nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒01‒16
24 papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Incomplete contracts and excludable public goods By Felix Bierbrauer
  2. On the Legitimacy of Coercion for the Financing of Public Goods By Felix Bierbrauer
  3. Do external grants to district governments discourage own-revenue generation?: A look at local public finance dynamics in Ghana By Mogues, Tewodaj; Benin, Samuel; Cudjoe, Godsway
  4. The role of mobility in tax and subsidy competition By Alexander Haupt; Tim Krieger
  5. Can lower tax rates be bought? Business rent-seeking and tax competition among U.S. states By Robert S. Chirinko; Daniel J. Wilson
  6. The Theory of Optimal Taxation: New Developments and Policy Relevance By Peter Birch Sørensen
  7. Public-Good Provision in a Large Economy By Felix Bierbrauer; Martin Hellwig
  8. Fiscal Federalism in Belgium: Main Challenges and Considerations for Reform By Willi Leibfritz
  9. How to Reform the Belgian Tax System to Enhance Economic Growth By Jens Høj
  10. Dual Income Taxes: A Nordic Tax System By Peter Birch Sørensen
  11. Voting on Thresholds for Public Goods: Experimental Evidence By Julian Rauchdobler; Rupert Sausgruber; Jean-Robert Tyran
  12. Tax Contracts and Elections By Hans Gersbach; Maik T. Schneider
  13. Fiscal Spending and the Environment: Theory and Empirics By Ramon Lopez; Gregmar Galinato; Asif Islam
  14. Heterogeneous firms, "Profit Shifting" FDI and international tax competition By Sebastian Krautheim; Tim Schmidt-Eisenlohr
  15. How much income redistribution? An explanation based on vote-buying and corruption By Loukas Balafoutas
  16. (Uncontrolled) Aggregate shocks or vertical tax interdependence? Evidende from gasoline and cigarettes By Alejandro Esteller-More (Universitat de Barcelona); Leonzio Rizzo (Universita di Ferrara)
  17. The Effect of Bans and Taxes on Passive Smoking By Jérôme Adda; Francesca Cornaglia
  18. Decentralization and local public services in Ghana: Do geography and ethnic diversity matter? By Akramov, Kamiljon T.; Asante, Felix Ankomah
  19. Fiscal, Distributional and Efficiency Impacts of Land and Property Taxes By Andrew Coleman; Arthur Grimes
  20. An Alternate Approach to Theory of Taxation and Sources of Public Finance in an Interest Free Economy By Shaikh, Salman
  21. Characteristics of the Reforming Process in the Romanian Public Administration System By Andrei, Tudorel; Matei, Ani; Tusa, Erika; Nedelcu, Monica
  22. Budgetary Separation of Powers in the American States and the Tax Level: A Regression Discontinuity Design By Leandro M. De Magalhães; Lucas Ferrero
  23. The Futile Quest for a Grand Explanation of Long-Run Government Expenditure By Durevall, Dick; Henrekson, Magnus
  24. Leading by Words: A Voluntary Contribution Experiment With One-Way Communication By Anastasios Koukoumelis; M. Vittoria Levati; Johannes Weisser

  1. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: We study the provision of an excludable public good to discuss whether the imposition of participation constraints is desirable. It is shown that this question may equivalently be cast as follows: should a firm that produces a public good receive tax revenues, or face a self-financing requirement. The main result is that the desirability of participation constraints is shaped by an equity-efficiency tradeoff: While first-best is out of reach with participation constraints, their imposition yields a more equitable distribution of the surplus. This result relies on an incomplete contracts perspective. With a benevolent mechanism designer, participation constraints are never desirable.
    Keywords: Large Economy, Mechanism Design, Public-good provision
    JEL: D60 D70 D82 H41
    Date: 2010–01
  2. By: Felix Bierbrauer (Max Planck Institute)
    Abstract: The literature on public goods has shown that efficient outcomes are impossible if participation constraints have to be respected. This paper addresses the question whether they should be imposed. It asks under what conditions efficiency considerations justify that individuals are forced to pay for public goods that they do not value. It is shown that participation constraints are desirable if public goods are provided by a malevolent Leviathan. By contrast, with a Pigouvian planner, efficiency can be achieved. Finally, the paper studies the delegation of public goods provision to a profit-maximizing firm. This also makes participation constraints desirable.
    Keywords: Public goods, Mechanism Design, Incomplete Contracts, Regulation
    JEL: D02 D82 H41 L51
    Date: 2009–11
  3. By: Mogues, Tewodaj; Benin, Samuel; Cudjoe, Godsway
    Keywords: Decentralization, Inter-governmental transfers, Local government, Internally generated revenues, Development strategies,
    Date: 2009
  4. By: Alexander Haupt (University of Plymouth); Tim Krieger (University of Paderborn)
    Abstract: In this paper, we analyse the role of mobility in tax and subsidy competition. Our primary result is that increasing ‘relocation’ mobility of firms leads to increasing ‘net’ tax revenues under fairly weak conditions. While enhanced relocation mobility intensifies tax competition, it weakens subsidy competition. The resulting fall in the governments’ subsidy payments overcompensates the decline in tax revenues, leading to a rise in net tax revenues. We derive this conclusion in a model in which two governments are first engaged in subsidy competition and thereafter in tax competition, and firms locate and potentially relocate in response to the two political choices.
    Keywords: Tax competition, subsidy competition, capital and firm mobility, foreign direct investment
    JEL: H71 H87 F H
    Date: 2009
  5. By: Robert S. Chirinko; Daniel J. Wilson
    Abstract: The standard model of strategic tax competition – the non-cooperative tax-setting behavior of jurisdictions competing for a mobile capital tax base – assumes that government policymakers are perfectly benevolent, acting solely to maximize the utility of the representative resident in their jurisdiction. We depart from this assumption by allowing for the possibility that policymakers, given the political and electoral environments in which they operate, also may be influenced by the rent-seeking (lobbying) behavior of businesses. Firms recognize the factors affecting policymakers’ welfare and may make campaign contributions to influence tax policy. These changes to the standard strategic tax competition model imply that business contributions affect not only the levels of equilibrium tax rates but also the slope of the tax reaction function between jurisdictions. Thus, business campaign contributions may affect tax competition and enhance or retard the mobility of capital across jurisdictions. ; Based on a panel of 48 U.S. states and unique data on business campaign contributions, our empirical work uncovers four key results. First, we document a significant direct effect of business contributions on tax policy. Second, the economic value of a $1 business campaign contribution in terms of lower state corporate taxes is nearly $4. Third, the slope of the reaction function between tax policy in a given state and the tax policies of its competitive states is negative. Fourth, we highlight the sensitivity of the empirical results to state effects.
    Keywords: Taxation
    Date: 2009
  6. By: Peter Birch Sørensen (Department of Economics, University of Copenhagen)
    Abstract: The theory of optimal taxation has often been criticized for being of little practical policy relevance, due to a lack of robust theoretical results. This paper argues that recent advances in optimal tax theory has made that theory easier to apply and may help to explain some current trends in international tax policy. Covering the taxation of labour income and capital income as well as indirect taxation, the paper also illustrates how some of the key results in optimal tax theory may be derived in a simple, heuristic manner.
    Keywords: optimal taxation; uniform taxation; tax neutrality
    JEL: H21 H24 H25
    Date: 2009–04
  7. By: Felix Bierbrauer (Max Planck Institute for Research on Collective Goods, Bonn); Martin Hellwig (Max Planck Institute for Research on Collective Goods)
    Abstract: We propose a new approach to the normative analysis of public-good provision in a large economy. Our analysis is based on a mechanism design approach that involves a requirement of coalition-proofness, as well as a requirement of robustness, so that the mechanism must not depend on specific assumptions about individual beliefs. Our main result shows that such a mechanism can condition only on the population shares of people with valuations above and below the per capita provision costs. This suggests an intriguing link between mechanism design for large economies and voting.
    Keywords: Large Economy, Mechanism Design, Public-good provision
    JEL: D60 D70 D82 H41
    Date: 2010–01
  8. By: Willi Leibfritz
    Abstract: The paper discusses the current state of fiscal relations across levels of government in Belgium and how it has developed over time. As the current system of fiscal federalism is creating imbalances between the federal and the sub-federal governments (vertical imbalance), and between sub-federal governments (horizontal imbalance) the paper also suggests directions for improvements. Without reform, the vertical imbalance will widen as the fiscal burden from the ageing of the population falls mainly on the federal level. Reform should therefore strengthen the fiscal capacity of the federal government by improving its revenue sources and by shifting some spending obligations to sub-federal governments. The imbalance between regions arises because of the lack of coherence between taxation and spending. Shared revenues from the personal income tax are allocated to the region of residence, while the region of the workplace does not benefit, which particularly affects Brussels’ revenue level. This imbalance could be eliminated by allocating more of the shared personal income tax to the region of the workplace. Furthermore, the system of equalisation grants should be re-designed to provide incentives to the recipient regions to develop their own revenue base. The performance of the fiscal system could further be improved by raising the efficiency of spending in areas of national interest, which have been assigned to sub-federal governments or where there are overlapping responsibilities, such as in employment, R&D, training, education, energy and environmental policies.<P>Fédéralisme budgétaire en Belgique : Défis principaux et réformes envisageables<BR>Cet document de travail porte sur l’état actuel des relations budgétaires entre les différents niveaux d’administration en Belgique ainsi que sur la manière dont celles-ci ont évolué au fil du temps. Partant du constat que le système qui donne corps au fédéralisme budgétaire est source de déséquilibres entre l’administration fédérale et les échelons infra-fédéraux (déséquilibre vertical) de même qu’entre les différentes entités fédérées (déséquilibre horizontal), les auteurs esquissent des orientations pour l’améliorer. Faute de réformes, le déséquilibre vertical ne fera que s’accentuer dans la mesure où la charge budgétaire imposée par le vieillissement de la population grèvera principalement le budget fédéral. Aussi la réforme devra-telle viser à renforcer la capacité budgétaire de l’administration fédérale en améliorant ses sources de recettes et en faisant basculer la charge représentée par certaines dépenses obligatoires sur les entités fédérées. Le déséquilibre entre régions résulte du manque de cohérence entre fiscalité et dépenses. Les recettes partagées provenant de l’impôt sur le revenu des personnes physiques sont attribuées à la région de résidence tandis que la région du lieu de travail n’en bénéficie pas, ce qui pénalise particulièrement la région de Bruxelles-Capitale en termes de recettes. Cette anomalie pourrait être corrigée en attribuant à la région du lieu de travail une proportion plus élevée des recettes partagées de l’impôt sur le revenu des personnes physiques. Par ailleurs, il conviendrait de réorganiser le système des subventions de péréquation afin d’inciter les régions bénéficiaires à développer leurs propres sources de recettes fiscales. La performance du système budgétaire pourrait être encore améliorée si l’on réussissait à accroître l’efficience des dépenses dans les domaines d’intérêt national qui sont du ressort des entités fédérées ou dans lesquels on observe un chevauchement de compétences, qu’il s’agisse des politiques de l’emploi, de la R-D, de la formation, de l’éducation, de l’énergie et de l’environnement.
    Keywords: equalisation, fiscal co-ordination, fiscal federalism, tax assignment
    JEL: H7 H71 H72 H73 H75 H77
    Date: 2009–12–14
  9. By: Jens Høj
    Abstract: Individual elements in Belgian tax system affect the growth process through different channels and to a varying degree. Consumption taxes are among the least distortive for growth, and there is considerable scope to increase the reliance on this tax source in Belgium. The Belgian differential taxation of saving vehicles distorts investment decisions, hampering the reallocation of capital towards its most productive use. However, the most distortive Belgian taxes are on labour through their effects on workers’ labour market decisions. Recognising the latter, the authorities have aimed at reducing taxation on labour. However, its level remains internationally high, reflecting numerous exemptions, which reduce tax bases and thus require higher tax rates than otherwise. To promote labour market prospects for individual groups on the labour market, wage subsidies and social security contribution reductions have been used extensively, leading to a complex system, often poorly targeted and at times subject to conflicting objectives. The end result is that the interaction between the personal income tax, the social security contributions, and the generous benefit systems has created a multitude of labour market traps which hold back employment. New tax reforms are constrained by the large and growing fiscal sustainability problem, implying that, unless substantial expenditure cuts are implemented, new tax reforms must be self-financed. This can be achieved by shifting the reliance of the tax system towards the least distortive sources and by broadening tax bases to allow lower tax rates. This Working Paper relates to the 2009 OECD Economic Survey of Belgium (<P>Comment réformer le système fiscal belge afin de renforcer l’expansion économique<BR>Les éléments constitutifs des systèmes fiscaux influent sur le processus de croissance par des canaux différents et à des degrés divers. Les impôts sur la consommation sont parmi ceux qui faussent le moins la croissance et il est tout à fait possible, en Belgique, d’exploiter davantage cette source de recettes fiscales. La taxation différenciée des instruments l’épargne fausse les décisions d’investissement, entravant le redéploiement des capitaux vers leur emploi le plus productif. Cependant, les impôts qui occasionnent le plus de distorsions sont ceux qui frappent le revenu du travail, en raison de leur impact sur les décisions des travailleurs en matière d'emploi. Conscientes de cela, les autorités belges ont cherché à alléger la fiscalité du travail. Cette dernière demeure cependant lourde en comparaison des autres pays, en raison de nombreuses exonérations, qui réduisent les bases d’imposition et nécessitent donc, pour compenser, des taux d’impôt plus élevés. Afin d’améliorer les perspectives des différents groupes sur le marché du travail, on a recouru largement à des subventions salariales et des réductions de cotisations de sécurité sociale, créant ainsi un système complexe, souvent mal ciblé et visant parfois des objectifs contradictoires. En fin de compte, l’interaction entre l’impôt sur le revenu des personnes physiques, les cotisations de sécurité sociale et le généreux système de prestations a créé une multitude de pièges du marché du travail qui brident l’emploi. Les nouvelles réformes fiscales sont limitées par les problèmes importants et grandissants de viabilité des finances publiques, ce qui signifie que, à moins de procéder à de fortes compressions de dépenses, ces réformes devront s’autofinancer. Pour ce faire, il faut déplacer la charge fiscale vers les sources qui créent le moins de distorsions et élargir les bases d’imposition afin de pouvoir appliquer des taux plus bas. Ce document de travail se rapporte à l’Étude économique de l’OCDE de la Belgique, 2009 (
    Keywords: Belgium, consumption tax, contribution, fiscal sustainability, labour market decisions, social security, tax and growth, tax bases, tax rates, taxation of savings vehicles
    JEL: H20 H23 H24 H25 O16
    Date: 2009–12–18
  10. By: Peter Birch Sørensen (Department of Economics, University of Copenhagen)
    Abstract: This paper discusses the principles and practices of dual income taxation in the Nordic countries. The first part of the paper explains the rationale and the historical background for the introduction of the dual income tax and describes the current Nordic tax practices. The second part of the paper focuses on the problems of taxing income from small businesses and the issue of corporate-personal tax integration under the dual income tax, considering alternative ways of dealing with these challenges. In the third and final part of the paper, I briefly discuss whether introducing a dual income tax could be relevant for New Zealand.
    Date: 2009–03
  11. By: Julian Rauchdobler (Department of Public Economics, University of Innsbruck); Rupert Sausgruber (Department of Public Economics, University of Innsbruck); Jean-Robert Tyran (Department of Economics, University of Copenhagen)
    Abstract: Introducing a threshold in the sense of a minimal project size transforms a public goods game with an inefficient equilibrium into a coordination game with a set of Pareto-superior equilibria. Thresholds may therefore improve efficiency in the voluntary provision of public goods. In our one-shot experiment, we find that coordination often fails and exogenously imposed thresholds are ineffective at best and often counter-productive. This holds under a range of threshold levels and refund rates. We test if thresholds perform better if they are endogenously chosen, i.e. if a threshold is approved in a referendum, because voting may facilitate coordination due to signaling and commitment effects. We find that voting does have signaling and commitment effects but they are not strong enough to significantly improve the efficiency of thresholds.
    Keywords: provision of public goods; threshold; voting; experiments
    JEL: H41 D72 C92
    Date: 2009–12
  12. By: Hans Gersbach (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland); Maik T. Schneider (CER-ETH - Center of Economic Research at ETH Zurich, Switzerland)
    Abstract: In this paper we examine the impact of tax contracts as a novel institution on elections, policies, and welfare. We consider a political game in which three parties compete to form the government. Parties have policy preferences about the level of public-good provision and benefit from perks when in office. A government raises taxes for both purposes. We show that tax contracts yield moderate policies and lead to lower perks by avoiding the formation of grand coalitions in order to win government. Moreover, in polarized societies they unambigously improve the welfare of the median voter.
    Keywords: political contracts, elections, government formation, tax promise
    JEL: D72 D82 H55
    Date: 2009–12
  13. By: Ramon Lopez; Gregmar Galinato; Asif Islam (School of Economic Sciences, Washington State University)
    Abstract: During economic crises, governments often increase fiscal spending to stimulate the economy. While the fiscal spending surge is sometimes temporary, recessions are opportunities to revise the spending composition often in favor of expenditures in social programs and other public goods which tend to persist over time. We model and measure the impact of fiscal spending patterns on the environment. The model predicts that a reallocation of government spending composition towards public goods reduces pollution while increasing total government spending has an ambiguous effect on pollution. We find consistent empirical results for various air and water pollutants. Increased environmental sustainability may be an important silver lining of economic crises.
    Keywords: Government Spending, Public Goods, Pollution
    JEL: H11 H20 O13 Q53
    Date: 2009–08
  14. By: Sebastian Krautheim (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - Ecole des Hautes Etudes en Sciences Sociales (EHESS) - Ecole Nationale des Ponts et Chaussées - Ecole Normale Supérieure de Paris - ENS Paris); Tim Schmidt-Eisenlohr (European University Institute - EUI)
    Abstract: Larger firms are more likely to use tax haven operations to exploit international tax differences. We study a tax game between a large country and a tax haven modeling heterogenous monopolistic firms, which can shift profits abroad. We shows that a higher degree of firm heterogeneity (a mean-preserving spread of the cost distribution) increases the degree of tax competition, i.e. it decreases the equilibrium tax rate of the large country, leads to higher outflows of its tax base and thus decreases its equilibrium tax revenue. Similar effects hold for a higher substitutability across varieties. We find that models with homogeneous firms understate the strenght of tax competition.
    Keywords: Heterogeneous firms, tax competition, profit shifting, tax havens.
    Date: 2009–10
  15. By: Loukas Balafoutas
    Abstract: This paper studies how income tax rates are determined and how they are related to government corruption in the form of fund capture. A model is presented where rich voters can block redistribution by buying the votes of some poor voters. In equilibrium there is only limited redistribution and income tax rates are a negative function of government corruption. When rich voters can bribe the government, an additional equilibrium with zero taxation is possible. The link between corruption and tax rates is tested using cross country data; the empirical evidence is fully consistent with the predictions of the model.
    Keywords: tax rates, vote-buying, lobbying, government corruption
    JEL: D72 D73 H2 H3
    Date: 2009–12
  16. By: Alejandro Esteller-More (Universitat de Barcelona); Leonzio Rizzo (Universita di Ferrara) (Universitat de Barcelona)
    Abstract: Besley and Rosen (1998) were the first authors to empirically estimate the presence of vertical tax externalities. They tested it on gasoline and tobacco unitary taxes. However, they did not take into account the difference in cost of living across states: high cost areas pay less in real terms than low cost areas, since the nominal unit tax on cigarettes and gasoline does not differ according to the state in which it is applied. Consequently, we propose that vertical tax competition can be estimated by deflating all financial variables using the House Price Index (HPI), which is disaggregated by states. This produces a federal tax variable that is expressed in real terms and shows crosssectional variation. This empirical strategy enabled us to disentangle the vertical interdependence between state and federal tax rates from aggregate shocks over time, using US data from 1975 to 2006 on gasoline and tobacco. We found significant horizontal tax competition, which was higher for cigarettes, but no vertical tax reaction. The results were robust to the period analyzed.
    Keywords: tax setting, vertical tax externality
    JEL: H77 H21 H3
    Date: 2009
  17. By: Jérôme Adda; Francesca Cornaglia
    Abstract: This paper evaluates the effect of smoking bans in public places on the exposure to tobacco smoke of non-smokers and contrasts it with the effect of excise taxes. Exploiting data on cotinine - a metabolite of nicotine - as well as state and time variation in anti-smoking policies across US states, we show that smoking bans in public places can perversely increase the exposure of non-smokers to tobacco smoke by displacing smokers to private places where they contaminate non-smokers, and in particular young children. In contrast, we find that higher taxes are an efficient way to decrease exposure to tobacco smoke, especially for those most exposed. We supplement this analysis by showing that bans have little effect on smoking cessation, and present evidence of displacement from public places using data on time use.
    Keywords: smoking, taxes, bans
    JEL: I1 H2
    Date: 2009–10
  18. By: Akramov, Kamiljon T.; Asante, Felix Ankomah
    Abstract: "This paper explores disparities in local public service provision between decentralized districts in Ghana using district- and household-level data. The empirical results show that districts' geographic locations play a major role in shaping disparities in access to local public services in Ghana. Most importantly, the findings suggest that ethnic diversity has significant negative impact in determining access to local public services, including drinking water. This negative impact is significantly higher in rural areas. However, the negative impact of ethnic diversity in access to local public services (drinking water) decreases as average literacy level increases. The paper relates the results to literature and discusses policy implications of main findings." from authors' abstract
    Keywords: Decentralization, Access to public services, Ethnic diversity, Geography, Development strategies,
    Date: 2009
  19. By: Andrew Coleman (Motu Economic and Public Policy Research); Arthur Grimes (Motu Economic and Public Policy Research)
    Abstract: Land taxes are known to be amongst the most efficient forms of taxation since land is an immobile factor; property (capital value) taxes are less efficient owing to the tax on improvements. However there is little international (or New Zealand) evidence regarding the distributional impacts of land and property taxes. Nor is there much New Zealand evidence on their potential fiscal implications or about the taxes’ impacts on asset values and debt positions. We explore impacts that may arise from a range of land and property taxes that differ across certain features (e.g. comprehensiveness and degree of grand-fathering). Both partial and general equilibrium models are used. The results provide a basis for considering alternative taxation options involving land or property taxes.
    Keywords: land tax, property tax
    JEL: H21 H22 H24
    Date: 2009
  20. By: Shaikh, Salman
    Abstract: This unique study discusses the theory of taxation in Islam and the role of Zakat in an Islamic economy. Zakat is a compulsory payment i.e. a tax in this sense paid to the government on one’s income and wealth. The Zakat rates are studied for their viability and effectiveness to fulfill fiscal needs of the government. Based on the evidence from many countries, it is argued that Zakat rates are substantial enough to generate the needed public finance given the large tax base and free the government from using seignorage and deficit financing. Its compulsory nature both as per law of the land and as per religion would ensure minimum tax evasion and its progressive and direct nature would effectively redistribute income. The effect of Zakat on the overall macroeconomy, the financial system, monetary system, property market, stock market, inflation, foreign debt, balance of payments, FDI and the on the development oriented variables like inequality and poverty are also discussed to give a holistic view of the effects of the proposed system.
    Keywords: Interest free economy; Public finance; Taxation; Inequality; Income redistribution; Islamic Economic System; fiscal policy; deficit financing.
    JEL: E62 H2 H3
    Date: 2009–12
  21. By: Andrei, Tudorel; Matei, Ani; Tusa, Erika; Nedelcu, Monica
    Abstract: This paper aims to analyze, starting from the case of Romania, the degree to which public administration reform contributes to the reduction of corruption. In this paper, which has its own methodology, the level of corruption is estimated and a series of factors that can contribute to its reduction in a certain time interval are determined. The analysis of the public administration reform process was realized by using a representative survey conducted in May 2007 at the public administration level. A two-phase sampling technique was used to build the sample, which included 971 civil servants from central and local public administration. The reforming process of the central and local public administration Romania is analyzed with regard to the civil service reform, the decentralization process and fight against corruption in the public administration. Eight statistical variables were defined in order to analyze these aspects. Most of the variables used in this study reveal significant differences at the level of the four types of public administration institutions. Nevertheless, the analysis shows that the intensification of the reform process at civil service level leads to the reduction of the level of corruption
    Keywords: administrative reform;corruption;performance;transparency;pressure of political system;decentralization
    JEL: D73 G38 H53
    Date: 2009–02
  22. By: Leandro M. De Magalhães; Lucas Ferrero
    Abstract: Should the Federal government and the remaining American states adopt the line item veto? What are its effects? We use regression discontinuity design to claim that in states with the line item veto, divided government has a causal negative effect on the tax level. By investigating a panel of 38 American states from 1960 to 2006, we estimate a significant discontinuous increase of 13% in the tax level as the party affiliated with the Governor in the state Legislature switches from being the minority party to being the majority. In the nine states that have block veto, we find no significant discontinuity in the tax level. We also find little evidence to suggest that the partisan identity of the majority party in the Legislature has a causal effect on the state tax level.
    Keywords: Separation of powers, line item veto, tax level, regression discontinuity, nonparametric
    JEL: H00 H11 H20 H30 H71
    Date: 2009–10
  23. By: Durevall, Dick (School of Business, Economics and Law); Henrekson, Magnus (Research Institute of Industrial Economics (IFN))
    Abstract: This paper carries out a critical reappraisal of the two contending theories purporting to explain long-run government spending: Wagner’s Law and different variants of the ratchet effect. We analyze data spanning from the early 19th century until the present day in Sweden and the United Kingdom. Hence, in contrast to previous studies, we evaluate the validity of Wagner’s Law and the ratchet effect hypothesis over a very long time period, starting at the beginning of industrialization. Cointegration analysis is used to investigate the long-run relationships between government expenditure and GDP, focusing on sub-periods and parameter stability. Moreover, we test the ratchet effect hypothesis by estimating models which allow for asymmetric adjustment. According to our main results, Wagner’s Law does not hold in the long run, although the data are consistent with Wagner’s Law between roughly 1860 and the late 1960s in Sweden, and the 1970s in the UK. This can be traced to the formation of the modern public sector, including the introduction of public education, health care, and so forth. Yet Wagner’s Law did not hold during the initial industrialization phase (before 1860), or during recent periods. Finally, we find some evidence of asymmetric adjustment, particularly in the post WWII period in the UK: Public expenditure grows more during bad times than it decreases during good times. However, the ratchet effect is only a short to medium-term phenomenon.
    Keywords: Government expenditure; Growth of government; Public sector; Ratchet effect; Wagner’s Law
    JEL: H55 I38 J22
    Date: 2010–01–02
  24. By: Anastasios Koukoumelis (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); M. Vittoria Levati (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany); Johannes Weisser (Max Planck Institute of Economics, Strategic Interaction Group, Jena, Germany)
    Abstract: In this paper, we study a voluntary contribution mechanism with one-way communication. The relevance of one person's words is assessed by assigning exogenously the role of the "communicator" to one group member. Contrary to the view that the mutual exchange of promises is necessary for the cooperation-enhancing effect of communication, we ï¬nd that, compared to a standard voluntary contribution mechanism with no communication, one-way communication signiï¬cantly increases contributions and renders them stable over time. Moreover, the positive effects of one-way communication persist even when communication is one-shot.
    Keywords: Public goods experiment, Computer-mediated communication, Cheap-talk, Cooperation
    JEL: C72 C92 H41
    Date: 2009–12–21

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