nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒07‒24
sixteen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Tobin Meets Oates: Solidarity and the Optimal Fiscal Federal Structure By Xavier Calsamiglia; Teresa Garcia-Milà; Therese J. McGuire
  2. Globalization and public administration: a complex relationship By Elisabetta Croci Angelini
  3. The price elasticity of charitable giving: does the form of tax relief matter? By Kim Scharf; Sarah Smith
  4. Aid, social capital and village public goods: after the tsunami. By Freire, Tiago; Henderson, J. Vernon; Kuncoro, Ari
  5. Collective Action in Diverse Sierra Leone Communities By Rachel Glennerster; Edward Miguel; Alexander Rothenberg
  6. Do High Tax and Tax Evasion go Hand in Hand? The Non-Linear Case By Alain Trannoy; Gwenola Trotin
  7. Fiscal federalism in crisis: lessons for Europe from the US By Zsolt Darvas
  8. What Does the Corporate Income Tax Tax? A Simple Model without Capital By Laurence J. Kotlikoff; Jianjun Miao
  9. European Union Citizenship: the hard road between a promising potential and bitterness By Paulo Vila Maior
  10. Interjurisdictional Capitalization of a New Metro Line on Housing Values By Claudio Agostini; Gastón Palmucci
  11. Regulatory Independence and Political Interference: Evidence from EU Mixed-Ownership Utilities’ Investment and Debt By Carlo Cambini; Laura Rondi
  12. The economic policy of Ronald Reagan By Magazzino, Cosimo
  13. A political economy model of road pricing By De Borger B.; Proost S.
  14. A Cross-national analysis of the relations between school choice and effectiveness differences between private-independent and public schools By Dronkers, Jaap; Avram, S
  15. Public and private values By Dan Ariely; Anat Bracha; Jean-Paul L'Huillier
  16. Reform of the Fiscal and Subsidy Regime for the Petroleum Sector By Sebastian Morris; Jayanth Varma; Samir Barua

  1. By: Xavier Calsamiglia; Teresa Garcia-Milà; Therese J. McGuire
    Abstract: We explore the implications for the optimal degree of fiscal decentralization when people’s preferences for goods and services, which classic treatments of fiscal federalism (Oates, 1972) place in the purview of local governments, exhibit specific egalitarianism (Tobin, 1970), or solidarity. We find that a system in which the central government provides a common minimum level of the publicly provided good, and local governments are allowed to use their own resources to provide an even higher local level, performs better from an efficiency perspective relative to all other systems analyzed for a relevant range of preferences over solidarity.
    Keywords: fiscal decentralization, specific egalitarianism, solidarity, externalities.
    JEL: H42 H77
    Date: 2010–07
  2. By: Elisabetta Croci Angelini (University of Macerata)
    Abstract: <div style="text-align: justify;">The paper examines the relationship between globalization and public administration through economic theory principles and an example. Starting from the consideration of early concerns about globalization, it argues that although the size of government has rarely declined, its power has been eroded, making room on the one hand to the quest for global public goods, while on the other hand urging for more local public goods and decentralization. University education, mainly publicly supplied in Italy as well as in many European countries, exemplifies the awkwardness of introducing best practices in a context of asymmetric information with many idiosyncratic features.</div>
    Keywords: globalization,university education,public goods,public administration
    JEL: H11 H42 H52
    Date: 2010–07
  3. By: Kim Scharf (Institute for Fiscal Studies and University of Warwick); Sarah Smith (Institute for Fiscal Studies and Centre for Market and Public Organisation)
    Abstract: <p>This paper uses a survey-based approach to test alternative methods of channeling tax relief to donors - as a tax rebate for the donor or as a matched payment to the receiving charity. On accounting grounds these two are equivalent but, in line with earlier experimental studies, we find that gross donations are significantly more responsive to a match change than to a rebate change. We show that the difference can largely be explained by the fact that a majority of donors do not adjust their nominal donations in response to a change in subsidy. This evidence adds to the growing empirical literature suggesting that consumers may not react to tax changes. In the case of tax subsidies for donations, this has implications for policy design - we show for the UK that a match-based system is likely to be more effective at increasing money going to charities. </p>
    Keywords: Charitable giving, tax subsidies, private provision of public goods
    JEL: C99 D12 D64 H24 H31 H41
    Date: 2010–05
  4. By: Freire, Tiago; Henderson, J. Vernon; Kuncoro, Ari
    Abstract: Using survey data on fishermen and fishing villages in Aceh, Indonesia from 2005 and 2007, this paper examines the effect of the December 2004 tsunami and resulting massive aid effort on local public good provision, in particular on public labor inputs, but also public capital choices. Also analyzed are the roles of and changes in local social and political institutions and participation in political and social activities. Such an examination informs not only our understanding of the impacts of aid on villages, but also our understanding of how villages allocate resources to public goods. For public labor inputs, volunteerism is lower in villages with more aid projects, but that is offset if the dominant donor mitigates agency problems by doing its own implementation. Volunteerism is lower in villages with more 'democratic' activity such as elections, although that effect is mitigated in villages with higher levels of social capital pre-tsunami. Evidence suggests volunteerism is lower not because of changes in types of leaders with village elections per se, but rather due to heightened internal divisions associated with elections. Correspondingly for public capital, villages with more democratic activity combined with more aid projects tend to emphasize garnering private aid (e.g., houses) at the expense of public aid (e.g., public buildings).
    Keywords: Aid; Volunteer; Public Goods.
    JEL: H41 O12
    Date: 2010–06–04
  5. By: Rachel Glennerster; Edward Miguel; Alexander Rothenberg
    Abstract: Scholars have pointed to ethnic and other social divisions as a leading cause of economic underdevelopment, due in part to their adverse effects on public good provision and collective action. We investigate this issue in post-war Sierra Leone, one of the world’s poorest countries. To address concerns over endogenous local ethnic composition, and in an advance over most existing work, we use an instrumental variables strategy relying on historical ethnic diversity data from the 1963 Sierra Leone Census. We find that local ethnic diversity is not associated with worse local public goods provision across a variety of outcomes, regression specifications, and diversity measures, and that these “zeros” are precisely estimated. We investigate the role that two leading mechanisms proposed in the literature – enforcement of collective action by strong local government authorities, and the existence of a common national identity and language – in generating these perhaps surprising findings.
    JEL: H41 O12 O55
    Date: 2010–07
  6. By: Alain Trannoy (EHESS, Greqam-Idep); Gwenola Trotin (EQUIPPE, Université Charles-de-Gaulle Lille 3)
    Abstract: This paper fully investigates how a tax rate change can affect tax evasion, under the expected utility theory hypothesis. We generalize the Allingham-Sandmo benchmark model of tax evasion, using very general non-linear specifications for the tax schedule and the fine scheme. We consider both interior and corner solutions in terms of tax evasion. When the fine is imposed on the evaded tax, we examine the robustness of Yitzhaki’s result of a positive relationship between a change in tax rate and undeclared income. When the fine is imposed on the undeclared income, we obtain conditions under which Allingham and Sandmo’s result of a inverse relationship remains valid, and particularly with DARA. The case of an endogenous audit probability is also considered.
    Keywords: Tax evasion; Non-linearity; Expected utility theory
    JEL: D81 H26 K42
    Date: 2010–07
  7. By: Zsolt Darvas
    Abstract: Drawing comparisons between the fiscal architecture and situation in the US and the European Union, Bruegel Research Fellow Zsolt Darvas answers three questions in this Policy Contribution- Why has the euro been hit so hard? How would a more federal European fiscal union closer to the US model have helped? How do the euro area's fiscal architecture reform plans stand up in light of the US example? He concludes that a higher level of fiscal federation is not inevitable for the viability of the euro area, but current European fiscal reform proposals carry political risk and their implementation could be deficient or lack credibility. Introduction of a Eurobond covering up to 60 percent of member states? GDP would be a much more preferable solution.
    Date: 2010–07
  8. By: Laurence J. Kotlikoff; Jianjun Miao
    Abstract: The economics workings of the corporate income tax remain controversial. Harberger’s seminal 1962 article viewed the tax as raising the cost of capital used to produce corporate goods. But corporate goods can be and generally are made by non-corporate firms, suggesting that the corporate tax penalizes the act of incorporating, not the decision of already incorporated firms to hire capital. This paper makes this point with a simple, capital-less model featuring entrepreneurs, with risky production technologies, deciding whether or not to go public. Doing so means selling shares, which is costly and triggers the firm’s classification as a corporation subject to income taxation. But going public has an upside. It permits entrepreneurs to diversify their assets. In discouraging incorporation, the corporate tax taxes business risk-sharing, keeping more entrepreneurs private and, thus, exposed to more risk. The added risk experienced by these entrepreneurs limits their demands for labor whose costs must be paid come what may. And less demand for labor spells a lower wage. Thus, the corporate tax is, as a general rule, borne, in part, by labor. But it is borne primarily by high-skilled entrepreneurs who decide to remain incorporated despite the attendant tax liability. While it hurts high-skilled entrepreneurs and low-skilled workers, the corporate tax benefits middle-skilled entrepreneurs who remain private, but are able, thanks to the tax, to hire labor at a lower cost. The reduction in labor costs has one other key effect. It induces low-skilled entrepreneurs to set up their own risky businesses rather than work for others. This represents a second channel through which the corporate tax induces excessive business.
    JEL: H22 H31 H32
    Date: 2010–07
  9. By: Paulo Vila Maior (Faculty of Humanities and Social Sciences)
    Abstract: At the outset, the paper briefly addresses European Union (EU) citizenship as enshrined in the Treaty on the European Union. Attention is paid on its transnational nature. The political symbolism attached to EU citizenship is also emphasised, as it tries to emulate national concepts of belonging at the EU level. Despite some achievements, flaws are nevertheless a major setback on the EU ambition for supranational citizenship’s limited scope. European Union citizenship is addressed through a twofold conceptual lens. On the one hand, it is measured in terms of the impact on citizens loyalties. Eurobarometer and other statistical data are scrutinised to draw a picture on whether citizens drive their loyalties to the EU or to the national (or even regional) levels. Therefore, empirical data provide an assessment of EU citizenship outcomes. Sixteen years of EU citizenship is a considerable time span to make this assessment. On the other hand, the paper asks whether the attempt to forge a complementary citizenship is out of context, considering the common understanding that citizenship is connected with taxation and representation. Thus, a normative approach of EU citizenship is also a reason of concern. Liberal democracies are anchored (among other things) on the “no taxation without representation” principle. I draw an extension of the aforementioned principle and ask whether the absence of significant EU taxation powers is an obstacle to effective supranational citizenship. Thus, the research question is whether EU citizenship is credible and effective if citizens don’t pay taxes to the EU?
    Keywords: European integration, European citizenship, Representation, Taxation
    JEL: O19
    Date: 2010
  10. By: Claudio Agostini (ILADES-Georgetown University, Universidad Alberto Hurtado); Gastón Palmucci (Department of Economics, University of Wisconsin, Madison)
    Abstract: Many governments continue constructing new subway lines with the goal of reducing congestion and pollution in large cities. Besides the potential global effects on reducing negative externalities in the city, there are some local positive effects in terms of lower commuting time and distance for residents living close to the subway stations. These benets of the public transport services should capitalize totally or partially on housing prices. Most of the empirical work has estimated the effects on housing prices after the public transit infrastructure is operating and implicitly assumed homogeneous capitalization across jurisdictions. However, due to differences on local public goods provision and residents' characteristics across jurisdictions, two identical housing units located at the same distance to the nearest metro station but in different local markets would not necessarily have the same degree of capitalization. Using parametric and non-parametric methods and transaction data for Santiago, Chile, we estimate the anticipated capitalization of a new metro line across counties in the city. The results show signicant anticipated effects, between 3.6% and 5.3%, and also large interjurisdictional differences in capitalization degrees, ranging between -6% and 40%.
    Keywords: Metro, Capitalization, Housing Prices
    JEL: H73 H54 R21 R53
    Date: 2010–01
  11. By: Carlo Cambini (Politecnico di Torino, IMT Lucca and FEEM); Laura Rondi (Politecnico di Torino and FEEM)
    Abstract: This paper examines the investment and financial decisions of a sample of 92 EU regulated utilities, taking into account key institutional features of EU public utilities, such as: a) regulation by agencies with various degrees of independence; b) partial ownership of the state in the regulated firm; and c) the government’s political orientation, which may ultimately influence the regulatory climate to be either more pro-firm or more pro-consumers. Our results show that regulatory independence matters for both investment and financial decisions. Investment increases under an Independent Regulatory Agency (IRA), while ownership has no effect. Leverage also increases when the IRA is in place, especially so if the regulated firm is privately controlled. Finally political orientation does matter, as firm investment increases under more conservative (pro-firm) governments, but this effect appears to revert when the IRA is in place.
    Keywords: Regulated Utilities, Investment, Capital Structure, Private and State Ownership, Regulatory Independence, overnment’s Political Orientation
    JEL: G31 G32 L33 L51 L90
    Date: 2010–06
  12. By: Magazzino, Cosimo
    Abstract: “Reaganomics” is a popular term used to refer to the economic policies of Ronald W. Reagan, the 40th U.S. President (1981–1989), which called for widespread tax cuts, decreased social spending, increased military spending, and the deregulation of domestic markets. In this paper, we analyze American economic policy during the Eigh-ties. After a brief introduction, where a general economic context of that country is shown, we discuss and revise the economic literature about these issues. Afterwards, we present an augmented IS-LM model for Reagan years, estimated bay VAR techniques.
    Keywords: Reaganomics; Supply-Side Economics; Laffer curve; tax cuts; twin deficits; IS-LM model; VAR.
    JEL: E65 N12
    Date: 2010–06–30
  13. By: De Borger B.; Proost S.
    Abstract: In this paper, we take a political economy approach to study the introduction of urban congestion tolls, using a simple majority voting model. Making users pay for external congestion costs is for an economist an obvious reform, but successful introductions of externality pricing in transport are rare. In the few cases where tolls were actually introduced, implementation was characterized by two salient facts. First, the toll revenues were tied to improvements of public transport. Second, opposition to the introduction of tolling decreased substantially after it was introduced. In most cases, a majority was against ex ante, but a majority favored the introduction of tolling after it was implemented. This paper develops a stylized model with car and public transport, allowing for idiosyncratic uncertainty about modal substitution costs. We show that uncertainty reduces the number of voters that favors road pricing ex ante. The model can explain the presence of a majority that is against road pricing ex ante and in favor ex post. Moreover, uncertainty also implies that, if a majority is against ex ante, there will be no majority for organizing an experiment that would take away the individual uncertainty. Finally, we show that it is easier to obtain a majority when the toll revenues are used to subsidize public transport than when they are used for a tax refund.
    Date: 2010–06
  14. By: Dronkers, Jaap; Avram, S
    Abstract: We apply propensity score matching to the estimation of the disparity in school effectiveness between the privately owned, privately funded school sector and the public one in a sample of 25 countries in Europe, America and Asia. This technique allows us to distinguish between school choice and school effectiveness processes and thus, to account for selectivity induced variation in school effectiveness. We find two broad patterns of private independent school choice: the choice as a social class reproduction choice; and the choice of an outsider’s for a good-equipped school. As regards school effectiveness, our results show that, after controlling for selectivity and school choice processes, the initial higher reading scores of students in private-independent schools become comparable to those public schools students in a majority of countries. However, in a few countries average reading scores remain higher in the private independent sector even after introducing controls for school choice induced selectivity. The opposite pattern, namely of higher average reading scores in the public sector has also been found in four countries.
    Keywords: school choice; school effectiveness; PISA data; public schools; private government-independent schools
    JEL: D71 I2 J24
    Date: 2010–07
  15. By: Dan Ariely; Anat Bracha; Jean-Paul L'Huillier
    Abstract: This paper experimentally examines whether looking at other people's pricing decisions is a type of heuristic - a decisionmaking rule - that people use even when it is not applicable, as in the case of clearly private value goods. We find evidence that this is indeed the case - an individual's valuation of a purely subjective experience under full information, elicited using an incentive compatible mechanism, is highly influence by valuations made by others. This result can shed light on price behavior, price rigidities, and rents.
    Keywords: Pricing ; Human behavior
    Date: 2010
  16. By: Sebastian Morris; Jayanth Varma; Samir Barua
    Abstract: Reform of the oil sector is long overdue. The problems in the sector emanate from the structure of central taxes and the system of subsidisation through prices. Solutions to the problems necessarily have to address both tax and subsidy simultaneously. The social losses include, misuse / wasteful use of scarce petroleum resources, diversion, adulteration, other avoidable negative externalities, improper substitution between products, tax arbitrage, distortion of consumer preferences and input choices of industries, and international cross hauling of petroleum. Nearly all these costs, and problems arise not because of subsidisation per se but due to the use of varying retail prices that are used to subsidise. Prices for the same product vary for different consumers besides. They also vary across products. These tax /subsidy variations are the root cause of nearly all problems in the sector. Autonomous price variations (i.e. those resulting from the actions of firms (under a regime of non- distortionary subsidies) would be small and not subject to ‘arbitrage’ i.e. to the realisation of rents through diversion and adulteration. [Working Paper No. 2010-03-03]
    Keywords: Reform, oil sector, subsidisation, subsidy, externalities, arbitrage’
    Date: 2010

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