nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒04‒04
sixteen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. International Experiences with Decentralisation By Surie, Mandakini Devasher
  2. On the Link Between Fiscal Decentralization and Public Debt in OECD Countries By Baskaran, Thushyanthan
  3. Fiscal Centralization and the Political Process By Facundo Albornoz; Antonio Cabrales
  4. Supranational Integration And National Reorganization By Baskaran, Thushyanthan
  5. Essays on Asymmetric Federalism By Libman, Alexander
  6. A reading Hayek on power to tax By Fernando, Estrada
  7. Optimal Redistributive Taxation with both Extensive and Intensive Responses By Jacquet, Laurence; Lehmann, Etienne; Van der Linden, Bruno
  8. Distributional implications of income tax evasion in Greece, Hungary and Italy By Matsaganis, Manos; Benedek, Dóra; Flevotomou, Maria; Lelkes, Orsolya; Mantovani, Daniela; Nienadowska, Sylwia
  9. A panel study on the relationship between corruption and government size By Go, Kotera; Okada, Keisuke; Samreth, Sovannroeun
  10. Infrastructure and City Competitiveness in India By Lall,Somik V.; Gun Wang, Hyoung; Deichmann, Uwe
  11. A Simple Theory of Optimal Redistributive Taxation with Equilibrium Unemployment By Hungerbühler, Mathias; Lehmann, Etienne; Parmentier, Alexis; Van der Linden, Bruno
  12. A Structural Dynamic Micro-Simulation Model for Policy Analysis: Application to Pension Reform, Income Tax Changes and Rising Life Expectancy By Justin van de Ven; Martin Weale
  13. Taxation, Labor Market Policy and High-Impact Entrepreneurship By Henrekson, Magnus; Johansson, Dan; Stenkula, Mikael
  14. An Experimental Test of the Pigovian Hypothesis By Jason Delaney
  15. Optimal Public Utility Pricing: A Further Reconsideration By Masatoshi Yamada
  16. Federalism in Russia By Ekaterina Zhuravskaya

  1. By: Surie, Mandakini Devasher
    Abstract: Effective decentralisation requires the clear assignment of duties and responsibilities (functions); sufficient resources (funds) and staff (functionaries) needed to carry out public duties at each level of government. The 3Fs as they are commonly known are critical to the design of any decentralised system and must be carefully sequenced to ensure their success. This paper looks at how three countries – Bolivia, Switzerland and Uganda – have devolved the 3Fs to local governments.
    Keywords: Decentralization; local governance; federalism
    JEL: H77 H7
    Date: 2010–02
  2. By: Baskaran, Thushyanthan
    Abstract: Excessive borrowing by subnational governments is considered to be one of the perils of fiscal decentralization. On the other hand, fiscal decentralization might ensure the scal stability of the public sector by constraining Leviathan governments. Since the impact of decentralized government on fiscal outcomes is therefore ambiguous from a theoretical perspective, we explore this question empirically with a panel of 17 OECD countries over the 1975-2001 period. Our findings suggest that expenditure decentralization signicantly reduces public indebtedness, whereas tax decentralization and vertical fiscal imbalances are insignicant.
    Keywords: Fiscal decentralization; Public debt; Soft budget constraints
    JEL: H77
    Date: 2010
  3. By: Facundo Albornoz; Antonio Cabrales
    Abstract: We study the dynamic support for fiscal decentralisation in a political agency model from the perspective of a region. We show that corruption opportunities are lower under centralization at each period of time. However, centralization makes more difficult for citizens to detect corrupt incumbents. Thus, corruption is easier under centralization for low levels of political competition. We show that the relative advantage of centralization depends negatively on the quality of the local political class, but it is greater if the center and the region are subject to similar government productivity shocks. When we endogenize the quality of local politicians, we establish a positive link between the development of the private sector and the support for decentralization. Since political support to centralization evolves over time, driven either by economic/political development or by exogenous changes in preferences over public good consumption, it is possible that voters are (rationally) discontent about it. Also, preferences of voters and the politicians about centralization can diverge when political competition competition is weak.
    Keywords: decentralization, centralization, political agency, quality of politicians, corruption
    JEL: H11 D72 D73 P16
    Date: 2010–03
  4. By: Baskaran, Thushyanthan
    Abstract: We explore the implications of European integration for scal decentralization in EU member states with a dataset on 21 OECD countries over the 1975-2000 period. The dierence-in-dierence methodology is used to establish causality. EU member states are classied as the treatment and non-EU OECD countries as the control group. The Maastricht treaty is interpreted as a quasi-experimental policy intervention that substantially advanced European integration. Our results suggest that tax decentralization has increased in EU countries after the signing of the Maastricht treaty. The treaty's eect on expenditure decentralization also seems to be positive, but is less clear-cut.
    Keywords: Fiscal decentralization; Maastricht treaty; supranational integration; institutional change.
    JEL: H77
    Date: 2009–08
  5. By: Libman, Alexander
    Abstract: The growing research on fiscal and political federalism in economics (as well as rational choice political science) basically shares two main assumptions regarding federal institutions: it takes democratic and symmetric federations as the reference point. Democracy means that the decision making is based on elections and/or referenda, which effectively constraint the actions of politicians. Symmetry means that the ”degree of devolution” for all regions is identical. In particular, if both federal and regional budgets are funded by a common split tax, the de-jure retention rate is identical for all states. It goes without saying that there is a multitude of models looking at economic asymmetry between regions: most federations include states or regions with significantly different economic potential, population and territory, obviously influencing both their comparative economic performance and their behavior in the federal bargaining. However, the economic asymmetry does not (necessarily) provide an identity mapping into the asymmetric devolution in terms of formal institutions and informal policy making (what I refer to as ”asymmetric federation” in this paper): this issue requires careful analysis.
    Keywords: Federalism; decentralization; Russia.
    JEL: H77
    Date: 2009–10
  6. By: Fernando, Estrada
    Abstract: This article describes the argumentative structure of Hayek on the relationship between power to tax and redistribution. It is observed throughout its work giving special attention to two works: The Constitution of Liberty (1959) and Law, Legislation and Liberty, vol3, The Political Order of Free People, University of Chicago Press, Chicago, 1979.) Hayek describes one of the arguments most complete information bout SFP progressive tax systems (progressive tax). According to the author the history of the tax progressive system, works against such a tax model and deploys a variety of arguments in his favorite spot by critics: liberal democracy.
    Keywords: Hayek; Power to Tax; Redistribution; Government; Progressive Tax; Democracy
    JEL: E62 O23 B13 B2 E6
    Date: 2010–03–21
  7. By: Jacquet, Laurence (Norwegian School of Economics and Business Administration); Lehmann, Etienne (CREST-INSEE); Van der Linden, Bruno (Université Catholique de Louvain)
    Abstract: This paper characterizes optimal income taxation when individuals respond along both the intensive and extensive margins. Individuals are heterogeneous across two dimensions: specifically, their skill and disutility of participation. Preferences over consumption and work effort can differ with respect to the level of skill, with only the Spence-Mirrlees condition imposed. Employing a tax perturbation approach, we derive an optimal tax formula that generalizes previous results by allowing for income effects and extensive margin responses. We provide a sufficient condition for optimal marginal tax rates to be nonnegative everywhere. We discuss the relevance of this condition with analytical examples and numerical simulations using U.S. data.
    Keywords: optimal tax formula, tax perturbation, random participation
    JEL: H21 H23
    Date: 2010–03
  8. By: Matsaganis, Manos; Benedek, Dóra; Flevotomou, Maria; Lelkes, Orsolya; Mantovani, Daniela; Nienadowska, Sylwia
    Abstract: Even though tax evasion has been the focus of a growing volume of research in recent years, the issue of its distributional impact is still relatively neglected. This paper is an attempt to analyse empirically the implications of tax evasion in terms of inequality, poverty, redistribution and progressivity of the income tax system in Greece, Hungary and Italy (three countries featuring an extensive informal economy). The paper applies the discrepancy method, i.e. compares two sets of data, household budget surveys and income tax returns, to derive ratios of under-reporting by income source and geographical area. The tax-benefit model EUROMOD is used to estimate the distributional impact of tax evasion comparing household disposable incomes to a full compliance counterfactual.
    Keywords: tax evasion; inequality; microsimulation
    JEL: H23 H26
    Date: 2010–02–01
  9. By: Go, Kotera; Okada, Keisuke; Samreth, Sovannroeun
    Abstract: Using panel data from 1996 to 2005, this paper shows that the effect of government size on corruption is positive at a low level of democracy, but it is negative at a high level. This finding could fill the gaps in previous studies whose findings on the relationship between corruption and government size are controversial.
    Keywords: Corruption; Government size; Democracy; Panel data
    JEL: D73 H11 C23
    Date: 2010–02
  10. By: Lall,Somik V.; Gun Wang, Hyoung; Deichmann, Uwe
    Abstract: Do local improvements in infrastructure provision improve city competitiveness? What public finance mechanisms stimulate local infrastructure supply? And how do local efforts compare with national decisions of placing inter-regional trunk infrastructure? In this paper, we examine how the combination of local and national infrastructure supply improve city competitiveness, measured as the city’s share of national private investment. For the empirical analysis, we collect city-level data for India, and link private investment decisions to infrastructure provision. We find that a city’s proximity to international ports and highways connecting large domestic markets has the largest effect on its attractiveness for private investment. In comparison, the supply of local infrastructure services – such as municipal roads, street lighting, water supply, and drainage – enhance competitiveness, but their impacts are much smaller. Thus, while local efforts are important for competitiveness, they are less likely to be successful in cities distant from the country’s main trunk infrastructure. In terms of financing local infrastructure, we find that a city’s ability to raise its own source revenues by means of local taxes and user fees increases infrastructure supply, whereas as inter governmental transfers do not have statistically significant effects.
    Keywords: urbanization, cities, India, infrastructure
    Date: 2010
  11. By: Hungerbühler, Mathias (University of Namur); Lehmann, Etienne (CREST-INSEE); Parmentier, Alexis (University of Evry); Van der Linden, Bruno (Université Catholique de Louvain)
    Abstract: We propose a canonical model of optimal nonlinear redistributive taxation with matching unemployment. In our model, agents are endowed with different skill levels and labor markets are perfectly segmented by skill. The government only observes negotiated wages. More progressive taxation leads to wage moderation that boosts labor demand. We design the optimal nonlinear redistributive tax schedule in the absence of welfare benefits and extensive labor supply margin. Compared to their efficient values, at the optimum gross wages and unemployment are lower. Average tax rates are moreover increasing in wages. The robustness of these properties is also discussed.
    Keywords: optimal income taxation, unemployment, matching
    JEL: H21 H23 J64
    Date: 2010–03
  12. By: Justin van de Ven; Martin Weale
    Abstract: This paper describes the National Institute’s Benefit and Tax Model, NIBAX and provides results of studies using it to explore i) the introduction of low-cost pensions similar to Personal Accounts, ii) the effects of the abolition of the 10p income tax rate and iii) the consequences of rising life expectancy.
    Date: 2009–07
  13. By: Henrekson, Magnus (Research Institute of Industrial Economics (IFN)); Johansson, Dan (Ratio); Stenkula, Mikael (Research Institute of Industrial Economics (IFN))
    Abstract: Public policy affects the prevalence and performance of both productive and high-impact entrepreneurship. High-impact entrepreneurship prospers when knowledge is successfully generated and exploited in the economy. This process depends on complementary key ac-tors who use their competencies in what we denote a competence bloc. Although variations in economic contexts make prescribing a general panacea impossible, a number of relevant policy areas that affect key actors can be identified. In this paper this is done in the areas of tax policy and labor market policy. It is shown that high and/or distortive taxes and heavy labor market regulations impinge on the creation and functioning of competence blocs, thereby reducing high-impact entrepreneurship.
    Keywords: Entrepreneurship; Gazelles; High-growth firms; High-impact entrepreneurship Innovation; Institutions; Labor market policy; Tax policy
    JEL: H32 L25 L50 M13 O31 P14
    Date: 2010–03–23
  14. By: Jason Delaney
    Abstract: Implementation of Pigovian taxation relies on the presumption that individuals follow self-interested Nash equilibrium predictions of behavior when making decisions. Experimental evidence indicates that, while Nash predictions perform quite well in impersonal exchange, in other environments, subjects behave in ways inconsistent with these equilibria. The predictive power of game-theoretic results with respect to an optimal subsidy in a common-pool resource game (CPR) remains an open question. This paper presents an experiment with training and a simplified decision task, allowing more tractable computerized CPR experiments. In this experiment, subject behavior converges to the Nash prediction, but it takes a number of periods to reach convergence. In addition, this paper provides the first experimental test of theoretical predictions of behavior under an optimal subsidy in CPR games. I find that a Pigovian subsidy effectively moves subject behavior to the pre-subsidy social optimum. Finally, this paper provides evidence of a small and non-persistent effect of information provision in moving subjects toward the social optimum.
    Date: 2009–12
  15. By: Masatoshi Yamada (Faculty of Economics, Osaka University)
    Abstract: Pricing of public utilities has long been discussed after Hotteling (1947), and most preceding arguments have provided a negative answer to the question to attain a Pareto-efficient allocation in an economy with non-convex production possibilities. Contrasting to these, Kamiya (1995) provided an argument that it is possible to devise a pricing mechanism of non-convex technology good(s) such that the equilibrium allocation under the pricing mechanism is always Pareto-efficient. The present note intends to examine a small question to find how Kamiyafs arguemnt differs from the preceding, with an intention to clarify how the efficiency property of his pricing mechanism is secured. The reconsideration however leads to a negative result that Kamiyafs pricing mechanism will fail to assure the efficiency property in a simple illustrative economy considered by himself. We first confirms that the simple example given in Kamiya contradicts his main theorem, and then review Kamiyafs proving argument and examine where any slip remains.
    Keywords: Public utility pricing, non-convex economy, Pareto-efficient allocation
    JEL: D51 D61 H42
    Date: 2010–03
  16. By: Ekaterina Zhuravskaya (New Economic School, CEFIR, and CEPR)
    Date: 2010–03

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