nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒03‒13
seventeen papers chosen by
Oliver Budzinski
Philipps-University of Marburg

  1. Determinants of Constitutional Change: Why Do Countries Change Their Form of Government? By Bernd Hayo; Stefan Voigt
  2. Fiscal decentralization and intergovernmental grants: the European regional policy and Spanish autonomous regions By Juan González Alegre
  3. Fiscal equalization and political conflict By Maria Cubel
  4. On the ease of overstating the fiscal stimulus in the US, 2008-9 By Joshua Aizenman; Gurnain Kaur Pasricha
  5. Do Governments Tax Agglomeration Rents? By Hyun-Ju Koh; Nadine Riedel
  6. The productivity of the public sector in OECD countries: eGovernment as driver of efficiency and efficacy By Corsi, Marcella; D'Ippoliti, Carlo
  7. Financial transactions tax : panacea, threat, or damp squib ? By Honohan, Patrick; Yoder, Sean
  8. Border Tax Adjustments to Negate the Economic Impact of an Electricity Generation Tax By Reyno Seymore; Margaret Mabugu; Jan van Heerden
  9. The Role of Headquarters in Multinational Profit Shifting Strategies By Matthias Dischinger; Nadine Riedel
  10. The Effects of Central Grants on Decentralized Social Programs: Post]2005 School Expense Assistance in Japan By Masayoshi Hayashi; Yohei Kobayashi
  11. The effects of tax incentives for small firms on employment levels By Corseuil, Carlos Henrique L.; Moura, Rodrigo Leandro de.
  12. Innovation, Public Capital, and Growth By Pierre-Richard Agénor; Kyriakos C. Neanidis
  13. Governance, Institutions, and Regional Infrastructure in Asia By De, Prabir
  14. Institutionalized Public Sector Corruption:a Legacy of the Soeharto Franchise By Ross H. McLeod
  15. Power, ideology, and electoral competition By Alejandro Saporiti
  16. Should Governments Minimize Debt Service Cost and Risk? By Massimo Bernaschi; Alessandro Missale; Davide Vergni
  17. Political Disagreement and Delegation in a Multi-Level Governance Setting By Annemarije Oosterwaal; Diane Payne; René Torenvlied

  1. By: Bernd Hayo (Philipps-University Marburg); Stefan Voigt (University of Hamburg)
    Abstract: A country’s form of government has important economic and political consequences, but the determinants that lead societies to choose either parliamentary or presidential systems are largely unexplored. This paper studies this choice by analyzing the factors that make countries switch from parliamentary to presidential systems (or vice versa). The analysis proceeds in two steps. First, we identify the survival probability of the existing form of government (drawing on a proportional hazard model). In our model, which is based on 169 countries, we find that geographical factors and former colonial status are important determinants of survival probability. Also, presidential systems are, ceteris paribus, more likely to survive than parliamentary ones. Second, given that a change has taken place, we identify the underlying reasons based on panel data logit models. We find that domestic political factors are more important than economic ones. The most important factors relate to intermediate internal armed conflict, sectarian political participation, degree of democratization, and party competition, as well as the extent to which knowledge resources are distributed among the members of society.
    Keywords: Constitutional change, institutional dynamics, form of government, endogenous constitutions, separation of powers
    JEL: H11 K10 P48
    Date: 2010
  2. By: Juan González Alegre (Universidad Pablo de Olavide)
    Abstract: Most of the Structural Actions are designed as an incentive to increase public investment in less-developed areas. However, we suspect that the efficiency of the policy is related to the level of fiscal autonomy of the subsidized government. In this paper we construct a paned data model in order to estimate the role of fiscal federalism on the effectiveness of the EU Structural Actions in enhancing public investment. We use data from the seventeen Spanish regions for the period 1993-2007. The estimation is run upon three alternative strategies: firstly we break the sample according to the level of fiscal autonomy of the units; secondly, we insert an interaction term capturing the join effect of both variables, fiscal decentralization and EU Structural Actions; finally, we estimate a simultaneous equation model in which public investment and the EU transfers are decided simultaneously. Results unambiguously support the hypothesis that the effectiveness of the Structural Funds decreases with larger decentralization. Our results suggest also that this could be due to the fact that regions find it more difficult to be eligible for additional EUSF as they gain fiscal autonomy. The general conclusions include the recommendation that the future design of the European Cohesion policy should take into account the heterogeneity of Fiscal Federalism across the Member States in order to the get the most out of it.
    Keywords: fiscal federalism, intergovernmental grants, European Union, regional policy, panel data, simultaneous equations for panels
    JEL: H72 H77 C33 C23
    Date: 2010
  3. By: Maria Cubel (University of Barcelona & IEB)
    Abstract: In this paper we analyze the political viability of equalization rules in the context of a decentralized country. In concrete terms, we suggest that when equalization devices are perceived as unfair by one or more regions, political conflict may emerge as a result. Political conflict is analysed through a non cooperative game. Regions are formed by identical individuals who, through lobbying, try to impose their regional preferences on the rest of the country, and political conflict is measured as the total contribution to lobbying. We conclude that the onset of conflict depends on the degree of publicness of the regional budget. When regional budgets are used to provide pure public goods, proportional equalization is politically feasible. However, no equalization rule is immune to conflict when budgets are used to provide private goods or a linear combination of private and public goods.
    Keywords: political conflict, lobbying, equalization grants, social decision rules
    JEL: D74 D31 H77 R51
    Date: 2010
  4. By: Joshua Aizenman; Gurnain Kaur Pasricha
    Abstract: This note shows that the aggregate fiscal expenditure stimulus in the United States, properly adjusted for the declining fiscal expenditure of the fifty states, was close to zero in 2009. While the Federal government stimulus prevented a net decline in aggregate fiscal expenditure, it did not stimulate the aggregate expenditure above its predicted mean. We discuss the implications of limitations on states' ability to run deficits for the design of fiscal stimulus at the federal level. We devote particular attention to intertemporal moral hazard concerns in a federal fiscal system, and ways to address these concerns.
    JEL: E62 F36 H5 H77
    Date: 2010–02
  5. By: Hyun-Ju Koh (University of Munich,); Nadine Riedel (Oxford University Centre for Business Taxation, CESifo Munich)
    Abstract: Using the German local business tax as a testing ground, we empirically investigate the impact of firm agglomeration on municipal tax setting behavior. The analysis exploits a rich data source on the population of German firms to construct detailed measures for the communities' agglomeration characteristics. The findings indicate that urbanization and localization economies exert a positive impact on the jurisdictional tax rate choice which confirms predictions of the theoretical New Economic Geography (NEG) literature. Further analysis suggests a qualification of the NEG argument by showing that a municipality's potential to tax agglomeration rents depends on its firm and industry agglomeration relative to neighboring communities. To account for potential endogeneity problems, our analysis exploits long-lagged population and infrastructure variables as instruments for the agglomeration measures.
    Keywords: Agglomeration Rents, Corporate Taxation, Regional Differentiation
    JEL: H73 R12
    Date: 2010
  6. By: Corsi, Marcella; D'Ippoliti, Carlo
    Abstract: This article aims at illustrating a theoretical approach to the analysis of the dynamics of productivity in the public sector, and at presenting a preliminary application of it to the estimation of the impact on productivity of the recent development of e-Government processes in a number of OECD countries. Our analysis serves a twofold purpose: at the microeconomic level, we set out to provide individual public administrations (PAs) with an instrument to evaluate the benefits, in terms of output, of alternative projects, particularly through a more efficient organisation of the relevant information. At the macroeconomic level, the aim is to highlight a significant relationship between e-Government and economic growth, as an indicator of social wellbeing.
    Keywords: e-Government; ICT; public sector; productivity growth
    JEL: H54 O47 H11 H83 O31
    Date: 2010–03–01
  7. By: Honohan, Patrick; Yoder, Sean
    Abstract: Attempts to raise a significant percentage of gross domestic product in revenue from a broad-based financial transactions tax are likely to fail both by raising much less revenue than expected and by generating far-reaching changes in economic behavior. Although the side-effects would include a sizable restructuring of financial sector activity, this would not occur in ways corrective of the particular forms of financial overtrading that were most conspicuous in contributing to the crisis.
    Keywords: Debt Markets,Emerging Markets,Taxation&Subsidies,Banks&Banking Reform,Economic Theory&Research
    Date: 2010–03–01
  8. By: Reyno Seymore (Department of Economics, University of Pretoria); Margaret Mabugu (Department of Economics, University of Pretoria); Jan van Heerden (Department of Economics, University of Pretoria)
    Abstract: In the 2008 Budget Review, the South African government announced its intention to levy a 2c/kWh tax on the sale of electricity generated from non-renewable sources. This measure is intended to serve a dual purpose of helping to manage the current electricity supply shortages and to protect the environment (National Treasury 2008). An electricity generation tax is set to have an impact on the South African economy. However, several instruments have been proposed in the literature to protect the competitiveness and economy of a country when it imposes a green tax, one of these remedies being border tax adjustments.This paper evaluates the effectiveness for the South African case, of border tax adjustments (BTAs) in counteracting the negative impact of an electricity generation tax on competitiveness. The remedial effects of the BTAs are assessed in the light of their ability to maintain the environmental benefits of the electricity generation tax. Additionally, the the Global Trade Analysis Project (GTAP) model is used to evaluate the impact of an electricity generation tax on the South African, SACU and SADC economies and to explore the possibility of reducing the economic impact of the electricity generation tax through BTAs. The results show that an electricity generation tax will lead to a contraction in South African gross domestic product (GDP). Traditional BTAs are unable to address these negative impacts. We propose a reversedBTA approach where gains from trade are utilised to counteract the negative effects of an electricity generation tax, while retaining the environmental benefits associated with the electricity generation tax. This is achieved through a lowering of import tariffs, as this will reduce production costs and thereby restore the competitiveness of the South African economy. The reduction in import tariffs not only negates the negative GDP impact of the electricity generation tax, but the bulk of CO2 abatement from the electricity generation tax is retained.
    Date: 2010–02
  9. By: Matthias Dischinger (University of Munich); Nadine Riedel (Oxford University Centre for Business Taxation, CESifo Munich)
    Abstract: This paper stresses the special role of multinational headquarters in corporate profit shifting strategies. Using a large panel of European firms, we show that multinational enterprises (MNEs) are reluctant to shift profits away from their headquarters even if these are located in high-tax countries. Thus, shifting activities in response to corporate tax rate differentials between parents and subsidiaries are found to be significantly larger if the parent observes a lower corporate tax rate than its subsidiary and profit is thus shifted towards the headquarters firm. This result is in line with recent empirical evidence suggesting that MNEs bias the location of profits and highly profitable assets in favor of the headquarters location (for agency cost reasons among others).
    Keywords: Multinational Firm, Profit Shifting, Headquarters Location
    JEL: H25 H26 C33
    Date: 2010
  10. By: Masayoshi Hayashi; Yohei Kobayashi
    Abstract: This study examines the effects of central matching grants for the School Expense Assistance (SEA) in the midst of increasing child poverty in Japan. The 2005 reform replaced SEA grants with increases in general revenues through the system of Local Allocation Tax (LAT). By exploiting the facts that the replaced grants were closed]ended and that LAT disbursements were not made to every locality, we could not only identify the effects of the matching grants but also decompose the effects into price and income effects. We show that the 2005 change indeed suppressed SEA expenditures. The loss of matching grants reduced per]recipient SEA benefits by about JPN\5,000 (US$56) for first]year elementary school students and JPN\12,000 (US$133) for first]year junior high school students. The loss also reduced recipient percentage among students by 1.2-2.1 percentage points from 11.52 percent in 2004, although the eligibility criteria were barely affected.
    Keywords: school expense assistance,fiscal transfers, differnce-in-difference, Japan
    JEL: H73 H75 H77
    Date: 2010–03
  11. By: Corseuil, Carlos Henrique L.; Moura, Rodrigo Leandro de.
    Abstract: This paper will examine the effects of tax incentives for small businesseson employment level evaluating a program with this purpose implemented in Brazil in the 1990s. We first develop a theoretical framework which guides both the de nition of the parameters of interest and their identi cation. Selection problems both into the treatment group and into the data sampleare tackled by combining fi xed effects methods and regression discontinuity design on alternative sub-samples of a longitudinal database of manufacturing fi rms. The results show that on the one hand the size composition of thetreated fi rms may be changed due to the survival of some smaller fi rms that would have exited had it not been eligible to the program. On the other hand, the treated fi rms who do not depend on the program to survive do employ more workers.
    Date: 2010–02–22
  12. By: Pierre-Richard Agénor; Kyriakos C. Neanidis
    Abstract: This paper studies interactions between public capital, human capital, and innovation in a three-period OLG model of endogenous growth. Public capital affects growth not only through productivity, but also through the diffusion rate of new technologies, the capacity to innovate, and the ability to produce human capital. Trade-offs involved in the allocation of public spending to R&D subsidies and nonlinearities are discussed. Panel data regressions based on a sample of 38 industrial and developing countries are used to test, using a variety of estimation techniques and variable definitions, the implications of the model over the period 1981-2008. Results show that higher innovation performance promotes growth directly, whereas public capital (both quantity and quality) has both direct and indirect effects on growth by promoting human capital accumulation and raising the capacity to innovate. The latter effect appears to operate in a nonlinear fashion, in line with “critical mass” models of infrastructure. Taking proper account of the government’s budget constraint, our estimates also suggest that public spending on R&D contributes to growth by fostering innovation.
    Date: 2010
  13. By: De, Prabir (Asian Development Bank Institute)
    Abstract: This study is a comprehensive, empirical analysis of the linkages between governance, institutions, and regional infrastructure. The empirical results indicate that governance and institutions are crucial for regional infrastructure development: every one point improvement in governance results in a 1 to 1.5 point rise in regional infrastructure. Countries (and regions) with higher income, stronger institutions, better governance, and more open economies are likely to have higher levels of regional infrastructure. The findings of this paper suggest that our efforts to promote regional infrastructure must not be limited to traditional policy measures aimed at attracting investment in infrastructure, but must also address policy reform across a number of areas. Thus, institutions and governance must play an important complementary role in strengthening Asia’s regional infrastructure.
    Keywords: regional infrastructure asia; governance; institutions; economics; governance; infrastructure; regional infrastructure asia
    JEL: F10 F15 O19
    Date: 2010–01–04
  14. By: Ross H. McLeod
    Abstract: Attempts to maintain prices different from those that would otherwise be determined by supply and demand are virtually guaranteed to result in illegal behaviour, including in the case of laws that determine the salaries of civil servants. In Indonesia, private sector salaries are highly progressive with respect to increasing levels of responsibility, whereas the civil service structure is very flat, resulting in an enormous gap between private and public sector salaries at higher levels of management. As a consequence, informal--and often illegal--income generating practices are observed that make public sector careers far more attractive than formal remuneration levels would suggest. It is argued here that it is unhelpful to view endemic corruption simply in terms of unprincipled behaviour. Rather, it is best understood in terms of institutional weakness in the form of continued reliance on entrenched personnel management practices from the Soeharto era that deliberately ignored market realities.
    Keywords: franchise, Indonesia, rents, private taxation, bureaucratic extortion
    JEL: D72 D73 P16 P17
    Date: 2010
  15. By: Alejandro Saporiti
    Date: 2010
  16. By: Massimo Bernaschi (Istituto Applicazioni del Calcolo ``M. Picone'', CNR); Alessandro Missale (University of Milan); Davide Vergni (Istituto Applicazioni del Calcolo ``M. Picone'', CNR)
    Abstract: Simulation-based cost-risk analysis of the interest expenditure is increasingly used for policy evaluation of public debt strategies by governments around the world. This paper is a first attempt to empirically evaluate this approach by comparing its implications for the maturity structure of public debt with those derived from the optimal taxation theory of debt management. To this end, we simulate the time path of the distribution of the interest expenditure for stylized portfolios of different maturities using simple stochastic models of the evolution of the term structure of interest rates, and examine the performance of such portfolios with standard cost-risk indicators. We find that: i) the ranking of debt portfolios by expenditure risk may depend on the length of the simulation period; to obtain the same policy conclusions as the optimal taxation theory, the time horizon must extend up to the redemption date of the longest maturity bond issued over the simulation period; ii) in sharp contrast with optimal taxation theory, a cost-risk trade off naturally emerges when a risk premium on long term bonds is considered, but this may not be sufficient to identify the optimal maturity structure. Our analysis points to the danger of assuming the cost-risk minimization of the interest expenditure as the main objective of debt management. A policy that either aims to minimize the interest expenditure over a too short horizon or does not consider that risk premiums may reflect a fair price for insurance may lead to sub-optimal debt strategies.
    Keywords: debt management, maturity structure, interest costs, interest rate risk, optimal taxation, simulation models, term structure,
    Date: 2009–12–15
  17. By: Annemarije Oosterwaal (Department of Sociology / ICS, Utrecht University); Diane Payne (School of Sociology/Geary Institute, University College Dublin); René Torenvlied (Department of Sociology / ICS, Utrecht University)
    Abstract: A large share of delegation models takes into account the effect of political disagreement when explaining delegation. Yet, delegation models make sharply contrasting predictions on how political disagreement translates into the level of discretion delegated to agencies. Moreover, empirical findings are contradictory. The current paper addresses this puzzle by disentangling mechanisms driving the effect of political disagreement on delegation. Furthermore, we distinguish conditions interacting with the effect of political disagreement on discretion. We apply the conditions to the research context of the present paper: economic restructuring in the UK under New Labour, which took place in a multi-level governance setting. We derive hypotheses on the effect of political disagreement on discretion and explore our theoretical predictions with the use of a novel dataset on economic restructuring in the UK under New Labour (Bennett and Payne 2000). Our analysis show that political disagreement leads to lower levels of discretion delegated.
    Date: 2010–03–03

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