nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒09‒25
nineteen papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Electoral Control under Decentralization: Decentralization as unbundling of public goods provision. By Farfan-Vallespin, Antonio
  2. Tax Revenue Instability in Sub-Saharan Africa: Consequences and Remedies By Christian EBEKE; Hélène EHRHART
  3. "Inspectors or Google Earth? Optimal fiscal policies under uncertain detection of evaders" By Martin Besfamille; Pablo Olmos
  4. Political economy of infrastructure spending in India By Khemani, Stuti
  5. Effect of constraints on tiebout competition: evidence from the Michigan school finance reform By Rajashri Chakrabarti; Joydeep Roy
  6. The involvement of the European Union in funding the member states during the economic crisis period By Grigorescu, Adriana; Balalia , Alina Elena
  7. Fiscal policy in the United States: automatic stabilizers, discretionary fiscal policy actions, and the economy By Glenn Follette; Byron Lutz
  8. A General Framework for Measuring VAT Compliance Rates By J.A Giesecke; Tran Hoang Nhi
  9. Electricity and telecoms reforms in the EU: Insights from the economics of federalism By Trillas, Francesc
  10. E-governmental services in the Baltic Sea Region By Lille, Maria; Prause, Gunnar
  11. Constitutionalism beyond the state: myth or necessity? By Jean L. Cohen
  12. The effect of sales tax holidays on household consumption patterns By Nathan Marwell; Leslie McGranahan
  13. How effective are level-based R&D tax credits? Evidence from the Netherlands By Lokshin, Boris; Mohnen, Pierre
  14. Taxing Human Capital: A Good Idea By Christoph Braun
  15. Evaluating Public Policies with High Frequency Data: Evidence for Driving Restrictions in Mexico City Revisited By Christian Salas
  16. Bringing European democracy back in – Or how to read the German Constitutional Court’s Lisbon Treaty ruling By Erik O. Eriksen; John Erik Fossum
  17. The incidence of Payroll Taxes in Ontario and Quebec; Evidence from collective agreements for 1985-2007 By Edison Roy César; François Vaillancourt
  18. Major public debt reductions: Lessons from the past, lessons for the future By Christiane Nickel; Philipp Rother; Lilli Zimmermann
  19. Counting the cost of crime in Italy By Claudio Detotto; Marco Vannini

  1. By: Farfan-Vallespin, Antonio
    Abstract: This paper addresses the question of whether a decentralized government is subject to a stronger level of electoral control than a centralized government. When electoral control is strong an incumbent investing a low level of effort in providing public goods will face a serious threat of being voted out of office. This threat should provide the incentives to the incumbent to exert effort in order to be re-elected as shown by Barro (1973) and Ferejohn (1986). According to the literature decentralization should increase electoral control due to the fact that under centralization the incumbent only needs to please the half plus one of the electorate in order to be re-elected. This paper presents analytically two new sources of differences in electoral control: assuming that public goods can be classified in lower tier public goods (e.g. sub-national or local level) and upper tier public goods (e.g. national public goods), then under centralization there are potential advantages derived from bundling the provision of both types of public goods, whereas under decentralization there are potential advantages derived from a clear delimitation of the responsibilities of the provider of each type of public good. We show that the trade-off depends on the probability distribution of the shocks and on the size of these shocks. --
    Keywords: Decentralization,electoral control,provision of public goods,bundling of issues
    JEL: H11 H41 H77
    Date: 2010
  2. By: Christian EBEKE; Hélène EHRHART (Centre d'Etudes et de Recherches sur le Développement International)
    Abstract: This paper focuses on the sources and consequences of the instability of tax revenue in Sub-Saharan African countries. We take advantage of a unique and extraordinarily rich dataset on the composition of tax revenues for a large number of countries. Using panel data for 39 countries observed over the period 1980-2005, our results are threefold. Firstly, the instability of government tax revenue leads to an instability of both the public investment and government consumption, and finally, reduces the level of public investment. Secondly, foreign aid inflows appear to be an effective insurance mechanism against the instability of tax revenue by lowering the sensitivity of public investment with respect to tax revenue shocks. Finally, the reliance on domestic indirect taxation-based systems seems more stabilizing than the dependency on trade tax revenue.
    Keywords: Tax Instability, Tax Composition, public spending, foreign aid, Sub-Saharan Africa
    Date: 2010
  3. By: Martin Besfamille; Pablo Olmos
    Abstract: Most of the contributions to the optimal tax-enforcement literature assume that audits are perfect and always discover evaders. However, evasion often remains undetected. To reduce the probability of such a failure, governments invest resources to improve their tax administrations’ detection technology. We incorporate these kind of investments into a model that studies optimal fiscal policies under uncertain detection of evaders. We characterize their level and we show numerically how they interact with the other dimensions of an optimal fiscal policy. Finally, we highlight the differences between our results and those obtained in a model without investment in audit technology.
    Keywords: Tax evasion - Tax rates - Enforcement - Imperfect audits - Investments in tax administration
    JEL: D82 H26 H83
    Date: 2010–08
  4. By: Khemani, Stuti
    Abstract: This paper examines a puzzle in the political economy of infrastructure in India -- the co-existence of relatively low shares of capital spending in public budgets alongside evidence of large demand for village infrastructure from poor voters. It argues that this pattern is due to infrastructure projects being used at the margin for political rent-seeking, while spending on employment and welfare transfers are the preferred vehicles to win votes for re-election. New suggestive evidence on the variation of public spending composition across states, and within states over time is offered that is consistent with this argument. This evidence underscores a growing argument in the development literature that the level and composition of public spending per se may not be sufficient metrics to assess the quality of public goods policies -- greater infrastructure spending in some contexts may go to political rents rather than to the actual delivery of broad public goods for growth and poverty reduction.
    Keywords: Public Sector Economics,National Governance,Public Sector Management and Reform,Parliamentary Government,Debt Markets
    Date: 2010–09–01
  5. By: Rajashri Chakrabarti; Joydeep Roy
    Abstract: This paper examines the effects of constraints in a Tiebout framework applied to school finance reforms. We use data from Michigan, which enacted a comprehensive school finance reform in 1994 that, in effect, ended local discretion over school spending. This scenario affords us a unique opportunity to study the implications of imposing limits on local government’s control over the quality of local public goods. We find that the reform was successful in overturning existing trends toward increased disparities. However, the reform also constrained the highest spending districts and was associated with negative effects on their subsequent educational outcomes. These results survive several sensitivity checks. Going behind the “black box” to look at whether the reform affected incentives and responses, we find that loss of discretion appeared to act as a strong disincentive to high-spending districts and, more generally, across the board. The performance improvements of the lowest spending districts were likely related to relative increases in spending rather than higher effort. This same finding is corroborated by results from an alternative strategy, which exploits differences in the nature of incentives faced by districts in more competitive areas versus those in less competitive areas.
    Keywords: Education - Economic aspects ; Public schools ; Reward (Psychology)
    Date: 2010
  6. By: Grigorescu, Adriana; Balalia , Alina Elena
    Abstract: The budget of the European Union (EU) is financed by the member states’ own resources and has different types of sources. A tax which represents the percentage of a member state’s Gross National Product into the European Union’s Gross National Product is one the main source for the budget. In addition, trade fees, duties, a fee applied on value added tax (VAT) are relevant contributions in financing the budget of the EU. In order to achieve a high level of welfare, the UE is funding a lot of actions at the community level. The EU support is reflected by structural funds, which generate a lot of benefits for the member states, encouraging the competition among them. The paper discusses about the involvement of the EU in funding the member states, taking into consideration the current context of the economic crisis. This crisis period, starting with 2007, creates new situations for which the UE has to adapt its offer of structural funds towards the member states. The situation of member states, the distribution of structural funds, main domains for investment in the current context and ways of actions is analyzed, in order to obtain an overall perspective on the EU support.
    Keywords: European Union; member states; structural funds; economic crisis
    JEL: E65 E61
    Date: 2009–11–06
  7. By: Glenn Follette; Byron Lutz
    Abstract: We examine the effects of the economy on the government budget as well as the effects of the budget on the economy. First, we provide measures of the effects of automatic stabilizers on budget outcomes at the federal and state and local levels. For the federal government, the deficit increases about 0.35 percent of GDP for each 1 percentage point deviation of actual GDP relative to potential GDP. For state and local governments, the deficit increases by about 0.1 percent of GDP. We then examine the response of the economy to the automatic stabilizers using the FRB/US model by comparing the response to aggregate demand shocks under two scenarios: with the automatic stabilizers in place and without the automatic stabilizers. Second, we provide measures of discretionary fiscal policy actions at the federal and state and local levels. We find that federal policy actions are somewhat counter-cyclical while state and local policy actions have been somewhat pro-cyclical. Finally, we evaluate the impact of the budget, from both automatic stabilizers and discretionary actions, on economic activity in 2008 and 2009.
    Date: 2010
  8. By: J.A Giesecke; Tran Hoang Nhi
    Abstract: Summary measures of VAT compliance rates are valuable for identifying problem areas in VAT implementation. They are also essential for meaningful cross-country and cross-time comparisons of VAT compliance. We present a comprehensive and general framework for calculating VAT compliance rates at both the economy-wide and detailed sectoral levels. Unlike existing measures of VAT compliance, our framework isolates a compliance measure from the effects on VAT receipts of detailed features of VAT systems as actually implemented by tax authorities. These features include multiple VAT rates, exemptions, registration rates, refund limitations, informal activity, taxation of domestic non-residents, and undeclared imports. We implement our comprehensive VAT compliance measure for Vietnam, a country with a complex VAT system. Our estimate of Vietnam's VAT compliance rate is about eleven percentage points higher than that calculated by the most popular measure of compliance, collection efficiency (CE). Our method facilitates decomposition of the difference between CE and our VAT compliance measure into the individual contributions of statutory and structural features of Vietnam's VAT regime.
    Keywords: VAT, collection efficiency, revenue ratio, compliance rate
    JEL: H25 H26 C68
    Date: 2010–08
  9. By: Trillas, Francesc (IESE Business School)
    Abstract: The economics of federalism is a broad discipline with more than five decades of experience. It may shed light on how regulatory jurisdiction is allocated in EU electricity and telecommunications markets. Specifically, this paper assesses the evolution of reform up to and including the third EU packages, which continue the liberalization and integration process in these markets. Liberalization has been accompanied by gradual harmonization of national markets to overcome resistance to competitive forces. Less steps than necessary have been undertaken to promote market integration; yet, positive and normative reasons remain for the participation of national or even regional/local powers. Vertical institutional cooperation will remain a necessary condition for a sound regulatory framework, but cooperation may sometimes be inhibited by distributive considerations.
    Keywords: federalism; regulation; electricity; telecommunications;
    JEL: H77 K23 L50 L94 L96 L97
    Date: 2010–05–07
  10. By: Lille, Maria; Prause, Gunnar
    Abstract: This paper will present results of the surveys and new trends which were related to e-governmental issues. A common understanding of e-government is usage of ICT means in the public sector for delivering information and services to its customers and enterprises. The objective is improvement of public services and strengthening democratic processes. E-government is a popular topic in the political agenda throughout the Baltic Sea Region (BSR) with all countries having ICT development strategies, policies or agendas. However, often are missing goals for thematic developments which would take into account the needs of potential users. The structure of the paper is ordered to present firstly, the overall objectives of e-governance and e-services. Secondly, the data about the satisfaction level of enterprises for e-services is given. As there are not many comparable results available about the needs of the enterprises, the paper is based on two main sources. One of the important outcomes of the LogOn Baltic project was to provide empirical data about satisfaction level of enterprises with existing eservices and about the needs for new services. The aim of the INTERREG III B project LogOn Baltic was to present solutions for improving the interplay between Logistics and Information and Communication Technologies (ICT) competence and spatial planning, strengthening the small and medium-sized enterprises' (SMEs) competitiveness in the BSR. The ICT-related results of the LogOn Baltic project provide an overview of the existing ICT structures and services in the BSR, mainly based on a web-based scientific survey with nearly 1,100 responses. A second source is the survey on the satisfaction level with public services among enterprises in Estonia in the City of Tallinn, which shows similar trends with the LogOn Baltic project. The third part of the paper introduces some case studies on innovative e-services in Estonia and Germany together with the European initiative for the BSR to improve e-services for companies. --
    JEL: L86 L96 R58
    Date: 2009
  11. By: Jean L. Cohen
    Abstract: Constitutionalism beyond the state is a deeply contested project. The emergence of global governance and global laws that directly affect individuals and regulate the conduct of states toward their own citizens raise questions about the basic hierarchy of authority among states, regional bodies and global institutions. States no longer have a monopoly of the production of international or global law. Thus questions about the legitimacy of global law and governance arise particularly, but not only, when they have constitutionalism- and democracy eviscerating effects. The discourse of global constitutionalism as a possible characterization of or response to the expanded juridification and exercise of coercive public power on the supra state level follows from these developments. But what kind of constitutionalism is appropriate beyond the state and what should be the relation among distinct and at times competing legal orders? This article addresses these questions focusing on the global political system and using the lens of the recent ECJ decision in the Kadi case to formulate the appropriate conceptual issues. I argue for a constitutional pluralist approach but I also argue that this requires reform of the global political system. I claim that a human rights-oriented constitutionalism is compatible with state sovereignty, appropriately understood. We should drop unhelpful dichotomous frameworks such as cosmopolitanism versus sovereignty, monism versus dualism and think creatively with respect to changing sovereignty regimes, federal unions of states that are not themselves states but which are constitutional and potentially constitutionalist legal orders. In this way we can try to preserve the best of what the older sovereignty regime of international law had to offer – constitutionalism, democracy, self determination of states, sovereign equality – while conceptualizing and (re-)designing the new, especially in light of international human rights concerns, in ways compatible with these and other, individual-oriented normative principles.
    Keywords: constitutional change; democracy; governance; law; legitimacy; pluralism
    Date: 2010–09–15
  12. By: Nathan Marwell; Leslie McGranahan
    Abstract: Sales tax holidays (STHs) are the temporary suspension of state (and some local) sales taxes on selected retail items for a brief period of time. The policy has gained popularity in recent years, beginning in one state in 1997 and growing to twenty by 2008. Despite the increased frequency with which states use STHs, little research has been conducted to study how households respond to this temporary tax manipulation. Our paper offers the first household-level, microeconometric evaluation on the effect of STHs on household consumption patterns. We find that on STHs, households increase the number of clothing and shoes bought by over 49 percent and 45 percent, respectively, relative to what they buy on average. Further, we find that this increase in consumption is limited to children’s apparel and that the wealthiest households and households consisting of married parents and young children have the largest, statistically significant response to STHs; for example, households with incomes over $70,000 increase the number of children’s clothing items purchased by 136 percent, while households that consist of married parents and young children increase the amount spent on children’s clothing and shoes by 117 percent and 295 percent, respectively.
    Keywords: Consumption (Economics) ; Households - Finance ; Sales tax
    Date: 2010
  13. By: Lokshin, Boris (Maastricht University, and UNU-MERIT); Mohnen, Pierre (UNU-MERIT, Maastricht University, and CIRANO)
    Abstract: This paper examines the impact of the R&D fiscal incentive program on R&D by Dutch firms. Taking a factor-demand approach we measure the elasticity of firm R&D capital accumulation to its user cost. Econometric models are estimated using a rich unbalanced panel of firm data covering the period 1996-2004 with firm-specific R&D user costs varying with tax incentives. Using the estimated user cost elasticity, we perform a cost-benefit analysis of the R&D incentive program. We find some evidence of additionality suggesting that the level-based program of R&D incentives in the Netherlands is effective in stimulating firms' investment in R&D. However, the hypothesis of crowding out can be rejected only for small firms. The analysis also indicates that the level-based nature of the fiscal incentive scheme leads to a substantial social dead-weight loss.
    Keywords: R&D tax credits; panel data; crowding out; user-cost elasticity
    JEL: O32 O38 H25 H50 C23
    Date: 2010
  14. By: Christoph Braun
    Abstract: This paper studies a Ramsey optimal taxation model with human capital in an infi nite-horizon setting. Contrary to Jones, Manuelli, and Rossi (1997), the human capital production function does not include the current stock of human capital as a production factor. As a result, the return to human capital, namely labor income, does not vanish in equilibrium. In a stationary state, the household underinvests in human capital relative to the fi rst best, i.e., education is distorted. Human capital is eff ectively taxed. The optimal tax scheme prescribes making the cost of education not fully tax-deductible.
    Keywords: Optimal taxation; human capital; Ramsey approach
    JEL: H21 I28 J24
    Date: 2010–09
  15. By: Christian Salas
    Abstract: The evaluation of public policies is on the heart of the e cient management of public resources. As complex as it generally is, any reform should be assessed on its ability to achieve its preconceived goals. This research paper attempts to show the importance of the design of a public policy's empirical evaluation, considering the susceptibility that its conclusions might have to changes in the approach to the data. The work of Davis (2008), which nds that a driving restrictions program had no impact on air quality in Mexico City, is revisited showing that reasonable changes in the methodology used can dramatically alter its conclusions. Additionally, evidence is presented that shows the success of the restrictions program in reducing air pollution by 12 to 18% during the first months of its implementation followed by a gradual increase in pollutants concentration, consistent with more limited opportunities for adaptation to the policy in the short-run. Finally, an alternative and robust framework is proposed to carry out the policy evaluation con rming the reduction of pollution right after the program's implementation.
    Keywords: Policy evaluation, air quality, regression discontinuity
    JEL: H43 Q52 Q53
    Date: 2010
  16. By: Erik O. Eriksen; John Erik Fossum
    Abstract: This article critically examines the democratic theory that informs the German Federal Constitutional Court’s Lisbon Treaty ruling. This is needed because the ruling is ambiguous with regard to what democracy for what Union. In order to analyse the ruling we establish three models of what European democracy possibly can amount to: Audit democracy based on the EU as a derivative of the member states, a multinational federal state, or a regional-cosmopolitan polity? The Court’s depiction of the EU does not fit as well as we should expect with the label derivative entity due to the important legislative role of the European Parliament. EU’s legal supranationalism points in the direction of a federation, but the Court’s argumentation does not lend support to this notion. The Court models democracy on a rather specific set of institutional presuppositions that are derived from the parliamentary model of democracy associated with the sovereign nation state. At the same time, the Court operates with a conception of a changing state sovereignty that unfolds more in line with cosmopolitan than with classical Westphalian statist principles.
    Keywords: democracy; democratization; federalism; German Constitutional Court; legitimacy; supranationalism
    Date: 2010–09–15
  17. By: Edison Roy César; François Vaillancourt
    Abstract: This study uses an original data set, combining information for all collective agreements covering more than 500 employees signed in Quebec or Ontario from 1985 to 2007 and information on payroll taxes and other variables, to measure the incidence of an increase in payroll tax. The results of this model show that that after one year, a one percentage point increase in the general payroll tax reduces wages growth by 1/2 of a percentage point in Quebec and 3/10 of a point in Ontario. <P>Cette étude utilise une base de données originale regroupant les conventions collectives couvrant plus de 500 employés signées au Québec ou en Ontario de 1985 `à 2007 et des informations sur les taxes sur la masse salariale et d’autres variables, afin de mesurer l’effet d’une augmentation de taxe sur la masse salariale. Les résultats de ce modèle indiquent qu’après un an, une augmentation d’un point de pourcentage des taxes générales sur la masse salariale fait diminuer la croissance des salaires de 1/2 point de pourcentage au Québec et 3/10 de point de pourcentage en Ontario.
    Keywords: Payroll taxes, incidence, collective agreements, wages, Taxe sur la masse salariale, incidence, conventions collectives, salaires
    JEL: H22 H24 H32 J32 J38
    Date: 2010–09–01
  18. By: Christiane Nickel (European Central Bank, Directorate General Economics, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Philipp Rother (European Central Bank, Directorate General Economics, Kaiserstrasse 29, D-60311 Frankfurt am Main, Germany.); Lilli Zimmermann (Center for European Studies (CEUS) at WHU – Otto Beisheim School of Management, Burgplatz 2, D-56179 Vallendar, Germany.)
    Abstract: The financial crisis of 2008/2009 has left European economies with a sizeable public debt stock bringing back the question what factors help to reduce these fiscal imbalances. Using data for the period 1985-2009 this paper identifies factors determining major public debt reductions. On average, the total debt reduction per country amounted to almost 37 percentage points of GDP. We estimate several specifications of a logistic probability model. Our findings suggest that, first, major debt reductions are mainly driven by decisive and lasting (rather than timid and short-lived) fiscal consolidation efforts focused on reducing government expenditure, in particular, cuts in social benefits and public wages. Second, robust real GDP growth also increases the likelihood of a major debt reduction because it helps countries to "grow their way out" of indebtedness. Third, high debt servicing costs play a disciplinary role strengthened by market forces and require governments to set up credible plans to stop and reverse the increasing debt ratios. JEL Classification: C35, E62, H6.
    Keywords: Fiscal policy, public debt, binary choice models.
    Date: 2010–09
  19. By: Claudio Detotto; Marco Vannini
    Abstract: The aim of this paper is to gauge the cost of crime in Italy by concentrating on a subset of offences covering about 64% of total recorded crime in year 2006. Following the breakdown of costs put forward by Brand and Price, we focus on the costs in anticipation, as a consequence and in response to a specific offence. The estimated total social cost is more than € 38 billion, which amounts to about 2.6% of Italy’s GDP. To show the usefulness of these measures, we borrow the elasticity estimates from recent studies concerning the determinants of crime in Italy and calculate the cost associated with the surge in crime fuelled by unemployment and pardons. Indeed, in both cases such costs are substantial, implying that they should no longer be skipped when assessing the relative desirability of public policies towards crime.
    Keywords: Cost of crime; Cost–Benefit Analysis; Investments in public security
    JEL: D61 H50 K00
    Date: 2010

This nep-pbe issue is ©2010 by Oliver Budzinski. It is provided as is without any express or implied warranty. It may be freely redistributed in whole or in part for any purpose. If distributed in part, please include this notice.
General information on the NEP project can be found at For comments please write to the director of NEP, Marco Novarese at <>. Put “NEP” in the subject, otherwise your mail may be rejected.
NEP’s infrastructure is sponsored by the School of Economics and Finance of Massey University in New Zealand.