nep-pbe New Economics Papers
on Public Economics
Issue of 2009‒01‒10
nine papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. A Political Economy Theory of Partial Decentralization By John William Hatfield; Gerard Padró i Miquel
  2. The role and the performance of public sector in the European Union By Donath, Liliana; Milos, Marius
  3. Tax Haven and Development Partner: Incoherence in Dutch Government Policies By Weyzig, Francis; Van Dijk, Michiel
  4. Public investment and budget rules for state vs. local governments By Marco Bassetto
  5. When Government Spending Serves the Elites: Consequences for Economic Growth in a Context of Market Imperfections By Lopez, Ramon; Islam, Asif
  6. Could you hand me the efficiency section, please? Newspaper circulation and local government efficiency in Norway By Bruns, Christian; Himmler, Oliver
  7. Intergovernmental grants and fiscal competition By Jakobsson, Niklas; Nordblom, Katarina
  8. Reciprocity, culture, and human cooperation: Previous insights and a new cross-cultural experiment By Simon Gaechter; Benedikt Herrmann
  9. Federal, State, and Local Governments: Evaluating their Separate Roles in US Growth By Matthew J. Higgins; Daniel Levy; Andrew T. Young

  1. By: John William Hatfield; Gerard Padró i Miquel
    Abstract: We revisit the classic problem of tax competition in the context of federal nations, and derive a positive theory of partial decentralization. A capital poor median voter wants to use capital taxes to provide public goods. This results in redistributive public good provision. As a consequence, when all public goods are provided by the central government, capital taxes and public good provision are high. The expectation of high capital taxes, however, results in a small capital stock which lowers returns to redistribution. The median voter would therefore like to commit to a lower level of capital taxes. Decentralization provides such a commitment: local governments avoid using capital taxes due to the pressure of tax competition. We therefore obtain that the median voter favors a partial degree of decentralization. The equilibrium degree of decentralization is non-monotonic in inequality, increasing in the redistributive efficiency of public good provision, and decreasing in capital productivity. When public goods are heterogeneous in their capacity to transfer funds, all voters agree that goods with high redistributive capacity should be decentralized.
    JEL: D72 H11 H7 H77
    Date: 2008–12
  2. By: Donath, Liliana; Milos, Marius
    Abstract: The role of the state is finally the decision of the citizens. The government, being a result of elections, can provide more or less protection and increase or decrease expenditures. Anyway for achieving goals and for being performant the state definitly has to promote a good governance. Good governance means the way unions, public institutions, civil society and tax payers work together. An other important factor is the transparency and accountability of the elected government. As regards public services and goods, it is definitly important to grow efficiency of the government. Therefore themes like tax competition, public expenditures and harmonization of the tax system have to be analysed. There are main differences between eastern and western countries of the European Union witch generate social and economical consequences. It is also important to think of measuring performances of the public sector and of finding the most appropriate way in which government size and efficiency can lead to economical growth.
    Keywords: distributive role; regulation; welfare; performance; public expenditures;
    JEL: E62 E6
    Date: 2008–02–07
  3. By: Weyzig, Francis; Van Dijk, Michiel
    Abstract: This paper focuses on a relatively new issue in the debate on policy coherence for development: the incoherence between tax and aid policies, using a case study of the Netherlands as illustration. Although the Netherlands cannot be considered a ‘pure’ tax haven like the Cayman Islands and the British Virgin Islands, evidence indicates that it does play a key role as ‘conduit’ country in tax planning structures of multinationals that wish to channel funds to ‘pure’ tax havens. This paper shows that as a consequence of the Dutch fiscal regime, other countries, including developing countries, are failing to collect important tax revenues which otherwise could have been used to finance health care, education and other essential public goods and services. It is estimated that developing countries miss about € 640 million in tax revenue – about 15 % of Dutch ODA. This suggests the Dutch tax policy is incoherent with the Dutch policy on development cooperation.
    Keywords: development policy; tax policy; policy coherence; policy incoherence
    JEL: D7 F3 H2
    Date: 2008–02–29
  4. By: Marco Bassetto
    Abstract: Across different layers of the U.S. government there are surprisingly large differences in institutional provisions that impose fiscal discipline, such as constitutionally mandated deficit or debt limits, or specific tax bases. In this paper we develop a framework that can be used to quantitatively assess their costs and benefits. The model features both endogenous and exogenous mobility across jurisdictions, so we can evaluate whether the different degree of mobility at the local vs. national level can justify different institutional restrictions. In preliminary results, we show that pure land taxes have very beneficial incentive effects, but can only raise limited amounts of revenues. In contrast, under exogenous mobility, income taxes lead unambiguously to insufficient incentives to invest in public capital, unless the fiscal constraints explicitly favor such investment. This conclusion seems to hold even with the introduction of endogenous mobility, since adverse congestion effects from inefficient migration offset the beneficial impact of (partial) capitalization of future taxes into land prices.
    Date: 2008
  5. By: Lopez, Ramon; Islam, Asif
    Abstract: Government spending should be regarded as a social and political phenomenon, not merely as a technical choice. We argue that there is an implicit contract between the organized elites and politicians which often leads to a pro-elite allocation of public resources. A natural and simple taxonomy of government spending follows from this view: spending in public goods broadly defined which mitigate market failures versus spending in non-social subsidies, mainly a vehicle to serve the elites. We theoretically and empirically show that pro-elite spending biases are costly in terms of economic growth. The empirical findings are exceptionally robust.
    Keywords: government spending, economic growth, market imperfections, investment, subsidies, International Development, Labor and Human Capital, Political Economy, Public Economics,
    Date: 2008
  6. By: Bruns, Christian; Himmler, Oliver
    Abstract: Whenever citizens want their elected officials to employ funds efficiently, they are in need of information in order to establish accountability. We develop an agency model with imperfect monitoring where newspapers provide voters with this information. The model predicts that an informed electorate is more likely to hold an incumbent accountable. Using panel data on Norwegian municipalities we show that increases in local newspaper circulation are associated with higher levels of local government efficiency as measured by an index introduced by the Norwegian authorities.
    Keywords: media; newspapers; local government; public sector efficiency; Norway
    JEL: H7 D72
    Date: 2008
  7. By: Jakobsson, Niklas (Department of Economics, School of Business, Economics and Law, Göteborg University); Nordblom, Katarina (Department of Economics, School of Business, Economics and Law, Göteborg University)
    Abstract: This theoretical paper shows how a central government can induce a policy concerning a municipal matter through a package of a policy requirement and a grant. We find that, due to fiscal competition and the possibility for citizens to move between municipalities, the central government can make all municipalities adopt the policy requirement despite the grant not being sufficiently high to make them gain from the reform. We apply this model to a recent Swedish child-care fee reform and can explain why all Swedish municipalities implemented the maximum child-care fee although it had a negative impact on many municipalities’ finances.<p>
    Keywords: child care; fiscal competition; municipality; intergovernmental grant
    JEL: H42 H72 H77 R23
    Date: 2009–01–08
  8. By: Simon Gaechter (Centre of Decision Research and Experimental Economics, School of Economics, University of Nottingham); Benedikt Herrmann (Centre of Decision Research and Experimental Economics, School of Economics, University of Nottingham)
    Abstract: Understanding the proximate and ultimate sources of human cooperation is a fundamental issue in all behavioural sciences. In this article we review the experimental evidence on how people solve cooperation problems. Existing studies show without doubt that direct and indirect reciprocity are important determinants of successful cooperation. We also discuss the insights from a large literature on the role of peer punishment in sustaining cooperation. The experiments demonstrate that many people are “strong reciprocators” who are willing to cooperate and punish others even if there are no gains from future cooperation or any other reputational gains. We document this in new one-shot experiments which we conducted in four cities in Russia and Switzerland. Our crosscultural approach allows us furthermore to investigate how the cultural background influences strong reciprocity. Our results show that culture has a strong influence on positive and in especially negative strong reciprocity. In particular, we find large crosscultural differences in “antisocial punishment” of pro-social co-operators. Further crosscultural research and experiments involving different socio-demographic groups document that antisocial punishment is much more widespread than previously assumed. Understanding antisocial punishment is an important task for future research because antisocial punishment is a strong inhibitor of cooperation.
    Keywords: human cooperation; strong reciprocity; public goods experiments; culture; antisocial punishment
    Date: 2008–12
  9. By: Matthew J. Higgins; Daniel Levy; Andrew T. Young
    Abstract: We use US county level data (3,058 observations) from 1970 to 1998 to explore the relationship between economic growth and the extent of government employment at three levels: federal, state and local. We find that increases in federal, state and local government employments are all negatively associated with economic growth. We find no evidence that government is more efficient at more decentralized levels – and thus reject Oates’ (1972) “decentralization theorem.” Furthermore, while we cannot separate out the productive and redistributive services of government, we document that the county-level income distribution became slightly wider from 1970 to 1998. For those who justify government activities in terms of equity concerns – perhaps even trading off economic growth for equity – the burden falls on them to show that the income distribution would have widened significantly more in the absence of government activities. We conclude that a release of government-employed labor inputs to the private sector would be growth-enhancing.
    Date: 2008–02

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