nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒07‒10
seventeen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Cooperation norms in multiple-stage punishment By Andreas Nicklisch; Irenaeus Wolff
  2. Limited Liability, Moral Hazard and Risk Taking - A Safety Net Game Experiment By Tibor Neugebauer; Sascha Füllbrunn
  3. Municipalities secession and uncertainty on public goods provision By Arvate, Paulo; Mattos, Enlinson; Ponczek, Vladimir
  4. Evaluating the Efficiency and Equity of Federal Fiscal Equalization By David Albouy
  5. Geographical Heterogeneity in Homeownership Rates: Does the Differential between Rent and Ownership Cost Explain Local Variation in Homeownership Rates? By Tsukamoto, Satoshi
  6. Should voters be afraid of hard budget constraint legislation? fiscal responsibility law in brazilian municipalities By Arvate, Paulo; Pereira, Carlos
  7. Fair and unfair income inequalities in Europe By Daniele Checchi; Vito Peragine; Laura Serlenga
  8. Political Selection of Public Servants and Parliamentary Oversight By Thomas Braendle; Alois Stutzer
  9. An analysis of the efficiency of public spending and national policies in the area of R&D By Conte, Andrea; Schweizer, Philip; Dierx , Adriaan; Ilzkovitz, Fabienne
  10. Collective Action forWatershed Management: Field Experiments in Colombia and Kenya By Cardenas, Juan-Camilo; Rodriguez, Luz Angela; Johnson, Nancy
  11. Social Norms and Behavior in the Local Commons Through the Lens of Field Experiments By Cardenas, Juan-Camilo
  12. Do More Decentralized Local Governments do Better? An Evaluation of the 2001 Decentralization Reform in Colombia By Cortés, Darwin
  13. Spain’s Referendum on the European Constitutional Treaty: A Quantitative Analysis Within the Conceptual Framework of First and Second Order Elections By Ozgur Erkan
  14. Dynamic Income Taxation without Commitment: Comparing Alternative Tax Systems By Jang-Ting Guo; Alan Krause
  15. Does Scarcity Exacerbate the Tragedy of the Commons? Evidence from Fishersâ Experimental Responses By Maldonado, Jorge Hignio; Moreno-Sanchez, Rocio del Pilar
  16. Public wages in the euro area - towards securing stability and competitiveness By Fédéric Holm-Hadulla; Kishore Kamath; Ana Lamo; Javier J. Pérez; Ludger Schuknecht
  17. Inequality of opportunity in Europe: Economic and policy facts By Gustavo A. Marrero; Juan Gabriel Rodríguez

  1. By: Andreas Nicklisch; Irenaeus Wolff
    Abstract: We analyze the interplay between cooperation norms and people's punishment behavior in a social-dilemma game with multiple pun- ishment stages. By combining multiple punishment stages with self- contained episodes of interaction, we are able to disentangle the e ects of retaliation and norm-related punishment. An additional treatment provides information on the norms bystanders use in judging punish- ment actions. Partly con rming previous ndings, punishment behav- ior and bystanders' opinions are guided by an absolute norm. This norm is consistent over decisions and punishment stages and requires full contributions. In the rst punishment stage, our results suggest a higher personal involvement of punishers, leading to a non-linearity de ned by the punishers' contribution. In later punishment stages, the personal-involvement e ect vanishes and retaliation kicks in. By- standers generally apply the same criteria in all stages, also favoring retaliation in response to harsh punishment actions.
    Keywords: Experiment, public-good, punishment, social norms, volun- tary cooperation
    Date: 2010
  2. By: Tibor Neugebauer (Luxembourg School of Finance, University of Luxembourg); Sascha Füllbrunn (Luxembourg School of Finance, University of Luxembourg)
    Abstract: Safety nets may reduce incentives to mitigate risks, and adversely affect people’s behavior. We model the safety net problem as a social dilemma game involving moral hazard, risk taking and limited liability. Individuals take costly measures to avoid a likely loss which, if incurred, is collectively indemnified. The situation is compared to a situation with full liability and the deterministic benchmark, i.e. the public goods game. We report experimental results. The data show that limited liability leads to higher risk taking in comparison to full liability; however, the difference is much smaller than predicted by theory. In comparison to the deterministic benchmark, individuals take higher loss avoidance levels. We attribute this effect to social responsibility since subjects behave as if they were liable for the losses they impose on the group. With repetition, the experimental data indicate a gradual emergence of the moral hazard problem in safety nets.
    Keywords: Experiment, social safety net, moral hazard, linear public goods game, hidden action
    JEL: C9 D7 D8 H4 I1 I3
    Date: 2010
  3. By: Arvate, Paulo; Mattos, Enlinson; Ponczek, Vladimir
    Abstract: This paper investigates the causes of municipalities secession in Brazil. The theoretical modelproposes that the median voter is not fully informed about the efficiency effect of secession on publicgood provision and uses the break up decision undertaken by neighbor’s municipalities within thestate to account for his voting. Our empirical results confirms that prediction.
    Date: 2010–07–01
  4. By: David Albouy
    Abstract: In theory, federal transfers that make household location decisions efficient will offset differences in federal-tax payments and local tax revenues on capital, but not local tax revenues from residents. Transfers that redistribute resources equitably across regions will likely target areas with individuals of low earnings potential or low real incomes. Examining these metrics in practice, federal transfer differences across Canadian provinces are neither efficient nor equitable, but exacerbate pre-existing inefficiencies and underfund minorities. Total locational inefficiencies cost the economy 0.41 percent of income annually and cause Atlantic and Prairie provinces to have populations 31 percent beyond their efficient long-run levels.
    JEL: H73 H77 J61 R13
    Date: 2010–07
  5. By: Tsukamoto, Satoshi
    Abstract: This paper focuses on differentials between rental and owner costs as a primary determinant of local homeownership. In simultaneous equations to estimate the separate effects of owner cost and rent on homeownership rates, the control variables are various household and geographical factors (Census 2000 tract level dataset), in the samples of 48 contiguous states within the United States. The results show negative effects of rental and owner costs on homeownership rates. Ethnicity, income, age, property tax rate and loan usage rates, contribute to increased owner costs. Several factors had significant association with the rise in housing prices before 2006.
    Keywords: Community/Rural/Urban Development, Consumer/Household Economics, Public Economics, D12, H0, R2,
    Date: 2010
  6. By: Arvate, Paulo; Pereira, Carlos
    Abstract: This manuscript demonstrates that voters have nothing to be afraid of when new hard budgetconstraint legislation is implemented. Our claim is that this kind of legislation reduces theasymmetry of information between voters and incumbents over the budget and, as aconsequence, the latter have incentives to increase the supply of public goods. As anationwide institutional innovation, the Fiscal Responsibility Law (FRL) is exogenous to allmunicipalities; therefore, there is no self-selection bias in its implementation. We show thatpublic goods expenditure increases after the FRL. Second, this increase occurs inmunicipalities located in the country’s poorest region. Third, our findings can be extended tothe supply of public goods because the higher the expenditure with health and education, thegreater the probability of incumbents being re-elected. Finally, there exists a “de facto”higher supply of public goods in education (number of per capita classrooms) after the FRL.
    Date: 2010–06–29
  7. By: Daniele Checchi (University of Milan); Vito Peragine (University of Bari); Laura Serlenga (University of Bari)
    Abstract: This paper analyses the extent of income inequality and opportunity inequality in 25 European countries. The present work contributes to understanding the origin of standard income inequality, helping to identify potential institutional setups that are associated to opportunity inequality. We distinguish between ex-ante and ex-post opportunity inequality. We find that ex-ante equality of opportunity exhibits positive correlation with public expenditure in education, whereas ex-post equality of opportunity is also positively associated to union presence and to fiscal redistribution.
    Keywords: Inequality of opportunity, income inequality.
    JEL: D31 D63 J62
    Date: 2010
  8. By: Thomas Braendle; Alois Stutzer (University of Basel)
    Date: 2010
  9. By: Conte, Andrea; Schweizer, Philip; Dierx , Adriaan; Ilzkovitz, Fabienne
    Abstract: Improving the quality of public finances is a major challenge for European policy makers. The economic crisis has increased budgetary pressures and accentuated the tension between the need to sustain public spending aimed at raising the EU growth potential and the increased scarcity of public resources. Rising the efficiency and effectiveness of public spending in growth-enhancing areas such as education, R&D and innovation has become, therefore, even more important. This paper reviews the innovation performance of the different EU Member States and provides estimates of the relative efficiency of their R&D spending. In doing so, it aims at moving the policy discussion from mere volume-based policy targets towards a better assessment of the quality and effects of public R&D spending. The main contribution of this paper is therefore the identification of both (1) a suitable methodology for the evaluation of efficiency levels across Member States and (2) structural and policy determinants which may contribute to raise efficiency levels of R&D spending across countries and over time. Results indicate that there exist large cross-country differences in terms of measured efficiency, which is an indication that in many Member States there remains a significant potential for further improvement. Currently, there appears to be a divide in efficiency levels between old and new Member States. However, there is some evidence that the new Member States are catching up. The estimated efficiency scores indicate that all EU Member States have improved their efficiency levels over time. There is evidence that the efficiency of R&D spending is higher in countries with a strong knowledge base which, in turn, implies that increases in R&D spending do not necessarily lead to reductions in efficiency levels. Other factors that positively affect efficiency levels include the high-tech specialisation of the economy, the level of investment in education, the employment share in science and technology, and the degree of protection of intellectual property rights. Finally, a R&D tax treatment more oriented towards fiscal incentives rather than direct subsidies appears to have a positive effect on the efficiency level of R&D spending across EU Member States. This work is based on both a quantitative measurement of efficiency levels and a qualitative analysis of the policy instruments used in the Member States to promote R&D efficiency and effectiveness. Efficiency scores are calculated by means of the Stochastic Frontier Analysis for a set of input and output indicators in order to overcome the limitations associated with each individual indicator. A complementary survey of national governments highlights some further policy instruments that could contribute to increase the efficiency of R&D and innovation policies, in particular at the national level. The results of the survey argue in favour of adopting a systemic approach to R&D, education and innovation policies, including three main elements: (i) adapting educational programmes and the research infrastructure to the needs of science and industry; (ii) making a sustained commitment to knowledge investment by adopting medium-term funding programmes; and (iii) evaluating existing R&D programmes in order to determine which policy tools are the most effective and in which areas R&D investments offer the highest returns. More recently, Member States have introduced R&D spending measures specifically targeted to deal with the consequences of the economic crisis. A closer look at these measures reveals that Member States consider direct grants and offers of tax relief as appropriate instruments to counteract the effects of the crisis. It should be clear that such policy measures should be tailored to the specific needs and strengths of every Member State.
    Keywords: Public Finance; Efficiency; R&D spending; patents; innovation policy.
    JEL: H50 C23 O33
    Date: 2009–09
  10. By: Cardenas, Juan-Camilo; Rodriguez, Luz Angela; Johnson, Nancy
    Abstract: The dilemma of collective action around water use and management involves solving both the problems of provision and appropriation. Cooperation in the provision can be affected by the rival nature of the appropriation and the asymmetries in the access. We report two field experiments conducted in Colombia and Kenya. The Irrigation Game was used to explore the provision and appropriation decisions under asymmetric or sequential appropriation, complemented with a Voluntary Contribution Mechanism experiment which looks at provision decisions under symmetric appropriation. The overall results were consistent with the patterns of previous studies: the zero contribution hypotheses is rejected whereas the most effective institution to increase cooperation was face-to-face communication, and above external regulations, although we find that communication works much more effectively in Colombia. We also find that the asymmetric appropriation did reduce cooperation, though the magnitude of the social loss and the effectiveness of alternative institutional options varied across sites.
    Keywords: Collective Action, Watersheds, Field Experiments, Colombia, Kenya, Community/Rural/Urban Development, Environmental Economics and Policy, Institutional and Behavioral Economics, Q0, Q2, C9, H3, H4,
    Date: 2009–11–12
  11. By: Cardenas, Juan-Camilo
    Abstract: Behavior in the local commons is usually embedded in a context of regulations and social norms that the group of users face. Such norms and rules affect how individuals value material and non-material incentives and therefore determine their decision to cooperate or over extract the resources from the common-pool. This paper discusses the importance of social norms in shaping behavior in the commons through the lens of experiments, and in particular experiments conducted in the field with people that usually face these social dilemmas in their daily life. Through a large sample of experimental sessions with around one thousand people between villagers and students, I test some hypothesis about behavior in the commons when regulations and social norms constrain the choices of people. The results suggest that people evaluate several components of the intrinsic and material motivations in their decision to cooperate. While responding in the expected direction to a imperfectly monitored fine on over extraction, the expected cost of the regulation is not a sufficient explanatory factor for the changes in behavior by the participants in the experiments. Even with zero cost of violations, people can respond positively to an external regulator that issues a normative statement about a rule that is aimed at solving the social dilemma.
    Keywords: social norms, regulations, cooperation, collective action, common-pool resources, experimental economics, field experiments., Public Economics, D71, Q0, Q2, C9, H3, H4,
    Date: 2009–11–05
  12. By: Cortés, Darwin
    Abstract: In this paper I evaluate the impact of the 2001 decentralization reform in Colombia. I use data from Colombia's municipalities. I look at the effect of the 2001 reform on enrolment in pre-college schools. While all municipalities received earnmarked national transfers, with the reform some of then now have more responsabilities to provide education (deeper decen- tralization) than others. Particulary important, the reform entitle the more decentralized municipalities to sign subsidy contracts with private school. Departments (the regional gov- ernments) are entitle to sign this type of contracts for the less decentralized municipalities. Since the rule for municipalities to receive more responsabilities follows and exogenous popu- lation threshold, I can implement Regression Discontinuity Design. Enrolment is measured through two variables: the number of students enroled in public schools and the number of subsidized students enroled in private schools. Results sugest that more decentralized mu- nicipalities subsidize more students in private schools. The difference is significant at all the levels of pre-college school for the period 2004-2006. In 2005, the difference accounts for 20% of enrolment in private schools and 3% of population of school age. Besides, there are not significant differences among municipalities regarding enrolment in public schools.
    Date: 2010–05–31
  13. By: Ozgur Erkan
    Abstract: In contrast to the attention devoted to the rejection of the EU Constitutional Treaty at French and Dutch referenda; the Spanish referendum, where this Treaty was ratified, remained under-researched by political scientists. This paper analyses the voting behaviour at the Spanish referendum on the EU Constitutional Treaty with the use of quantitative methods and the concept of first and second-order elections. This paper finds that the Spanish referendum was a second-order referendum, because the effects of domestic political issues in Spain had a greater impact on the electoral behaviour of Spanish voters than had genuinely European issues. This finding raises doubts over the suitability of using direct democracy in the EU in order to raise the legitimacy and democratic accountability of the European project.
    Keywords: Spain, EU, referendum, European Constitutional Treaty, first and second-order elections
    Date: 2010–06
  14. By: Jang-Ting Guo (Department of Economics, University of California Riverside); Alan Krause (Department of Economics, University of York)
    Abstract: This paper addresses the question as to whether it is optimal to use separating or pooling nonlinear income taxation, or to use linear income taxation, when the government cannot commit to its future tax policy. We consider both two- period and inÖnite-horizon settings. Under empirically plausible parameter values, separating income taxation is optimal in the two-period model, whereas linear income taxation is optimal when the time horizon is inÖnite. The welfare e§ects of varying the discount rate, the degree of wage inequality, and the population of high-skill workers are also explored. For realistic changes in these parameters, separating income taxation remains optimal in the two-period formulation, and linear income taxation remains optimal in the inÖnite-horizon model.
    Keywords: Dynamic Income Taxation; Commitment
    JEL: H21 H24
    Date: 2010–06
  15. By: Maldonado, Jorge Hignio; Moreno-Sanchez, Rocio del Pilar
    Abstract: Economic Experimental Games (EEGs), focused to analyze dilemmas associated with the use of common pool resources, have shown that individuals make extraction decisions that deviate from the suboptimal Nash equilibrium. However, few studies have analyzed whether these deviations towards the social optimum are affected as the stock of resource changes. Performing EEG with local fishermen, we test the hypothesis that the behavior of participants differs under a situation of abundance versus one of scarcity. Our findings show that under a situation of scarcity, players over-extract a given resource, and thus make decisions above the Nash equilibrium; in doing so, they obtain less profit, mine the others-regarding interest, and exacerbate the tragedy of the commons. This result challenges previous findings from the EEG literature. When individuals face abundance of a given resource, however, they deviate downward from the prediction of individualistic behavior. The phenomenon of private, inefficient overexploitation is corrected when management strategies are introduced into the game, something that underlines the importance of institutions.
    Keywords: tragedy of the commons intensified, economic experimental games, resource abundance, resource scarcity, dynamic effects, Community/Rural/Urban Development, Environmental Economics and Policy, Institutional and Behavioral Economics, Land Economics/Use, Public Economics, D01, D02, D03, O13, O54, Q01, Q22, C93, C72, C73, C23,
    Date: 2009–10–05
  16. By: Fédéric Holm-Hadulla (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Kishore Kamath (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Ana Lamo (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main); Javier J. Pérez (Banco de España, Alcalá 50, E-28014 Madrid, Spain); Ludger Schuknecht (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main)
    Abstract: This paper examines the role of government wages in ensuring macroeconomic stability and competitiveness in the euro area. Recent empirical evidence suggests that government wage expenditure is subject to a pro-cyclical bias in most euro area countries and at the euro area aggregate level. Moreover, the evidence points to a strong positive correlation and co-movement between public and private wages in the short to medium term, both directly and indirectly via the price level, in most euro area countries. In a number of countries this interrelation between public and private wages coincided with strong public wage growth and competitiveness losses. These findings underpin the need for prudent public wage policies supported by strong domestic fiscal frameworks and appropriate wage-setting institutions in order to enhance economic stability and competitiveness in Economic and Monetary Union. JEL Classification: E62, E63, J45, H11, H50
    Keywords: government wage expenditure, fiscal cyclicality, competitiveness
    Date: 2010–06
  17. By: Gustavo A. Marrero (Universidad de La Laguna); Juan Gabriel Rodríguez (Instituto de Estudios Fiscales and Universidad Rey Juan Carlos)
    Abstract: In this paper we consider the main factors that have influenced inequality of opportunity (IO) in Europe. Based on the EU-SILC database, we find that the various levels of development, education and social protection expenditure in 23 European countries significantly affect IO. Dropping out from school, reaching at least secondary levels of education, social spending to promote social integration and child care are the most important variables of those analyzed. The functioning of the labor market and the tax structure, on the other hand, do not have a significant bearing on IO. Lastly, we note that IO and total inequality exhibit differentiated explanatory patterns, which signifies that means of redistribution that serve to reduce overall inequality do not necessarily reduce IO.
    Keywords: inequality of opportunity; growth; education; public expenditure; labor market.
    JEL: D63 E24 O15 O40
    Date: 2010

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