents considers collaborating on a project which requires putting together elements owned by some of them. These elements are pure public goods with exclusion i.e. nonrival but excludable goods like for instance knowledge, data or information, patents or copyrights. The present paper addresses the question of how should agents be compensated for the goods they own. It is shown that this problem can be framed as a cost sharing game – called "data game" – to which standard cost sharing rules like the Shapley value or the nucleolus can then be applied and compared.
    Keywords: cost sharing, compensation, Shapley value.
    JEL: C71 D46 M41
    Date: 2008–02

This nep-pbe issue is ©2008 by Oliver Budzinski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.