nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒05‒15
twelve papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Fiscal Federalism and Long-Run Macroeconomic Performance By Lars P. Feld; Jan Schnellenbach
  2. Tax Assignment: Does the Practice Match the Theory? By Roy Bahl; Musharraf Cyan
  3. Ontario’s Green Energy “Fee”: The Trouble with Taxation through Regulation By Benjamin Alarie; Finn Poschmann
  4. Fiscal and Political Decentralization and Government Quality By Andreas P. Kyriacoua; Oriol Roca-Sagalésb
  5. Enhanced Cooperation in an Asymmetric Model of Tax Competition By Hendrik Vrijburg; Ruud A. de Mooij
  6. Measuring the Effects of Fiscal Policy By Hafedh Bouakez; Foued Chihi; Michel Normandin
  7. Moving Beyond Expenditures: Reevaluating the Way We Test Theories of Fiscal Federalism By Cameron A. Shelton
  8. An experimental analysis of team production in networks By Enrique Fatas; Miguel A. Melendez Jimenez; Hector Solaz
  9. Peer Group Effects, Sorting, and Fiscal Federalism By Sam Bucovetsky; Amihai Glazer
  10. Gauging by numbers: A first attempt to measure the quality of public finances in the EU By Salvador Barrios; Andrea Schaechter
  11. The Consequences of Fiscal Decentralization on Poverty and Income Inequality By Cristian Sepúlveda; Jorge Martinez-Vazquez
  12. Climate Change Disaster Management: Mitigation and Adaptation in a Public Goods Framework By Reviva Hasson; Åsa Löfgren; Martine Visser

  1. By: Lars P. Feld (Ruprecht-Karls-Universitat Heidelberg, Alfred Weber Institute for Economics); Jan Schnellenbach (Ruprecht-Karls-Universitat Heidelberg, Alfred Weber Institute for Economics)
    Abstract: In this paper, we offer both a broad survey of the literature on fiscal federalism and long-run economic performance, and a detailed report of some of our own recent studies in this field. We look at the difference between study types (cross-country versus single-country studies), and at the relevance of the broader institutional framework into which fiscal decentralization is embedded. We also look into structural change and intergovernmental transfers as a detailed mechanism through which federalism may have an impact on aggregate economic performance.It turns out that fiscal decentralization has no robust effect on growth, but the evidence hints at a positive effect on overall productivity, conditional on the broader institutional framework.
    Keywords: fiscal federalism; scal decentralization; growth; economic performances
    Date: 2010–02–01
  2. By: Roy Bahl (Andrew Young School of Policy Studies, Georgia State University); Musharraf Cyan (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: The goal in this paper is to build on the existing literature to better explain the tax assignment choices made by countries in different economic circumstances. In particular, we explain why tax assignment to subnational governments is five times greater in industrial than developing countries, even when adjustment is made for differences in income level. Following on from the theory of tax assignment, we consider four arguments for this disparity. First, electoral regimes are not in place for the accountability gains to be captured. Second, tax decentralization may result in unacceptable fiscal disparities, and third, tax administration costs are higher for subnational governments and there is not enough incentive to take steps to lower them. Finally, we find empirical evidence to reject the hypothesis that giving more discretionary powers to subnational governments in developing countries will lead to a crowding out of central revenues, but find the opposite in the case of industrial countries.
    Keywords: Tax Assignment, tax administration , fiscal disparities, theory of tax assignment
    Date: 2010–02–01
  3. By: Benjamin Alarie (University of Toronto); Finn Poschmann (C.D. Howe Institute)
    Abstract: Canadian provincial governments have broad authority to impose direct taxes by passing enabling legislation in their respective legislatures. Governments may also use regulation to set fees, for example, to recover the cost of services they provide, but cannot use regulation to impose taxes that raise general revenue. Doing so would be unconstitutional. Governments nonetheless sometimes attempt to raise revenue by imposing levies that are deliberately mislabelled as “fees” – past efforts to do so have exposed provincial governments to successful constitutional challenges. This e-brief examines problematic example: the Ontario government recently ordered the Ontario Energy Board to impose a “fee” to be used to fund activities of the Ministry of Energy and Infrastructure; this fee is quite likely an unconstitutional tax.
    Keywords: Governance and Public Institutions, Ontario Energy Board, Independent Electricity System Operator (IESO), taxation, regulation, unconstitutional tax
    JEL: H25 H41 H71 L94
    Date: 2010–04
  4. By: Andreas P. Kyriacoua (Departament d’Economia, Universitat de Girona); Oriol Roca-Sagalésb (Departament d’Economia Aplicada, Universitat Autònoma de Barcelona)
    Abstract: In this paper we apply both cross-section and panel analysis to the relationship between fiscal and political decentralization and government quality. We find that fiscal decentralization has a positive impact. Moreover, political decentralization tends to reduce the positive impact of fiscal decentralization on the quality of government. This negative impact of political decentralization on government quality persists when controlling for the degree of democratic maturity of countries but disappears when controlling for the extent of experience with statehood or public administration. This suggests that it is more affordable, in terms of government quality, to combine fiscal and political decentralization in countries with a long history of statehood.
    Keywords: Quality of government, fiscal decentralization, political decentralization, democratic maturity, cross-section and panel data
    Date: 2010–02–01
  5. By: Hendrik Vrijburg (Erasmus University Rotterdam); Ruud A. de Mooij (Erasmus University Rotterdam)
    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: 2010–01–11
  6. By: Hafedh Bouakez; Foued Chihi; Michel Normandin
    Abstract: Measuring the effects of discretionary fiscal policy is both difficult and controversial, as some explicit or implicit identifying assumptions need to be made to isolate exogenous and unanticipated changes in taxes and government spending. Studies based on structural vector autoregressions typically achieve identification by restricting the contemporaneous interaction of fiscal and non-fiscal variables in a rather arbitrary way. In this paper, we relax those restrictions and identify fiscal policy shocks by exploiting the conditional heteroscedasticity of the structural disturbances. We use this methodology to evaluate the macroeconomic effects of fiscal policy shocks in the U.S. before and after 1979. Our results show substantive differences in the economy’s response to government spending and tax shocks across the two periods. Importantly, we find that increases in public spending are, in general, more effective than tax cuts in stimulating economic activity. A key contribution of this study is to provide a formal test of the identifying restrictions commonly used in the literature.
    Keywords: Fiscal policy, Government spending, Taxes, Primary deficit, Structural vector auto-regression, Identification
    JEL: C32 E62 H20 H50 H60
    Date: 2010
  7. By: Cameron A. Shelton (Robert Day School of Economics and Finance, Claremont McKenna College)
    Abstract: This paper reviews the literature on the effects of fiscal decentralization on the magnitude and composition of expenditures. There is consistent evidence that vertical imbalance leads to larger general government. The evidence on the effects of balanced decentralization is mixed, depending a great deal on the sample and the fiscal federal margin in question. Theory and case studies suggest such heterogeneity in the comparative effectiveness of fiscal decentralization is due to heterogeneity in the institutional environment by which citizens gather information, register preferences, and monitor officials. Unfortunately, quantifying this institutional heterogeneity remains elusive. More troubling, there is sufficient distance between recorded expenditure and the quality of service delivery that using the former to assess the efficacy of fiscal decentralization is surely inadequate. We then review those studies which progress beyond measures of expenditures to measures of outcomes. Here too, the results of fiscal decentralization vary a great deal and the determinants of that variation remain elusive. There is thus room for clever work highlighting the conditions delivering effective monitoring thereby enabling successful fiscal decentralization.
    Keywords: Fiscal Federalism, fiscal decentralization, decentralization
    Date: 2010–02–01
  8. By: Enrique Fatas (ERI-CES); Miguel A. Melendez Jimenez (University of Malaga); Hector Solaz (ERI-CES)
    Abstract: Experimental and empirical evidence highlights the role of networks on social outcomes. In this paper we test the properties of exogenously fixed networks in team production. Subjects make the same decisions in a team-work environment under four different organizational networks: The line, the circle, the star, and the complete network. In all the networks, links make information available to neighbors. This design allows us to analyze decisions across networks and a variety of subjects’ types in a standard linear team production game. Contribution levels differ significantly across networks and the star is the most efficient incomplete one. Moreover, our results suggest that subjects act as conditional cooperators with respect to the information received from the network.
    Keywords: public goods, networks, experiments
    JEL: H41 C92
    Date: 2010–05
  9. By: Sam Bucovetsky (Department of Economics, York University); Amihai Glazer (Department of Economics, University of California-Irvine)
    Abstract: Suppose that, other things equal, an individual's utility increases with the fraction of residents in his community who are rich. Suppose further that the rich are more willing to pay for a local public than are the poor Then the rich may over-provide a local public good, with the aim of dissuading the poor from moving into a community inhabited by the rich. We describe conditions under which the equilibrium will have mixed or homogeneous communities, and conditions under which the rich or the poor benefit from central government rules which constrain local decision making.
    Keywords: Status; Migration
    JEL: H73 R13
    Date: 2010–05
  10. By: Salvador Barrios; Andrea Schaechter
    Abstract: Ensuring high quality of public finances (QPF) with a view to supporting long-term economic growth has gained new urgency as the room for fiscal manoeuvre has shrunk in light of the current crisis. To more systematically analyse QPF and compare developments across countries and over time, a greater focus on identifying and developing comparable QPF indicators is needed. This paper provides a first attempt in this respect. Based on the view that QPF is a multi-dimensional concept, it creates composite indicators for twelve areas of public finances that are linked to long-term economic growth. While the proposed alternative calculation methods yield relatively robust results and findings are in line with conventional wisdom, due to data problems the composite indicators should only be seen as a useful starting point for identifying a country's main strengths and weaknesses in QPF. This would need to be complemented by qualitative analysis that also accounts for country and other specificities. JEL classification: E62, H11, H50, H52, H60
    Keywords: Quality of public finances, public finances, fiscal policy, long-term economic growth, public expenditure, public revenue, fiscal governance, Barrios, Schaechter
    JEL: E62 H11 H50 H52 H60
    Date: 2009–08
  11. By: Cristian Sepúlveda (International Studies Program. Andrew Young School of Policy Studies, Georgia State University); Jorge Martinez-Vazquez (International Studies Program. Andrew Young School of Policy Studies, Georgia State University)
    Abstract: Many countries around the world are currently pursuing policies for poverty reduction and improving income distribution. Many of these same countries are also aggressively implementing fiscal decentralization reforms. Although fiscal decentralization, poverty and the distribution of income have been the subject of extensive separate theoretical and empirical research, to date we have little understanding of what may be the impact of fiscal decentralization on poverty and inequality. This paper sets out to shed some light on those relationships. After reviewing the literature addressing different aspects of these relationships, the paper describes the possible channels through which fiscal decentralization might affect poverty and income inequalities. We also carry out an empirical analysis with panel data for a large number of countries at different stages of development covering the period 1971-2000. We find that fiscal decentralization may have significant effects on poverty and inequality. In particular, fiscal decentralization appears to reduce poverty as long as the share of sub-national expenditures is not greater than one third of total government expenditures. Fiscal decentralization appears to also help reduce income inequality only if the general government represents a significant share of the economy (twenty percent or more).
    Keywords: fiscal decentralization, poverty reduction, income inequality
    Date: 2010–02–01
  12. By: Reviva Hasson; Åsa Löfgren; Martine Visser
    Abstract: This paper explores the collective action problem as it relates to climate change and develops two models that capture the mitigation/adaptation trade-off. The first model presents climate change as a certain disaster, while the second models climate change as a stochastic event. A one-shot public goods experiment with students reveals a relatively low rate of mitigation for both models. The effect of vulnerability towards climate change is also examined by varying the magnitude of the disaster across treatments. Our results find no significant difference between the high and low-vulnerability environments. This research contributes to the literature concerning public goods experiments as well as the analysis of climate change policy.
    Keywords: Public good; climate change; mitigation; adaptation; experiment; risk
    JEL: I21
    Date: 2010

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