nep-pbe New Economics Papers
on Public Economics
Issue of 2009‒05‒23
fourteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Constitutional Design: Separation of Financing and Project Decision By Hans Gersbach; Volker Hahn; Stephan Imhof
  2. Free riders and strong reciprocators coexist in public goods experiments: evolutionary foundations By Angelo Antoci; Paolo Russu; Luca Zarri
  3. Walras-Lindahl-Wicksell : What equilibrium concept for public goods provision ? I - The convex case. By Monique Florenzano
  4. Conspicuous Leisure: Optimal Income Taxation when both Relative Consumption and Relative Leisure Matter By Aronsson, Thomas; Johansson-Stenman, Olof
  5. From local to global public goods: how should externalities be represented? By Rosella Levaggi
  6. Hold Your Nose and Vote: Why Do Some Democracies Tolerate Corruption? By Marco Pani
  7. The economic cost of public funds in infrastructure investment By Riess, Armin
  8. Free Riders and Cooperators in Public Goods Experiments: Can Evolutionary Dynamics Explain their Coexistence? By Angelo Antoci; Paolo Russu; Luca Zarri
  9. Firm-oriented policies, tax cheating and perverse outcomes By Francesco Busato; Bruno Chiarini; Pasquale De Angelis; Elisabetta Marzano
  10. Why Pay Taxes When No One Else Does? By Epstein, Gil S.; Gang, Ira N.
  11. Welfare Measurement and Public Goods in a Second Best Economy By Aronsson, Thomas
  12. Macro-fiscal policy challenges and public investment in new EU member states By Schwartz, Gerd; Corbacho, Ana; Cui, Qiang; Ganelli, Giovanni; Manasse, Paolo
  13. The Size of Government and U.S.-European Differences in Economic Performance By Norikazu Tawara; Gerwin Bell
  14. Asymmetric Fiscal Stabilization Policy and the Public Deficit: Theory and Evidence By Karin Mayr; Johann Scharler

  1. By: Hans Gersbach (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Volker Hahn (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Stephan Imhof (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: We examine the provision of public projects under separate tax and subsidy rules. We find that tax rules separated from project cum subsidy decisions exhibit several advantages when incentive problems of the agenda-setter are taken into account. In particular, tax rules may prevent the proposal of inefficient projects which benefit only a small lobby group. We propose “redistribution efficiency” as a socially desirable property of proposals and find that tax rules always guarantee redistribution efficiency. We show that rules on subsidies combined with discretion regarding taxes always yield socially inferior proposals. Finally, tax rules induce the agenda-setter to look for potential improvements of public projects.
    Keywords: constitutional design, provision of public projects, voting, taxes and subsidies
    JEL: D72 H40
    Date: 2009–05
  2. By: Angelo Antoci; Paolo Russu; Luca Zarri
    Abstract: Experimental evidence indicates that free riders and strongly reciprocal papers coexist in the public goods game framework. By means of an evolutionary analysis, we provide an endogenization of this behavioral regularity.
    Keywords: Free Riding, Cooperation, Strong Reciprocity, Public Goods Game, Evolutionary Game Theory.
    JEL: B41 C73 D74 Z13
    Date: 2009–05
  3. By: Monique Florenzano (Centre d'Economie de la Sorbonne)
    Abstract: Despite the large number of its references, this paper is less a survey than a systematic exposition, in an unifying framework and assuming convexity as well on the consumption side as on the production side, of the different equilibrium concepts elaborated for studying provision of public goods. As weak as possible conditions for their existence and their optimality properties are proposed. The general conclusion is that the drawbacks of the different equilibrium concepts lead to founding public economic policy either on direct Pareto improving government interventions or on state enforcement of decentralized mechanisms.
    Keywords: Private provision equilibrium, Lindahl-Foley equilibrium, public competitive equilibrium, abstract economies, equilibrium existence, welfare theorems, core.
    JEL: D51 D60 H41
    Date: 2009–02
  4. By: Aronsson, Thomas (Department of Economics, Umeå University); Johansson-Stenman, Olof (Department of Economics, School of Business, Economics and Law, University of Gothenburg)
    Abstract: Previous studies on public policy under relative consumption concerns have ignored the role of leisure comparisons. This paper considers a two-type optimal nonlinear income tax model where people care both about their relative consumption and their relative leisure. Increased consumption positionality typically implies higher marginal income tax rates for both the high-ability and the low-ability type, whereas leisure positionality has an offsetting role. However, this offsetting role is not symmetric; concern about relative leisure implies a progressive income tax component, i.e., a component that is larger for the high-ability than for the low-ability type. Moreover, leisure positionality does not modify the policy rule for public good provision when the income tax is optimally chosen.
    Keywords: Optimal taxation; redistribution; public goods; relative consumption; status; positional goods
    JEL: D62 H21 H23 H41
    Date: 2009–05–11
  5. By: Rosella Levaggi
    Abstract: The literature on public goods provision has experienced a significant increase since Samuelson's (1954) paper. The common goal is to make the model more suitable to describe a more general class of non-rival goods. However, there does not seem to be a consensus in the literature on the form of the function to be used to describe the externality created by the public good. In this note we try to show the hypotheses underlying the functions used. The different models proposed are optimal when used in the right framework and this should be kept in mind when choosing the function in relation to the type of public good to be studied.
    Date: 2009
  6. By: Marco Pani
    Abstract: This paper analyses why corruption can persist for long periods in a democracy and inquires whether this can result from a well-informed rational choice of the citizens. By applying a citizen-candidate model of representative democracy, the paper analyzes how corruption distortsthe allocation of resources between public and private expenditure, altering the policy preferences of elected and nonelected citizens in opposite directions. The result is a reduction in real public expenditure and, if the median voter's demand for public goods is sufficiently elastic, a tax reduction. In this case, some citizens can indirectly benefit from corruption. The paper shows that, under this condition, if the citizens anticipate a shift in policy preferences in favor of higher public expenditure, they may support institutional arrangements that favor corruption (such as a weak enforcement of the law) in order to alter future policy decisions in their favor. This result complements the findings of other studies that have attributed the persistence of corruption in a democracyto some failure on the part of the voters or the electoral system. It also bears implications for developing effective anticorruption strategies and for redefining the role that can be played by the international community.
    Keywords: Corruption , Developed countries , Developing countries , Governance , Political economy , Government expenditures , Private sector , Legislation , Economic models ,
    Date: 2009–04–22
  7. By: Riess, Armin (European Investment Bank, Economic and Financial Studies)
    Abstract: This paper discusses alternative ways of defining and measuring the marginal economic cost of public funds and reviews empirical cost estimates - including estimates for EU countries. Moreover, it illustrates how the economic cost of public funds should be accounted for in cost-benefit analyses of government expenditure, notably on public infrastructure, and how the cost-benefit assessment changes if user fees contribute to the financing of infrastructure services. The paper also clarifies why the economic cost of public funds must not be confused with the social discount rate, social opportunity cost, and the interest rate on government debt. In this context, the paper discusses how government borrowing - that is, taxing later in lieu of taxing now - affects the cost-benefit assessment.
    Keywords: cost of public funds; excess burden of taxation; infrastructure; user fees; discounting
    JEL: D60 H21 H43 H54
    Date: 2008–07–18
  8. By: Angelo Antoci; Paolo Russu; Luca Zarri
    Abstract: An oft-cited and robust result from Public Goods Game experiments is that, when subjects start playing, the aggregate level of contributions is significantly different from zero. At the same time, a sizeable proportion of players free ride from the outset. Behavioural economics has persuasively shown that these laboratory findings are compatible with the presence of motivationally heterogeneous agents, displaying both standard, self-centred preferences and non-standard, interdependent preferences. However, at the theoretical level, economists would prefer to account for motivational heterogeneity endogenously, instead of simply assuming it from the outset. Our work provides such endogenisation, by assuming that social evolution is driven by material payoffs only. By separately focusing on different types of ‘experimentally salient’ pro-social players (such as Reciprocators, Strong Reciprocators and Altruists), we are able to shed light – to our knowledge, for the first time, within the public good framework – on the evolutionary stability of two-type populations consisting of positive proportions of both ‘nice’ and ‘mean’ guys.
    Keywords: Free Riding; Strong Reciprocity; Altruism; Nonstrategic Punishment; Public Goods Game; Evolutionary Game Theory.
    JEL: C7 D6 H8 Z1
    Date: 2009–05
  9. By: Francesco Busato; Bruno Chiarini; Pasquale De Angelis; Elisabetta Marzano (-; -; -; -)
    Abstract: This paper examines the implications of firm-oriented fiscal policies, namely investment subsidies and tax allowances, in an economy where producers may potentially avoid taxes. Among our results we stress the following. First, although investment subsidies induce increased capital accumulation (a level effect), they promote tax evasion; these subsidies induce firms to increase actual capital accumulation (a level effect), but also produce a reduction in the share of aggregate capital stock deployed in taxed, "official" production (a composition effect). Second, parameters characterizing the tax enforcement system play a major role in explaining tax evasion and firm size. Third, the technology structure matters for determining how to allocate resources between official and unofficial production.
    Keywords: State aid, tax exemptions, investment subsidies, tax evasion, unofficial underground production, investment
    JEL: E26 E22 H25 H26
    Date: 2008–08–31
  10. By: Epstein, Gil S. (Bar-Ilan University); Gang, Ira N. (Rutgers University)
    Abstract: In this paper we try to understand the phenomena whereby a large proportion of the population evades tax payments. We present a model which incorporates elements from the theory of information cascades with the standard model of tax evasion and analyze the connection between the decision of a potential tax evader, the number of tax evaders and the number caught in previous periods. General conditions exist under which any expected utility maximizing tax evaders will decide to emulate other tax evaders.
    Keywords: tax evasion, uncertainty, information cascades
    JEL: H26 H31 D82
    Date: 2009–04
  11. By: Aronsson, Thomas (Department of Economics, Umeå University)
    Abstract: This chapter concerns welfare measurement in economies, where the government raises revenue by means of distortionary taxation. A major issue is the treatment of (state-variable) public goods in the context of social accounting. Although the marginal value that the government attaches to a public good is model-specific (as it depends on the exact nature of the underlying decision-problem), the analysis explains how the direct resource cost of providing increments to the public good and the marginal cost of public funds can be used to measure this marginal value. The first part of the chapter is based on a representative-agent growth model with linear taxation, whereas the second part addresses a model with heterogeneous agents and nonlinear taxation. The latter model also provides a framework for analyzing redistribution in the context of social accounting, and enables me to compare the results with those that would follow in a first best resource allocation.
    Keywords: Social accounting; second best; public goods
    JEL: D30 D60 H21 H41
    Date: 2009–05–11
  12. By: Schwartz, Gerd (International Monetary Fund); Corbacho, Ana (International Monetary Fund); Cui, Qiang (International Monetary Fund); Ganelli, Giovanni (International Monetary Fund); Manasse, Paolo (University of Bologna.)
    Abstract: Most new EU member states (NMS) need further fiscal adjustment to support economic growth and macroeconomic stability. In this context, achieving income convergence with other EU members rests more with maintaining productivity growth, attracting foreign savings, and improving investment efficiency than with increasing government spending (including for infrastructure). Additional institutional fiscal reforms, aimed at improving expenditure efficiency and facilitating private sector investment, will be needed to support these objectives. However, further fiscal adjustment and reforms do not necessarily need to depress public investment. New financing options for public investment - including from various EU funds and through public-private partnerships - can ease existing fiscal and macroeconomic constraints, but present both new opportunities and challenges that need to be handled carefully.
    Keywords: new member states; sustainable growth; convergence; infrastructure investemnt; public-private partnership; EU fund
    JEL: F21 H54 H62
    Date: 2008–07–18
  13. By: Norikazu Tawara; Gerwin Bell
    Abstract: An influential strand of recent research has claimed that large governments in European countries explain their weaker long-term economic performance compared to the U.S. On the other hand, despite these alleged costs, large governments have been popular with electorates. This paper seeks to shed light on this apparent inconsistency; it confirms an adverse effect of taxes on labor supply, but also finds evidence of efficiency-increasing government intervention. However, and especially in the core "Rhineland-model" European countries, actual government policies often depart from such efficient interventions, pointing to the possibility that voters prefer redistribution even at the cost of allocational efficiency.
    Keywords: Public sector , United States , Europe , Public finance , National income , Government expenditures , Economic models , Cross country analysis ,
    Date: 2009–04–23
  14. By: Karin Mayr; Johann Scharler
    Abstract: This paper studies the implications of asymmetric fiscal stabilization policy for the budget deficit. In our model, the government is more concerned about downturns than upturns in economic activity and therefore conducts fiscal stabilization policy in a precautionary way. We show that this type of behavior results in a deficit which on average exceeds its target levelt. We test our hypothesis empirically and find that asymmetric preferences for output stabilization are consistent with how fiscal policy was conducted in a sample of OECD countries during 1987-2005. According to our estimates, the upward bias due to precautionary behavior accounted for roughly 13 percent of the average deficit.
    JEL: H62 E60 E32
    Date: 2009–05

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