nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒04‒11
fifteen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. The Provision of Public Goods with Positive Group Interdependencies By Werner Güth; Lauri Sääksvuori
  2. On the political economy of tax limits By Stephen Calabrese; Dennis Epple
  3. How sensitive is the provision of public inputs to specifications? By Diego Martinez Lopez; A. Jesus Sanchez Fuentes
  4. Tax compliance under tax regime changes By Heinemann, Friedrich; Kocher, Martin G.
  5. Decentralization and Local Governments’ Performance: How Does Fiscal Autonomy Affect Spending Efficiency? By Lorenzo Boetti; Massimiliano Piacenza; Gilberto Turati
  6. Social fragmentation and public goods : polarization, inequality and patronage in Uttar Pradesh and Bihar. By Catherine Bros
  7. Taxing Our Neighbors? Why Some Sub-National Revenues Are So Small By Jorge Baldrich
  8. Is agglomeration taxable? By Jordi Jofre-Monseny
  9. The Link between the Intrinsic Motivation to Comply and Compliance Behavior – A Critical Appraisal of Existing Evidence By Martin Halla
  10. Fiscal decentralisation and the quality of public services in Russian regions By Alexander Plekhanov; Lev Freinkman
  11. Public governance of central banks: an approach from new institutional economics By Yoshiharu Oritani
  12. Political Institutions and the Dynamics of Public Investment By Marco Battaglini; Salvatore Nunnari; Thomas R. Palfrey
  13. Timing of death and the repeal of the Swedish inheritance tax By Eliason, Marcus; Ohlsson, Henry
  14. The future of public debt: prospects and implications By Stephen Cecchetti; Madhusudan Mohanty; Fabrizio Zampolli
  15. Do Leaders Affect Government Spending Priorities? By Adi Brender; Allan Drazen

  1. By: Werner Güth (Max Planck Insitute of Economics, Jena); Lauri Sääksvuori (Max Planck Insitute of Economics, Jena)
    Abstract: This article examines the nature of human behavior in a nested social dilemma referred to as the Spillover Game. Players are divided into two groups with positive production interdependencies. Based on theoretically derived opportunistic, local, and global optima, our experimental results demonstrate the importance of in-group beneficiaries over global efficiency. We find that the observed behavior is primarily determined by an imperfect conditional cooperation that prioritizes local level feedback. Results stress the importance of building strong local level commitment to encourage the provision of public goods with positive externalities.
    Keywords: Public good, experiment, groups, Spillover Game, social dilemma
    JEL: H41 C72 C91 C92
    Date: 2010–03–25
  2. By: Stephen Calabrese (Carnegie Mellon University); Dennis Epple (Carnegie Mellon University)
    Abstract: We study the political economy of state limitations on the taxing powers of local governments, investigating the effects of such restriction on housing markets, community composition, and types of taxes and expenditures undertaken by local governments. We characterize equilibrium when voters choose values of multiple policy (tax and expenditure) instruments, finding that tax limitations have very substantial effects on housing prices and the composition of communities. Political support for tax limits comes from suburban voters and from a subset of central-city voters. Support for tax limits come even from residents of communities that are not constrained by the limits.
    Keywords: Tax limits, redistribution, public goods, property tax, income tax, head tax
    JEL: D72 D78 H30 H42 H72 H73
    Date: 2010
  3. By: Diego Martinez Lopez (Department of Economics, Universidad Pablo de Olavide); A. Jesus Sanchez Fuentes (Department of Economics, Universidad Pablo de Olavide)
    Abstract: This paper studies the sensitivity of provision of public inputs to changes in the specification of technology and consumer preferences. We consider a simple model in which the government, with recourse to three different tax settings (a lump-sum tax, a tax on labour and a tax on economic profit), provides firms with certain productive services. We focus on the numerical results coming from the government optimization problem. We look at several specific cases in which the returns to scale in the production function emerges as a critical issue. Our …findings also address the impact of changes in output elasticity, in consumer preferences and in the number of households on the levels of public input and utility.
    Keywords: firm-augmenting public input, factor-augmenting public input, optimal provision
    JEL: H21 H3 H41 H43
    Date: 2010–03
  4. By: Heinemann, Friedrich; Kocher, Martin G.
    Abstract: In this paper we focus on the compliance effects of tax regime changes. According to the economic model of tax evasion, a tax reform should affect compliance through its impact on tax rates and incentives. Our findings demonstrate the importance of at least two further effects not covered by the traditional model: First, reform losers tend to evade more taxes after the reform. Second, a reform from a proportionate to a progressive system decreases compliance compared to a switch in the reverse direction. However, the level of compliance is generally higher under a progressive than under a proportionate regime.
    Keywords: tax reforms; tax compliance; experiment
    JEL: C72 C91 H26
    Date: 2010–03
  5. By: Lorenzo Boetti (Catholic University of Milan); Massimiliano Piacenza (Department of Economics and Public Finance "G. Prato", University of Torino); Gilberto Turati (Department of Economics and Public Finance "G. Prato", University of Torino)
    Abstract: In Italy, as in other countries around the world, recent reforms share the goal of increasing the fiscal autonomy of lower tiers of governments, from Regions to Municipalities, in order to align spending with funding responsibilities and increase the efficiency in the provision of essential public services. The purpose of this paper is to assess spending efficiency of local governments and to investigate the effects of tax decentralization, focusing on the role played by incumbent politicians’ accountability. The analysis relies on a sample of Italian municipalities and exploits both parametric (SFA) and nonparametric (DEA) techniques to study spending inefficiency and its main determinants. Consistently with modern fiscal federalism theories, our results show that more fiscally autonomous municipalities exhibit less inefficient behaviours. We also find that the shorter is the distance from new elections, the higher is excess spending, thus giving further support to the traditional “electoral budget cycle” agument. Other political features of governing coalition, such as age and gender of the mayor, do not seem to exert any significant impact on inefficiency levels.
    Keywords: Local governments, Fiscal autonomy, Political accountability, Spending efficiency, Parametric and nonparametric frontiers
    JEL: D72 D78 H71 H72 H77 R51
    Date: 2010–03
  6. By: Catherine Bros (Centre d'Economie de la Sorbonne and CSH - Delhi)
    Abstract: A vast recent literature has stressed social fragmentation's negative impact on the provision of public goods. It has been established theoretically that social fragmentation engenders discord and thereby undermines public goods provision. Empirical research has produced mixed results about this relationship. On the one hand it rarely holds for all the goods and on another hand it appears attenuated at the micro-level. Three points ought to be considered. First, the negative role attributed to social fragmentation rests upon the actuality of a relationship between social antagonisms and ethnic diversity. Yet, such an actuality is to be proved. Second, should such a relationship exist, polarization indices would be more appropriate than the traditional fractionalization index used so far in the literature. Third, theoretical works have set aside the possibility of ethnic patronage in accessing public goods. Nevertheless, it is a central issue as patronage is common in developing countries. In this event, a positive relationship could be found between social fragmentation and the presence of public goods. This article aims at showing that such a positive relationship does exist, at least in parts of India, as a consequence of caste patronage. It also shown that polarization is irrelevant as social antagonisms do not seem to be an obstacle to the provision of public goods.
    Keywords: Political economy, patronage, public goods, collective action, inequality, Olson, Caste, India.
    JEL: H4 O1 O2
    Date: 2010–03
  7. By: Jorge Baldrich (Department of Economics, Universidad de San Andres)
    Abstract: This paper analyzes the determinants of local government revenues and the incentives faced by politicians in the design of tax policy. The decision of deepening local tax collections carries costs and benefits for local politicians. Balancing in the margin these costs and benefits allows for an endogenous determination of the taxing level. The paper stresses the role of markets size in determining politicians’ incentives to enact a tax regime. In addition, we provide a rationale for the central government-local government tax ratio as a key tax effort variable. Furthermore, local levels of income inequality are relevant in explaining tax collections.
    Keywords: tax, sub-national revenues
    Date: 2010–03
  8. By: Jordi Jofre-Monseny (University of Barcelona & IEB)
    Abstract: Several theoretical papers that examine tax competition with agglomeration effects have stressed the possibility that the governments of jurisdictions in which economic activity is concentrated may tax firms more heavily (taxable agglomeration rents). In this paper, we examine the tax rate setting decisions taken with regard to the Spanish municipal business tax (Impuesto sobre Actividades Económicas). The analysis, carried out with a sample of 2,772 municipalities, focuses on the effect that urbanization economies, localization economies and the market potential of municipalities have on their business tax rates. High urbanization economies and high localization economies are found to increase the business tax rate. Although the evidence is weaker, the results also indicate that municipalities with better access to demand (of consumers) set higher tax rates
    Keywords: Local taxes, agglomeration economies, tax competition
    JEL: H3 H7 R
    Date: 2010
  9. By: Martin Halla
    Abstract: Recent economic literature emphasizes the importance of moral considerations to explain compliance behavior with respect to underground activities such as tax evasion. A considerable amount of research aims to identify factors that affect the intrinsic motivation to comply. However, the causal link between the intrinsic motivation to comply and actual compliance behavior is not established yet. We provide a discussion of the underlying identification problem and suggest (potentially) feasible empirical strategies to uncover a causal effect.
    Keywords: Shadow economy, tax evasion, tax compliance, benefit fraud, tax morale, benefit morale, social norms
    JEL: O17 H26 A13 Z13 C81
    Date: 2010–03
  10. By: Alexander Plekhanov (European Bank of Reconstruction and Development); Lev Freinkman (World Bank)
    Abstract: The paper provides empirical analysis of the relationship between fiscal decentralisation and the quality of public services in the Russian regions. The analysis suggests that fiscal decentralisation has no significant effect on the key inputs into secondary education, such as schools, computers, or availability of pre-schooling, but has a significant positive effect on average examination results, controlling for key observable inputs and regional government spending on education. Decentralisation also has a positive impact on the quality of municipal utilities provision. Both effects can be attributed to strengthened fiscal incentives rather than to superior productive efficiency of municipal governments.
    Keywords: decentralisation, education, utilities, public services, Russian regions
    JEL: H72 H73 H75 H77
    Date: 2009–11
  11. By: Yoshiharu Oritani
    Abstract: The governance of central banks has two dimensions: corporate governance and public governance. Public governance is an institutional framework whereby the general public governs a central bank by and through the legislative and executive bodies in a country. This paper argues that the literature of new institutional economics sheds new light on the public governance of central banks. First, Williamson’s theory of "governance as integrity" (probity) is applied to the internal management of central banks. Moe’s theory of "public bureaucracy" is applied to the concept of central bank independence. Second, we apply agency theory to the issues associated with central bank independence and accountability. Third, public choice theory is applied to central bank independence.
    Keywords: central bank, public governance, transaction cost economics, public choice
    Date: 2010–03
  12. By: Marco Battaglini; Salvatore Nunnari; Thomas R. Palfrey
    Abstract: We present a theoretical model of the provision of a durable public good over an infinite horizon. In each period, there is a societal endowment of which each of n districts owns a share. This endowment can either be invested in the public good or consumed. We characterize the planner's optimal solution and time path of investment and consumption. We then consider alternative political mechanisms for deciding on the time path, and analyze the Markov perfect equilibrium of these mechanisms. One class of these mechanisms involves a legislature where representatives of each district bargain with each other to decide how to divide the current period's societal endowment between investment in the public good and transfers to each district. The second class of mechanisms involves the districts making independent decisions for how to divide their own share of the endowment between consumption and investment. We conduct an experiment to assess the performance of these mechanisms, and compare the observed allocations to the Markov perfect equilibrium.
    Keywords: Dynamic political economy; voting; public goods; bargaining; experiments
    JEL: D71 D72 C78 C92 H41 H54
    Date: 2010
  13. By: Eliason, Marcus (Institute of Labour Market Policy Evaluation); Ohlsson, Henry (Department of Economics)
    Abstract: Does taxation affect the timing of death? This is an interesting example of how behavior might be affected by economic incentives. We study how two changes in Swedish inheritance taxation 2003/04 and 2004/05 have affected mortality during the turns of the years. Our first main result is that deceased with estates taxable for legal heirs were 10 percentage points more likely to have died on New Year’s Day 2005, from when the inheritance tax was repealed, rather than on New Year’s Eve 2004, compared to deceased without taxable estates for legal heirs. The second main result is that deceased with estates taxable for a married spouse were 12 percentage points more likely to have died on New Year’s Day 2004, from when the inheritance tax between spouses was repealed, rather than on New Year’s Eve 2003, compared to deceased without taxable estates for a married spouse.
    Keywords: behavioral response to taxes; timing of death; estate tax; inheritance tax; tax avoidance; mortality
    JEL: H24 H31 I12
    Date: 2010–03–26
  14. By: Stephen Cecchetti; Madhusudan Mohanty; Fabrizio Zampolli
    Abstract: Since the start of the financial crisis, industrial country public debt levels have increased dramatically. And they are set to continue rising for the foreseeable future. A number of countries face the prospect of large and rising future costs related to the ageing of their populations. In this paper, we examine what current fiscal policy and expected future age-related spending imply for the path of debt/GDP ratios over the next several decades. Our projections of public debt ratios lead us to conclude that the path pursued by fiscal authorities in a number of industrial countries is unsustainable. Drastic measures are necessary to check the rapid growth of current and future liabilities of governments and reduce their adverse consequences for long-term growth and monetary stability.
    Keywords: public debt, fiscal deficit, age-related spending, inflation, interest rates, default risk
    Date: 2010–03
  15. By: Adi Brender; Allan Drazen
    Abstract: Since a key function of competitive elections is to allow voters to express their policy preferences, one might take it for granted that when leadership changes, policy change follows. Using a dataset we created on the composition of central government expenditures in a panel of 71 democracies over 1972-2003, we test whether changes in leadership induce significant changes in one measure of policy - spending composition - as well as looking at the effect of other political and economic variables. We find that the replacement of a leader tends to have no significant effect on expenditure composition in the short-run. This remains true after controlling for a host of political and economic variables. However, over the medium-term leadership changes are associated with larger changes in expenditure composition, mostly in developed countries. We also find that in established democracies, election years are associated with larger changes in expenditure composition while new democracies, which were found by Brender and Drazen (2005) to raise their overall level of expenditures in election years, tend not to have such changes.
    Keywords: Budget; Political Leaders; Elections; Fiscal Policy; Expenditure Composition
    JEL: D72 O10 D78
    Date: 2010

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