nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒09‒18
nine papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Stimulating Local Public Employment: Do General Grants Work? By Lundqvist, Heléne; Dahlberg, Matz; Mörk, Eva
  2. The Reality and Masquerade behind Bargaining over Welfare Pie Sizing, Delivery and Slicing. By Mullat, Joseph E.
  3. Government Spending and Re-election By Stephan Litschig; Kevin Morrison
  4. Financial Transaction Tax: Small is Beautiful By Zsolt Darvas; Jakob von Weizsäcker
  5. Innovative Financing at a Global Level By European Commission
  6. Fiscal Federalism in Crisis: Lessons for Europe from the US By Zsolt Darvas
  7. Increasing Shadow Economies all over the World - Fiction or Reality? By Dominik Ernste; Friedrich Schneider
  8. Size Matters (in Output-Sharing Groups): Voting to End the Tragedy of the Commons By Cherry, Josh; Salant, Stephen; Uler, Neslihan
  9. Elections related cycles in publicly supplied goods in Albania By Kächelein, Holger; Lami, Endrit; Imami, Drini

  1. By: Lundqvist, Heléne (Uppsala University); Dahlberg, Matz (Uppsala University); Mörk, Eva (IFAU)
    Abstract: The effectiveness of public funds in increasing public employment has long been a question on public and labor economists’ minds. In most federal countries local governments employ large fractions of the working population, meaning that a tool for stimulating local public employment can substantially affect the overall unemployment level. This paper asks whether general grants to lower-level governments have the potential of doing so. Applying the regression kink design to the Swedish grant system, we are able to estimate causal effects of intergovernmental grants on personnel in different local government sectors. Our robust conclusion is that personnel in the central administration increased substantially after a marginal increase in grants, but that such an effect was lacking both for total personnel and personnel in child care, schools, elderly care, social welfare and in technical services. We suggest several potential reasons for these results, such as heterogeneous treatment effects and bureaucratic influence in the local decision-making process.
    Keywords: fiscal federalism, intergovernmental grants, public employment, regression kink design, instrumental variables
    JEL: C33 H11 H70 J45
    Date: 2010–09
  2. By: Mullat, Joseph E.
    Abstract: The present analysis addresses the apparently critical issue of circulation of wealth in society. Three actors play the game of welfare-related taxation. The first actor, in the role of Negotiator No.1, stands up for citizens’ legal and moral rights to primary needs. The second actor, in the role of Negotiator No.2, proceeds in response to public will for the provision and delivery of public goods. Quite the opposite, the third actor, hereinafter named the Voter, who represents the taxpayers, prefers personal consumption to moral understanding and public activity. In fact, backed by electoral maneuvering, the Voter emanates a risk to break down negotiations. The result of the simulation provides an evidence for the claim that a 50% median income is close enough to be considered a realistic choice of poverty line within the variety or rules of the alternating-offers bargaining game and conditions for unanimous consent of voter-citizens.
    Keywords: bargaining; policy; public goods; simulation; taxation; voting
    JEL: H21 C78 C71 H24
    Date: 2010–09–04
  3. By: Stephan Litschig; Kevin Morrison
    Abstract: Does additional government spending improve the electoral chances of incumbent political parties? This paper provides the first quasi-experimental evidence on this question. Our research design exploits discontinuities in federal funding to local governments in Brazil around several population cutoffs over the period 1982-1985. We find that extra fiscal transfers resulted in a 20% increase in local government spending per capita, and an increase of about 10 percentage points in the re-election probability of local incumbent parties. We also find positive effects of the government spending on education outcomes and earnings, which we interpret as indirect evidence of public service improvements. Together, our results provide evidence that electoral rewards encourage incumbents to spend part of additional revenues on public services valued by voters, a finding in line with agency models of electoral accountability.
    Keywords: Government spending, voting, regression discontinuity.
    JEL: H40 H72 D72
    Date: 2010–06
  4. By: Zsolt Darvas (Bruegel, Hungarian Academy of Sciences, Corvinus University of Budapest); Jakob von Weizsäcker (Thüringer Wirtschaftsministerium, Bruegel)
    Abstract: The case for taxing financial transactions merely to raise more revenues from the financial sector is not particularly strong. Better alternatives to tax the financial sector are likely to be available. However, a tax on financial transactions could be justified in order to limit socially undesirable transactions when more direct means of doing so are unavailable for political or practical reasons. Some financial transactions are indeed likely to do more harm than good, especially when they contribute to the systemic risk of the financial system. However, such a financial transaction tax should be very small, much smaller than the negative externalities in question, because it is a blunt instrument that also drives out socially useful transactions. There is a case for taxing over-the-counter derivative transactions at a somewhat higher rate than exchange-based derivative transactions. More targeted remedies to drive out socially undesirable transactions should be sought in parallel, which would allow, after their implementation, to reduce or even phase out financial transaction taxes.
    Keywords: transaction tax, Tobin tax, financial transactions, global financial crisis, financial regulation
    JEL: H20 D62 G10 F30
    Date: 2010–01–11
  5. By: European Commission
    Abstract: The European Commission services published a staff working document assessing the main sources of innovative financing under discussion. The analysis shows that for some of the instruments a "double dividend" of both raising revenues and improving market efficiency and stability could be reaped, in particular by putting a price on risk-taking in the financial sector and on carbon emissions.
    Keywords: European Union, taxation, financial transaction tax, bank levy, bonus tax, carbon tax, financial institutions
    JEL: G15 G18 G28 H21 H22 H23 H25 H27 H62
    Date: 2010–04
  6. By: Zsolt Darvas (Bruegel, Hungarian Academy of Sciences, Corvinus University of Budapest)
    Abstract: The euro area is facing crisis, while the US is not, though the overall fiscal situation and outlook is better in the euro area than in the US, and though the US faces serious state-level fiscal crises. A higher level of fiscal federalism would strengthen the euro area, but is not inevitable. Current fiscal reform proposals (strengthening of current rules, more policy coordination and an emergency financing mechanism) will if implemented result in some improvements. But implementation might be deficient or lack credibility, and could lead to disputes and carry a significant political risk. Introduction of a Eurobond covering up to 60 percent of member states’ GDP would bring about much greater levels of fiscal discipline than any other proposal, would create an attractive Eurobond market, and would deliver a strong message about the irreversible nature of European integration.
    Keywords: federalism, redistribution, stabilisation, risk-sharing, crisis, euro-area governance reform, Eurobond
    JEL: E62 H60 H77
    Date: 2010–07–12
  7. By: Dominik Ernste; Friedrich Schneider
    Abstract: Using various methods (currency demand, physical input (electricity) measure, model approach), which are discussed and criticized, estimates about the size of 67 developing, transition and OECD countries are presented. The average size of the shadow economy (in % of GDP) over 1989-93 in developing countries is 39.2%, in transition countries 23.2% and in OECD countries 14.2%. An increasing burden of taxation and social security contributions combined with rising state regulatory activities are the driving forces for the size of the shadow economy. According to some findings, a growing shadow economy has a negative impact on official GDP growth, however, a positive impact of corruption on the size of the shadow economy can be found, i.e. the bigger the corruption, the larger is the shadow economy. [ Discussion Paper No. 26]
    Keywords: shadow economy, corruption, tax evasion
    Date: 2010
  8. By: Cherry, Josh; Salant, Stephen; Uler, Neslihan
    Abstract: Individuals extracting common-pool resources in the field sometimes form output-sharing groups to avoid costs of crowding. In theory, if the right number of groups forms, Nash equilibrium aggregate effort should fall to the socially optimal level. Whether individuals manage to form the efficient number of groups and to invest within the chosen groups as theory predicts, however, has not been previously determined. We investigate these questions experimentally. We find that subjects do vote in most cases to divide themselves into the optimal number of output-sharing groups, and in addition do decrease the inefficiency significantly (by 50% to 71%). We did observe systematic departures from the theory when the group sizes are not predicted to induce socially optimal investment. Without exception these are in the direction of the socially optimal investment, confirming the tendency noted elsewhere in public goods experiments for subjects to be more “other-regarding” than purely selfish.
    Keywords: catch-sharing, common-pool resources, efficient private provision, free-riding, laboratory experiment, partnership solution
    Date: 2010–09–08
  9. By: Kächelein, Holger; Lami, Endrit; Imami, Drini
    Abstract: The phenomena of manipulation of the economy by the incumbent for electoral purpose are called Political Business Cycles (PBC), introduced by Nordhaus (1975). Using policy control economic instruments, as fiscal and monetary instruments, government may manipulate the economy to gain electoral advantage by producing growth and decreasing unemployment before elections. In addition to increased public expenditures, also the production/supply of certain publicly provided goods may score improvements. In Albania, production and supply of electricity (for the time span of our analyzes) was controlled by KESH (Korporata Energjitike Shqiptare - Albanian Energy Corporation) which is a quasi- monopoly in the supply of electricity in Albania, and it is publicly run. Throughout the transition, supply of electricity, due to various technical and economic reasons, has not been stable, and characterized by systematic interruption for households and businesses users, affecting their well-being and performance (electricity is a main source of energy for households, including heating and cooking). Therefore, it seems so that there is an incentive and rationale for the incumbent to use also the provision of electricity to impress the voters before elections, beside of the classical instruments of expenditures. In this paper we analyze consumption, production and import of electricity in Albania. Our hypothesis is that before elections, electricity consumption may increase above usual levels, followed by a contraction after elections. In our analysis we use modern standard econometric approach, used widely for research related to PBC. By ARMA modelling it is possible to prove if elections can explain changes in electricity production, in addition to the past history of the variable and the random error term. --
    Keywords: Political Business Cycle,Electricity,Albania
    JEL: P26 E32 D72 H72
    Date: 2010

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