nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒01‒23
fifteen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. The behavioral validity of the strategy method in public good experiments By Urs Fischbacher; Simon Gaechter
  2. Public Goods and Voting on Formal Sanction Schemes: An Experiment By Louis Putterman; Jean-Robert Tyran; Kenju Kamei
  3. Tax burden and competition in the European Union – Does it change? By Szarowska, Irena
  4. Can lower tax rates be bought? Business rent-seeking and tax competition among U.S.States By Robert S. Chirinko; Daniel J. Wilson
  5. Enhanced Coorporation in an asymmetric model of Tax Competition By Hendrik Vrijburg; Ruud A. de Mooij
  6. A note on the valuation of collective goods: overlooked input market free riding for non-individually incrementable goods By Graves, Philip E.
  7. Specific Issues of the Structure and Relations between Executive and Legislature at Local Level in Romania By Matei, Lucica; Matei, Ani
  8. Optimal observability in a linear income tax By Joel Slemrod; Christian Traxler
  9. On Probation. An Experimental Analysis By Christoph Engel; Heike Hennig-Schmidt; Bernd Irlenbusch; Sebastian Kube
  10. Sponsoring a race to the top : the case for results-based intergovernmental finance for merit goods By Shah, Anwar
  11. The Reception of International Law by Constitutional Courts through the Prism of Legitimacy By Andreas Nicklisch; Irenaeus Wolff
  12. Political ideology and economic freedom across Canadian provinces By Christian Bjørnskov; Niklas Potrafke
  13. Who favors freer markets? The composition and interests of Russia’s regional business lobbies By William Pyle; Laura Solanko
  14. Citizen-centric governance indicators : measuring and monitoring governance by listening to the people and not the interest groups By Ivanyna, Maksym; Shah, Anwar
  15. A Nash bargaining solution to models of tax and investment competition: tolls and investment in serial transport corridors By Bruno De Borger; Wilfried Pauwels

  1. By: Urs Fischbacher (University of Konstanz); Simon Gaechter (University of Nottingham)
    Abstract: We compare the strategy method and the direct response method in public good experiments in a within-subject design. This comparison is interesting because the strategy method is frequently used to investigate preference heterogeneity. We find that people identified by the strategy method as conditional cooperators also behave as conditional cooperators under the direct response method. Free-rider types contribute systematically less than all others but show the most systematic deviation from the predicted contributions, because they contribute in the first half of the direct response experiment. Overall, our results support the behavioral validity of the strategy method in public good experiments.
    Keywords: Public goods experiments, strategy method, direct response method, voluntary cooperation, conditional cooperators, free riders
    JEL: C91 C72 H41 D64
    Date: 2009–12
  2. By: Louis Putterman (Department of Economics, Brown University); Jean-Robert Tyran (Department of Economics, University of Copenhagen); Kenju Kamei (Department of Economics, Brown University)
    Abstract: The burgeoning literature on the use of sanctions to support public goods provision has largely neglected the use of formal or centralized sanctions. We let subjects playing a linear public goods game vote on the parameters of a formal sanction scheme capable both of resolving and of exacerbating the free-rider problem, depending on parameter settings. Most groups quickly learned to choose parameters inducing efficient outcomes. But despite uniform money payoffs implying common interest in those parameters, voting patterns suggest significant influence of cooperative orientation, political attitudes, and of gender and intelligence.
    Keywords: public good; voluntary contribution; formal sanction; experiment; penalty; voting
    JEL: C91 C92 D71 D72 H41
    Date: 2010–01
  3. By: Szarowska, Irena
    Abstract: Enlargement of the European Union and the globalization process significantly affect tax systems and fiscal policies of individual countries. The level and structure of tax burden is often discussed in the European Union, as well as what is more profitable – keeping tax competition or tax harmonization. Tax environment and tax burden are significant factors when deciding about investment allocation. For international comparison, the easiest way is to use statutory tax rates but the result may be rather inaccurate. More convenient way of comparison is comparing implicit rates where we may express impact of taxes on economic activities according to their functions. The paper first summarizes basic theoretic approaches to tax competition. Then it is followed by an analysis of level and structure of tax burden in the European Union in the period of 1995 to 2006. There is emphasis on the dissimilarity of results depending on the type of tax rates used, namely statutory and implicit. The aim is to verify the hypothesis that value of tax burden (measured by tax quota) falls in time and that indirect taxes outweigh direct taxes in the tax burden of the European Union.
    Keywords: tax competition; tax burden; tax quota; implicit tax rate
    JEL: E62 F2 H2
    Date: 2009
  4. By: Robert S. Chirinko (University of Illinois at Chicago); Daniel J. Wilson (Federal Reserve Bank of San Francisco)
    Abstract: The standard model of strategic tax competition assumes that government policymakers are perfectly benevolent. We depart from this assumption by allowing policymakers to be influenced by the rent-seeking behavior of businesses. 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, we find that contributions have a significant direct effect on tax policy, the economic value of a $1 business campaign contribution is nearly $4, the slope of the tax reaction function is negative, and the empirical results are sensitive to state effects.
    Keywords: Campaign contributions, business taxation, state tax competition
    JEL: H71 H73 H25
    Date: 2010
  5. By: Hendrik Vrijburg (Erasmus University Rotterdam); Ruud A. de Mooij (Erasmus University Rotterdam, CPB, Tinbergen Institute, Oxford University Centre for Business Taxation, CESifo)
    Abstract: This paper analyzes enhanced cooperation agreements in corporate taxation in a three country tax competition model where countries differ in size. We characterize equilibrium tax rates and the optimal tax responses due to the formation of an enhanced cooperation agreement. Conditions for strategic complementarity or strategic substitutability of tax rates are crucial for the welfare effects of enhanced cooperation. Simulations show that enhanced cooperation is unlikely to be feasible for small countries. When enhanced cooperation is feasible, it may hamper global harmonization. Only when countries are of similar size is global harmonization a feasible outcome.
    Keywords: Tax coordination; Asymmetry; Enhanced Cooperation Agreements; Strategic Tax Response
    JEL: E62 F21 H25 H77
    Date: 2010
  6. By: Graves, Philip E.
    Abstract: For at least fifty years economists have argued that vertically-aggregated marginal willingness to pay, when set equal to marginal provision cost, will result in optimal public good provision levels. This methodological approach would be expected to yield an exact analog, in terms of optimal levels of public good provision, to efficient provision of private goods in a perfect market setting. There is, however, a potentially serious flaw in the approach as actually practiced, since initial incomes are implicitly–and wrongly–taken to be optimal. From a given income, the output demand revelation problem has long been recognized–that there will be difficulty inferring true demands for public goods at that income (the traditional ‘free rider’ problem). But what has failed to receive widespread recognition among theoreticians, and especially among practitioners, is that there will also be a concomitant ‘input demand revelation’ problem. In any situation where workers cannot individually increment a class of goods by increasing their income (e.g. public goods), they will have no incentive to generate the income that would have been devoted to that class of goods. They will only generate income that is optimal to pay the higher taxes or prices associated with whatever initial public goods levels are provided. As a consequence, the benefit-cost practitioner will, even if somehow able to accurately guess marginal willingness-to-pay out of current income, observe only one apparent optima. There are an infinite number of such optima, one for each level of free riding in input markets, where aggregated marginal willingness-to-pay will appear to equal marginal provision cost. The one true Samuelson ‘optimum optimorum’ occurs when there is free riding in neither output nor input markets (that is, when the ‘full’ demand revelation problem is solved). As a consequence, pure public goods, as well as other ‘non-incrementable’ goods and goods for which non-use values are of importance will be undervalued, hence under-provided. Evidence is presented that the problem raised here might be of importance, undermining the practical significance of the Coase theorem vis-a-vis Pigouvian taxation.
    Keywords: environmental economics; willingness-to-pay; willingness-to-accept; benefit-cost analysis; public goods; publicly-provided goods; efficiency
    JEL: D62 H0 A1 Q51 A2 H4 H42 Q5 C92 H43 N5 D61 D01 Q58
    Date: 2009
  7. By: Matei, Lucica; Matei, Ani
    Abstract: Public management and civil servant's performance, productivity and quality of public service, flexibility and responsiveness to challenges of change in administration, autonomy and decentralising, the reduced costs of reform represent only a part of the characteristics and requirement of administration. Administration as structure is approached from organisational perspective.The principles of public administration are the following: local autonomy, decentralising civil services of local interest, electing local government authorities, legality, consulting the citizens on local problems of special interest
    Keywords: Local legislature; the role of political parties; specific issues
    JEL: H19 D73 H72
    Date: 2002–05–15
  8. By: Joel Slemrod (University of Michigan); Christian Traxler (Max Planck Institute for Research on Collective Goods)
    Abstract: We study the optimal observability of the tax base within the standard linear income tax problem, where observability is determined by the government’s investment into the accurate measurement of the tax base. We characterize the optimal level of observability and derive a new expression for the optimal progressivity, which – in addition to the standard equity efficiency trade-off – accounts for the limited accuracy of an income tax system.
    Keywords: optimal linear income taxation, observability, tax enforcement
    JEL: D8 H11 H21
    Date: 2010–01
  9. By: Christoph Engel (Max Planck Institute for Research on Collective Goods, Bonn); Heike Hennig-Schmidt (University of Bonn, Dept. of Economics); Bernd Irlenbusch (London School of Economics and Max Planck Institute for Research on Collective Goods); Sebastian Kube (University of Bonn, Dept. of Economics and Max Planck Institute for Research on Collective Goods, Bonn)
    Abstract: Does probation pay a double dividend? Society saves the cost of incarceration, and convicts preserve their liberty. But does probation also reduce the risk of recidivism? In a meta-study we show that the field evidence is inconclusive. Moreover it struggles with an identification problem: those put on probation are less likely to recidivate in the first place. We therefore complement the field evidence by a lab experiment that isolates the definitional feature of probation: the first sanction is conditional on being sanctioned again during the probation period. We find that probationers contribute less to a joint project; punishment cost is higher; efficiency is lower; inequity is higher. While experimental subjects are on probation, they increase their contributions to a joint project. However, once the probation period expires, they reduce their contributions. While in the aggregate these two effects almost cancel out, critically those not punished themselves do trust the institution less if punishment does not become effective immediately.
    Keywords: probation, recidivism, public goods, punishment, experimental economics
    JEL: C91 H41 K14 K42
    Date: 2009–11
  10. By: Shah, Anwar
    Abstract: Intergovernmental finance is a significant source of sub-national finance in most countries. In both industrial and developing countries, formula based"manna from heaven"general purpose transfers dominate but co-exist with highly intrusive micro-managed"command and control"specific purpose transfers. Both these types of transfers undermine political and fiscal accountability. Reforms to bring in design elements that incorporate incentives for results-based accountability are resisted by both donors and recipients alike. This is because the donors perceive such reforms as attempts at chipping away at their powers and recipients fear such programs will be intrusive. This paper presents conceptual and practical underpinnings of grant designs that could further simplicity, objectivity, and local autonomy objectives while furthering citizen-centric results-based accountability. The paper further highlights a few notable recent initiatives in both industrial and developing countries that embrace such directions for reform. The paper concludes that results-based intergovernmental finance offers significant potential to minimize tradeoffs between local autonomy and accountability while furthering access to merit goods.
    Keywords: Banks&Banking Reform,Tertiary Education,Public Sector Economics,Public Sector Expenditure Policy,Access to Finance
    Date: 2010–01–01
  11. By: Andreas Nicklisch (Max Planck Institute for Research on Collective Goods, Bonn); Irenaeus Wolff (University of Erfurt)
    Abstract: Carpenter and Matthews (2009) examine the cooperation norms determining people's punishment behavior in a social-dilemma game. Their findings are striking: absolute norms outperform the relative norms commonly regarded as the determinants of punishment. Using multiple punishment stages and self-contained episodes of interaction, we disentangle the effects of retaliation and norm-related punishment. An additional treatment provides data on the norms bystanders use in judging punishment actions. Our results partly confirm the findings of Carpenter and Matthews: only for the punishment-related decisions in the first iteration is the absolute norm outperformed by the self-referential norm set by the punisher's own contribution. For the decisions in all later iterations, as well as for bystanders' support in all iterations, the absolute norm organizes our data best. In contrast to the study by Carpenter and Matthews, we find an absolute norm of 3=4 of players' endowments to be both consistent across decisions and relatively stable over time.
    Keywords: Experiment, public-good, punishment, social norms, voluntary cooperation
    JEL: C92 D63 H41
    Date: 2009–12
  12. By: Christian Bjørnskov (Aarhus School of Business, Aarhus University); Niklas Potrafke (University of Konstanz)
    Abstract: This paper examines how political ideology influenced economic freedom in the Canadian provinces. We analyze the dataset of economic freedom indicators compiled by the Fraser Institute in 10 Canadian provinces over the 1981-2005 period and introduce two different indices of political ideology: government and parliament ideology. The results suggest that government ideology influenced labor market reforms: market-oriented governments promoted liberalization of the labor market. Parliamentary ideology did not influence economic liberalization at all. This finding (1) identifies differences between leftist and rightwing governments concerning the role of government in the economy and (2) indicates that ideological polarization concerns governments but less parliamentary fractions in the Canadian provinces.
    Keywords: economic freedom, taxation, regulations, ideology, panel data
    JEL: O51 P16 R11 R50
    Date: 2009–12
  13. By: William Pyle; Laura Solanko
    Abstract: Why are some lobby groups less benign in their external effects than others? Olson (1982) proposed that those that are less encompassing in the sense that their constituents collectively represent a narrower range of sectors are more apt to seek the types of subsidies, tariffs, tax loopholes and competition-limiting regulations that impose costs on the rest of society. But his hypothesis has to our knowledge not been directly tested. Part of the reason, we suspect, relates to the absence of adequate data. By drawing on a unique pair of surveys, targeted to both business associations (lobby groups) and their constituents, we provide what we believe to be the first direct test of Olson’s hypothesis. Managers from a diverse array of Russian industrial firms and business associations were asked similar questions regarding their attitudes to policies that explicitly benefit well-defined sectoral or regional interests and, implicitly, impose external costs. The pattern of responses is striking. Managers of both the less encompassing associations and the firms that belong to such groups are much more apt to view such policies in a favorable light. More encompassing associations and the members of such organizations are relatively more skeptical of narrowly-targeted government interventions. The results, we believe, provide strong support for Olson’s hypothesis.
    Date: 2009
  14. By: Ivanyna, Maksym; Shah, Anwar
    Abstract: Governance indicators are now widely used as tools for conducting development dialogue, allocating external assistance, and influencing foreign direct investment. This paper argues that available governance indicators are not suitable for these purposes as they do not conceptualize governance and fail to capture how citizens perceive the governance environment and outcomes in their countries. The paper attempts to fill this void by conceptualizing governance and implementing a uniform and consistent framework for measuring governance quality across countries and over time based on citizens'evaluations. Using data from the World Values Survey (and other sources) we implement this framework into practice and build citizen-centric governance indicators for 120 countries over the period 1994 to 2005.
    Keywords: Governance Indicators,National Governance,Public Sector Corruption&Anticorruption Measures,Banks&Banking Reform,Economic Policy, Institutions and Governance
    Date: 2010–01–01
  15. By: Bruno De Borger (University of Antwerp); Wilfried Pauwels (University of Antwerp)
    Abstract: The purpose of this paper is to study toll and investment competition along a serial transport corridor competition allowing for partial cooperation between regional governments. Partial cooperation is modeled as a Nash bargaining problem with endogenous disagreement points. We show that the bargaining approach to partial cooperation implies lower tolls and higher quality and capacity investment than fully non-cooperative behavior. Moreover, under bargaining, strategic behavior at the investment stage induces regions to offer lower quality and invest less in capacity as compared to full cooperation. Finally, Nash bargaining partially resolves the problem of welfare losses due to toll and capacity competition pointed out in the recent literature.
    Keywords: Nash bargaining, tax competition, congestion pricing
    JEL: H71 H77 R48 R42
    Date: 2010

This nep-pbe issue is ©2010 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.