nep-pbe New Economics Papers
on Public Economics
Issue of 2008‒12‒07
nine papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Intertwined Federalism: Accountability Problems under Partial Decentralization By Marcelin Joanis
  2. Optimal Redistributive Taxation and Provision of Public Input Goods in an Economy with Outsourcing and Unemployment By Aronsson, Thomas; Koskela, Erkki
  3. Fiscal Decentralization in Kenya: The Constituency Development Fund and the Growth of Government By Bagaka, Obuya
  4. Corruption and Positive Selection in Privatization By Raluca E. Buia; M. Cristina Molinari
  5. The Contest for Olympic Succes as a Public Good By Loek Groot
  6. The effect of capital gains taxation on home sales: evidence from the Taxpayer Relief Act of 1997 By Hui Shan
  7. The Economics of Subsidies in Ontario’s Automotive Industry By Leslie Shiell; Justin Stuart
  8. Intergovernmental Grants and Bureaucratic Power By Dahlberg, Matz; Lundqvist, Heléne; Mörk, Eva
  9. Income Tax Design and the Desirability of Subsidies to Secondary Workers in a Household Model with Joint and Non-Joiont Time By Edgar Cudmore; John Piggott; John Whalley

  1. By: Marcelin Joanis (Université de Sherbrooke, GREDI and CIRANO)
    Abstract: Decentralization of expenditure responsibilities from central to local governments is generally thought to increase overall government accountability by bringing the policymaking process closer to citizens. In practice, decentralization reforms tend to be partial in nature, leading to the coexistence of multiple tiers of government in public good provision. Electoral accountability in such a context presents voters with the complex task of assessing the respective role of each level of government in the policy outcomes that they observe. This paper analyses the effects of such partial decentralization on accountability using a two-period political agency model, in which two levels of government are involved in public good provision and voters are imperfectly informed about each government’s contribution to the public good. The model predicts that a departure from complete centralization (or decentralization) will, in general, have ambiguous consequences for voter welfare, the benefits associated with the vertical complementarity among governments being weighed against the loss of accountability following from imperfect information and detrimental vertical interactions among levels of government.
    Keywords: decentralization, accountability, shared responsibility, federalism, vertical interactions
    Date: 2008
  2. By: Aronsson, Thomas (Department of Economics, Umeå University); Koskela, Erkki (Department of Economics)
    Abstract: This paper concerns optimal redistributive income taxation and provision of a public input good in a two-type model with a minimum wage policy implemented for the low-ability type, where firms may use some of their resources for outsourcing by locating part of the production process abroad. Our results show that the incentive to relax the self-selection constraint and the incentive to increase employment among the low-skilled reinforce each other in terms of marginal income taxation. In addition, the appearance of equilibrium unemployment also provides an incentive for the government to directly tax outsourcing. Without a direct instrument for taxing outsourcing, the government may reduce the amount of resources spent on outsourcing by increased provision of the public input good, which is desirable in the sense that reduced outsourcing contributes to less wage inequality and increased employment.
    Keywords: outsourcing; optimal nonlinear taxation; public goods; unemployment
    JEL: H21 H25 J31 J62
    Date: 2008–11–27
  3. By: Bagaka, Obuya
    Abstract: This paper explores the financial implications of fiscal decentralization policies on the central government's operating budget in Kenya. The paper evaluates how devolved funds under the constituency development fund (CDF) have been utilized to start healthcare capital projects (clinics) at the local level. The study finds that fiscal decentralization has promoted allocative efficiency and equity but at a cost of exporting tax burdens (operations and maintenance) to the central government emanating from capital projects implemented at the local level. The exported tax burdens have policy implications and call for reforms of the CDF program to reflect a benefit-expenditure structure.
    Keywords: fiscal decentralization; budget;devolution; constituency development fund; health care; allocative efficiency
    JEL: H77 H0 H7 H5 H2 A10
    Date: 2008–10–10
  4. By: Raluca E. Buia (Advanced School of Economics, University Of Venice Cà Foscari); M. Cristina Molinari (Department of Economics, University Of Venice Cà Foscari)
    Abstract: We consider the supply of a public good based on a publicly-owned facility. The Government has a choice between provision in-house and privatizing the facility and then outsourcing the production. In particular, we focus on corruption in the decision to privatize and on its effect on social welfare when there is asymmetric information on the public and private manager's efficiency. Our analysis shows that a corrupt Government, that chooses to privatize only in exchange for a bribe, makes a positive selection on the private firm's efficiency and, thus, may raise expected social welfare above what an honest Government could get.
    Keywords: Corruption, Privatization, Private vs. public provision.
    JEL: D73 H44 K42 L33
    Date: 2008
  5. By: Loek Groot
    Abstract: This study considers the performance of countries at the Olympic Games as a public good. Firstly, it is argued that, at the national level, Olympic success meets the two key conditions of a public good: non-rivalry and non-excludability. Secondly, it is demonstrated that standard income inequality measures, such as the Lorenz curve and the Gini index, can be successfully applied to the distribution of Olympic success. The actual distribution of Olympic success is compared with alternative hypothetical distributions, among which according to population shares, the distribution favoured by a social planner and the noncooperating Nash-Cournot distribution. By way of conclusion, a device is proposed to make the distribution of Olympic success more equitable.
    Keywords: Olympic Games, public goods, externalities, social welfare, Nash
    JEL: D63 H41 H50
    Date: 2008–11
  6. By: Hui Shan
    Abstract: The Taxpayer Relief Act of 1997 (TRA97) significantly changed the tax treatment of housing capital gains in the United States. Before 1997, homeowners were subject to capital gains taxation when they sold their houses unless they purchased replacement homes of equal or greater value. Since 1997, homeowners can exclude $500,000 of capital gains when they sell their houses. Such drastic changes provide a good opportunity to study the lock-in effect of capital gains taxation on home sales. Using ZIP-code level housing price indexes and sales on single-family houses data from 1982 to 2006 in 16 affluent towns within the Boston metropolitan area, this paper finds that TRA97 reversed the lock-in effect of capital gains taxes on houses with low and moderate capital gains. However, TRA97 may have generated an unintended lock-in effect on houses with capital gains over the maximum exclusion amount. In addition, this paper exploits legislative changes in capital gains tax rate to estimate the tax elasticity of home sales during the post-TRA97 period.
    Date: 2008
  7. By: Leslie Shiell (Department of Economics, University of Ottawa); Justin Stuart (Department of Economics, University of Ottawa)
    Abstract: We compare the choice between granting subsidies to the automotive industry and using the funds instead to implement a permanent reduction in the sales tax on capital goods, one of Ontario’s most distortionary taxes. Our results depend critically upon how workers respond to the withdrawal of subsidies. Either workers agree to reduce their wages to offset the lost subsidies or they refuse to adjust. Our cost-benefit analysis shows the best outcome for the economy is to eliminate the subsidies, have workers adjust, and reduce the deadweight loss of taxation. The second-best outcome is to subsidize, maintain high wage levels in the industry, but forgo the benefits of tax reform. The worst outcome would be to withdraw subsidies, have workers refuse to adjust, and then experience lost employment and production. In contrast, the best outcome for the affected workers is to maintain high wages through subsidies. Therefore workers have an incentive to act strategically, by refusing to adjust their wages. For this reason, the government’s openness to subsidies likely contributes to an environment in which subsidies become inevitable.
    Keywords: subsidies, Ontario, automotive sector
    JEL: H2
    Date: 2008
  8. By: Dahlberg, Matz (Department of Economics); Lundqvist, Heléne (Department of Economics); Mörk, Eva (IFAU)
    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: 2008–10–20
  9. By: Edgar Cudmore (University of Western Ontario); John Piggott (University of New South Wales); John Whalley (University of Western Ontario)
    Abstract: In this paper we analyze income tax design in a two member household labor supply model where time spent on consumption together by the two household members is valued differently from time spent apart. We treat consumption as a non excludable public good to members of the household; one example would be where all household members or one alone can watch TV. When jointly consumed, however, TV services are valued more highly than the same consumption undertaken separately. We use this model to numerically investigate the welfare implications of different tax structures. In sharp contrast to existing literature, our results suggest the desirability of subsidizing secondary worker's labor supply. We also relate our discussion to existing individual-household tax unit literature.
    Date: 2008

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