nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒10‒02
twenty-two papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. Does Fiscal Decentralization Constrain Leviathan? Evidence from Local Property Tax Competition By George R. Crowley; Russell S. Sobel
  2. Cooperative provision of indivisible public goods By dEHEZ, Pierre
  3. Competition and Welfare Effects of VAT Exemptions By Helmut Dietl; Christian Jaag; Markus Lang; Urs Trinkner
  4. Recovery and Reinvestment Act Spending at the State Level: Keynesian Stimulus or Distributive Politics? By Russell S. Sobel; Andrew Young
  5. Fiscal Institutions and Public Spending Volatility in Europe By Bruno Albuquerque
  6. The economics of wealth transfer tax By CREMER, Helmuth; PESTIEAU, Pierre
  7. Optimal Taxation over the Life Cycle By Gorry, Aspen; Oberfield, Ezra
  8. Nature of human capital, technology and ownership of public goods By Maija Halonen
  9. The Framing of Games and the Psychology of Play By Martin Dufwenberg; Simon Gaechter; Heike Hennig-Schmidt
  10. Demographic change, growth and agglomeration By Gerlinde Fellner; Yoshio Iida; Sabine Kröger; Erika Seki
  11. Taxing Intermediate Goods to Compensate for Distorting Taxes on Household Consumption By Bohlin, Lars
  12. The Decomposition of the Redistributive Effect and the Issue of Close Equals Identification By Edyta Mazurek; Simone Pellegrino; Achille Vernizzi
  13. Tax progression: International and intertemporal comparison using LIS data By Pogorelskiy, Kirill; Seidl, Christian; Traub, Stefan
  14. Taxation, Dividends, and Share Repurchases: Taking Evidence Global By Jacob, Martin
  15. Performance Measurement at the Sub-national Government Level in Croatia By Dubravka Jurlina Alibegovic; Suncana Slijepcevic
  16. The worldwide governance indicators : methodology and analytical issues By Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
  17. Regulatory Schemes and Political Capture in a Local Public Sector By Gagnepain, Philippe; Ivaldi, Marc
  18. Some Uncomfortable Arithmetic Regarding Europe’s Public Finances By Delia Velculescu
  19. The Sustainability of Public Finance in Greece By Dimitrios, Koumparoulis
  20. Is Crowding Out Due Entirely to Fundraising? Evidence from a Panel of Charities By James Andreoni; A. Abigail Payne
  21. On the Optimal Taxation of Common-Pool Resources By Georgios Kossioris; Michael Plexousakis; Anastasios Xepapadeas; Aart de Zeeuw
  22. Interactions between State and Federal Climate Change Policies By Lawrence H. Goulder; Robert N. Stavins

  1. By: George R. Crowley (Department of Economics, West Virginia University); Russell S. Sobel (Department of Economics, West Virginia University)
    Abstract: This paper reexamines whether fiscal decentralization constrains Leviathan government. Using panel data for Pennsylvania, we compare actual property tax rates to the Leviathan revenue-maximizing rates for municipalities, school districts, and counties. Using spatial econometric methods we also estimate the degree of spatial dependence at the three levels of local government. We find that fiscal decentralization results in stronger intergovernmental competition and lower tax rates. We also find evidence of collusion among school districts that exhibit high interdependence but also high tax rates. This calls into question the current literature's blind use of spatial dependence as a measure of intergovernmental competition.
    Keywords: Fiscal decentralization, Leviathan, Tax competition
    JEL: H77 H73
    Date: 2010
  2. By: dEHEZ, Pierre (Université catholique de Louvain, CORE, B-1348 Louvain-la-Neuve, Belgium)
    Abstract: A community faces the obligation of providing an indivisible public good. Each member is capable of providing it at a certain cost and the solution is to rely on the player who can do it at the lowest cost. It is then natural that he or she be compensated by the other players. The question is to know how much they should each contribute. We model this compensation problem as a cost sharing game to which standard allocation rules are applied and related to the solution resulting from the auction procedures proposed by Kleindorfer and Sertel (1994).
    Keywords: public goods, cost sharing, core, nucleolus, Shapley value
    JEL: C71 H41 M41
    Date: 2010–05–01
  3. By: Helmut Dietl; Christian Jaag; Markus Lang; Urs Trinkner
    Abstract: Distortions under the value-added tax (VAT) arise mainly from the exemption of specific services and sectors. This paper develops an analytical model that is applicable to any sector characterized by asymmetric VAT exemptions of services and activities or differentiated VAT rates. We analyze the effects of such asymmetric VAT regimes on market shares, optimal prices, and tax receipts analytically and by simulation. The analytical model shows how asymmetric VAT exemptions distort competition by strengthening the competitive position of non-rated firms. The net effect of VAT exemptions depends on the fraction of VAT rated inputs versus the fraction of non-rated customers. We further shed light on the main competitive impact of VAT policies, while showing the consequences on overall welfare by presenting simulation results based on a calibrated quantitative model of a selected sector. The contribution of our paper is to provide guidance on how to resolve the policy trade-off between a level playing field, consumer surplus and government tax revenue.
    Keywords: Value-added tax, indirect taxation, tax regulation, tax exemption, universal service obligation, postal sector
    JEL: H21 H25 L51 L87
    Date: 2010–09
  4. By: Russell S. Sobel (Department of Economics, West Virginia University); Andrew Young (Department of Economics, West Virginia University)
    Abstract: We examine the US state-level pattern of American Recovery and Reinvestment Act (ARRA) spending. We relate spending to (1) Keynesian determinants of countercyclical policy, (2) congressional power and dominance, and (3) presidential electoral vote importance. We find that the ARRA is, in practice, poorly-designed countercyclical stimulus. After controlling for political variables, coefficients on Keynesian variables are often statistically insignificant. When they are statistically significant they are often the “incorrect” sign. On the other hand, statistically significant effects associated with political variables are almost always of the sign predicted by public choice theory. One striking result is that the elasticity of ARRA spending with respect to the pre-ARRA levels of federal grants and payments to state and local governments is between 0.254 and 0.361. States previously capturing large amounts of federal funds continue to do so under the ARRA stimulus.
    Keywords: fiscal stimulus, fiscal policy, political economy, public choice, congressional dominance model, American recovery and reinvestment act
    JEL: D7 H5 E6
    Date: 2010
  5. By: Bruno Albuquerque
    Abstract: This work provides empirical evidence for a sizeable, statistically significant negative impact of the quality of fiscal institutions on public spending volatility for a panel of 25 EU countries over the 1980-2007 period. The dependent variable is the volatility of discretionary fiscal policy, which does not represent reactions to changes in economic conditions. Our baseline results thus give support to the strengthening of institutions to deal with excessive levels of discretion volatility, as more checks and balances make it harder for governments to change fiscal policy for reasons unrelated to the current state of the economy. Our results also show that bigger countries and bigger governments have less public spending volatility. In contrast to previous studies, the political factors do not seem to play a role, with the exception of the Herfindahl index, which suggests that high concentration of parliamentary seats in a few parties would increase public spending volatility.
    JEL: E32 E62 H30
    Date: 2010
  6. By: CREMER, Helmuth (IDEI, Toulouse School of Economics, France); PESTIEAU, Pierre (Center for Operations Research and Econometrics (CORE), Université catholique de Louvain (UCL), Louvain la Neuve, Belgium; CREPP, Université de Liège, Belgium; PSE and CEPR)
    Abstract: This paper discusses the merits of wealth transfer taxation on both efficiency and equity grounds. It first deals with the popular debate that is dominated by American economists. This debate concerns the US estate tax, which is one, among many, types of wealth transfer tax. After addressing the main issues prevailing in this debate and discussing the lack of popular support for such tax, the paper adopts a more theoretical approach to explore the pluses and the minuses of a wealth transfer tax. The main point is that the desirability of a wealth transfer tax depends on the motives of wealth accumulation and transmission.
    Keywords: estate tax, inheritance tax, bequest motives
    JEL: H21 H24
    Date: 2010–06–01
  7. By: Gorry, Aspen; Oberfield, Ezra
    Abstract: We derive the optimal labor income tax schedule for a life cycle model with deterministic productivity variation and complete asset markets. An individual chooses whether and how much to work at each date. The government must finance a given expenditure and does not have access to lump sum taxation. We develop a solution method that combines incentive constraints into a single implementability constraint. The average tax rate determines when an individual will work while the marginal tax rate determines how much she will work. The optimal tax schedule has an increasing average tax rate at low levels of income to encourage labor market participation, even in the absence of redistributive concerns. In contrast to the Mirrleesian optimal taxation literature, the marginal tax rate at the top is strictly positive.
    Keywords: Optimal Taxation; Life Cycle; Mirrlees
    JEL: E62 H21
    Date: 2010–05–26
  8. By: Maija Halonen
    Abstract: Besley and Ghatak (2001) show that public good should be owned by the agent who values the public good most — irrespective of technological factors. In this paper we relax their assumptions in a natural way by allowing the agents to be indispensable and show that relative valuations are not the sole determinant of optimal ownership structure but also nature of human capital and technology matter.
    Keywords: property rights, public goods, indispensability, technology
    JEL: D23 H41 L33
    Date: 2010–08
  9. By: Martin Dufwenberg; Simon Gaechter; Heike Hennig-Schmidt
    Abstract: Psychological game theory can provide rational-choice-based framing effects; frames influence beliefs, beliefs influence motivations. We explain this theoretically and explore empirical relevance experimentally. In a 2×2 design of one-shot public good games we show that frames affect subject’s first- and second-order beliefs, and contributions. From a psychological gametheoretic framework we derive two mutually compatible hypotheses about guilt aversion and reciprocity under which contributions are related to second- and first-order beliefs, respectively. Our results are consistent with either.
    Keywords: framing, psychological game theory, guilt aversion, reciprocity, public good games, voluntary cooperation
    JEL: C91 C72 D64 Z13
    Date: 2010–09
  10. By: Gerlinde Fellner (Department of Economics, Vienna University of Economics & B.A.); Yoshio Iida (Faculty of Economics, Kyoto Sangyo University, Kyoto, Japan); Sabine Kröger (Laval University, Department of Economics, Quebec, Canada); Erika Seki (Department of Economics, University of Aberdeen, Scotland, UK)
    Abstract: This article experimentally examines voluntary contributions when group members' marginal returns to the public good vary. The experiment implements two marginal return types, low and high, and uses the information that members have about the heterogeneity to identify the applied contribution norm. We find that norms vary with the information environment. If agents are aware of the heterogeneity, contributions increase in general. However, high types contribute more than low types when contributions can be linked to the type of the donor but contribute less otherwise. Low types, on the other hand, contribute more than high types when group members are aware of the heterogeneity but contributions cannot be linked to types. Our results underline the importance of the information structure when persons with different abilities contribute to a joint project, as in the context of teamwork or charitable giving.
    JEL: H41
    Date: 2010–07
  11. By: Bohlin, Lars (Department of Business, Economics, Statistics and Informatics)
    Abstract: In contrast to the classic result in Diamond and Mirrlees (1971) that fiscal taxes should not be levied on intermediate use of goods, Newbury (1985) showed that, in a closed economy with Leontief technology, input taxes should be used to indirectly tax commodities that for some reason are untaxed in final consumption. <p> This paper extends the Newbury result to more general cases; i.e., to open economies with substitution possibilities in the production functions. Moreover, it shows that the welfare maximizing proportion between the tax rate for intermediate use by firms and final demand by households declines with higher elasticities of substitution in production functions and with higher price elasticities in import demand functions and export supply functions. It also shows that the welfare maximizing proportion of tax rates between households and firms for one commodity will depend upon the corresponding proportion of tax rates for important substitutes for that commodity. These results are shown both in stylized Computable General Equilibrium (CGE) models and in an applied CGE model of the Swedish economy where the tax on electricity is used as an example.
    Keywords: Optimal taxation; CGE-analysis
    JEL: D58 H21
    Date: 2010–09–21
  12. By: Edyta Mazurek (Department of Statistics, Wroclaw University of Economics); Simone Pellegrino (Department of Economics and Public Finance "G. Prato", University of Torino); Achille Vernizzi (Department of Economics, Business and Statistics, University of Milan)
    Abstract: Urban and Lambert (2005, 2008) present an exhaustive summary and an in-depth discussion of the literature contributions about the decomposition of the redistributive effect of a tax (RE). The authors discuss the indexes available in the literature for the potential vertical effect (V), the loss due to horizontal fairness violations (H) and that due to re-rankings (R); they also introduce new indexes specifically conceived to take into account problems arising when groups of exact equals are substituted by groups of close equals. Close equals groups are generally obtained by splitting the pre-tax income distribution into contiguous intervals having the same bandwidth, so that the problem of the bandwidth choice arises. van de Van, Creedy and Lambert (2001) suggest choosing the bandwidth that maximizes the potential vertical effect V. Even looking for V maximization, we discuss a new criterion that yields a compromise between the contrasting needs of minimizing the effects of pre-tax within groups inequalities and the minimization of group average re-rankings. The criterion is then applied to evaluate the components of two decompositions: the former is the one suggested by Urban and Lambert (2005, 2008) as preferable, the latter is suggested by us on the basis of Urban and Lambert’s paving discussion. According to our simulation results, when comparing different income tax systems for a same population as well as adopting the “optimal” bandwidth, the new criterion seems to introduce lower approximation errors than the maximization of V.
    Keywords: Income Tax, Redistributive Effect, Horizontal Inequity, Re-ranking
    JEL: H23 H24
    Date: 2010–09
  13. By: Pogorelskiy, Kirill; Seidl, Christian; Traub, Stefan
    Abstract: The conventional approach to comparing tax progression (using local measures, global measures or dominance relations for first moment distribution functions) often lacks applicability to the real world: local measures of tax progression have the disadvantage of ignoring the income distribution entirely. Global measures are affected by the drawback of all aggregation, viz. ignoring structural differences between the objects to be compared. Dominance relations of comparing tax progression depend heavily on the assumption that the same income distribution holds for both situations to be compared, which renders this approach impossible for international and intertemporal comparisons. Based on the earlier work of one of the authors, this paper develops a unified methodology to compare tax progression for dominance relations under different income distributions. We address it as uniform tax progression for different income distributions and present the respective approach for both continuous and discrete cases, the latter also being employed for empirical investigations. Using dominance relations, we define tax progression under different income distributions as a class of natural extensions of uniform tax progression in terms of taxes, net incomes, and differences of first moment distribution functions. To cope with different monetary units and different supports of the income distributions involved, we utilized their transformations to population and income quantiles. Altogether, we applied six methods of comparing tax progression, three in terms of taxes and three in terms of net incomes, which we utilized for empirical analyses of comparisons of tax progression using data from the Luxembourg Income Study. This is the first paper that performs international and intertemporal comparisons of uniform tax progression with actual data. For our analysis we chose those countries for which LIS disposes of data on gross incomes, taxes, payroll taxes and net incomes. This pertains to 15 countries, out of which we selected 13. This gave rise to 78 international comparisons, which we carried out for household data, equivalized data, direct taxes and direct taxes inclusive of payroll taxes. In total we investigated 312 international comparisons for each of the six methods of comparing tax progression. In two thirds of all cases we observed uniformly greater tax progression for international comparisons. In a bit more than one fifth of all cases we observed bifurcate tax progression, that is, progression is higher for one country up to some population or income quantile threshold, beyond which the situation is the opposite, i.e., progression is higher for the second country. No clear-cut findings can be reported for just one tenth of all cases. But even in these cases some curve differences are so small that they may well be ignored. We also test consistency of our results with regard to the six methods of comparing tax progression and present here twelve (Germany, the UK and the US) plus four comparing Germany and Sweden out of the total of 312 graphs, each containing six differences of first moment distribution functions. These differences can be interpreted as intensity of greater tax progression. We demonstrate the overall picture of uniform tax progression for international comparisons using Hasse diagrams. Concerning intertemporal comparisons of tax progression, we present the results for the US, the UK, and Germany for several time periods. We align our findings with respect to major political eras in these countries, e.g., G. Bush senior, W. Clinton, and G. Bush junior for the United States; M. Thatcher, J. Major, and A. Blair for the United Kingdom, and for Germany, the last year before German re-unification (1989), the beginning of H. Kohl's last term as chancellor (1994), and G. Schröder (2000). In addition, we study sensitivity of our results to the equivalence scale parameter. --
    Keywords: income tax progression,measurement of uniform tax progression,comparisons of tax progression,tax progression with different income distributions
    JEL: H23 H24
    Date: 2010
  14. By: Jacob, Martin (Uppsala Center for Fiscal Studies)
    Abstract: We compile a comprehensive international dividend and capital gains tax data set to study tax explanations of corporate payouts for a panel of 5,767 firms from 25 countries for 1990-2008. We find robust evidence that the tax penalty on dividends versus capital gains is statistically significant and negatively related to firms’ propensity to pay dividends, initiate such payments, and the amount of dividends paid. Our analysis further reveals that an increase in the dividend tax penalty raises firms’ likelihood to repurchase shares, initiate such repurchases, and the amount of shares repurchased. This is strong confirming evidence that when listed industrial firms globally design their payout policies, they take into careful consideration the relative tax implications of their payout choices.
    Keywords: Taxation; Dividends; Stock Repurchases; Payout Policy
    JEL: G10 G15 G30 G35 H24 H25
    Date: 2010–09–22
  15. By: Dubravka Jurlina Alibegovic (The Institute of Economics, Zagreb); Suncana Slijepcevic (The Institute of Economics, Zagreb)
    Abstract: This paper analyzes the role of performance measurement at the sub-national government level in Croatia as one of the crucial factors that lead to the improvement of implementation of local and regional policies. The analysis is based on the Public Expenditure and Financial Accountability Public Financial Management (PEFA PFM) Performance Measurement Framework. Three performance indicators are used for measuring the credibility of the sub-national budget. The first performance indicator measures the differences between aggregate expenditure outturns and the original approved budget at the sub-national government level in Croatia. The second performance indicator is used to examine the difference between the composition of expenditure outturn and the original approved budget at the sub-national government level in Croatia. The third indicator measures the deviation of aggregate revenue outturn from the original approved budget at the sub-national government level in Croatia. A significant divergence of budgetary outturns from the original approved budget, both on the revenue and expenditure side of the budget, confirms the hypothesis about low credibility of the budget at the sub-national level in Croatia. The paper also analyzes the impact of expenditure structure on the performance of the sub-national government level in Croatia. The results presented in this paper identify the main policies which the sub-national government uses to encourage local and regional development in Croatia. However, the results show that the budget does not incorporate any aspects of strategic planning, which is necessary to achieve local and regional development. The substantial difference between planned and realized budgetary expenditures is a key obstacle to faster local and regional development.
    Keywords: local and regional development, local and regional policy, performance measurement, Croatia
    JEL: R51
    Date: 2010–09
  16. By: Kaufmann, Daniel; Kraay, Aart; Mastruzzi, Massimo
    Abstract: This paper summarizes the methodology of the Worldwide Governance Indicators (WGI) project, and related analytical issues. The WGI cover over 200 countries and territories, measuring six dimensions of governance starting in 1996: Voice and Accountability, Political Stability and Absence of Violence/Terrorism, Government Effectiveness, Regulatory Quality, Rule of Law, and Control of Corruption. The aggregate indicatorsare based on several hundred individual underlying variables, taken from a wide variety of existing data sources. The data reflect the views on governance of survey respondents and public, private, and NGO sector experts worldwide. The WGI also explicitly report margins of error accompanying each country estimate. These reflect the inherent difficulties in measuring governance using any kind of data. Even after taking these margins of error into account, the WGI permit meaningful cross-country and over-time comparisons. The aggregate indicators, together with the disaggregated underlying source data, are available at
    Keywords: Governance Indicators,National Governance,Public Sector Corruption&Anticorruption Measures,Economic Policy, Institutions and Governance,Statistical&Mathematical Sciences
    Date: 2010–09–01
  17. By: Gagnepain, Philippe; Ivaldi, Marc
    Abstract: We consider a framework of contractual interactions between urban transport authorities and transport operators. We estimate simultaneously the choice of contract by the authorities and the effect of regulation on the cost reducing activity of the operators. We test whether regulatory schemes currently implemented in the industry are the observable items of a more general menu of second best contracts. We suggest that the generation process of the data we have in hand is better explained by the political aspects of regulation. Moreover, the cost reducing effort of the operators is greater under fixed-price regimes, compared to the cost-plus case.
    Date: 2010–05
  18. By: Delia Velculescu
    Abstract: Traditional fiscal indicators focused on measures of current deficits and debt miss the potentially important implications of current policies for future public finances. This could be problematic, including in the case of Europe, where population aging is expected to pose additional fiscal costs not captured by such indicators. To better gauge the state of public finances in the EU27 countries, this paper derives forward-looking fiscal measures of intertemporal net worth both directly from the European Commission’s Aging Working Group’s long-run indicators and using a comprehensive public-sector balance sheet approach. These measures could be used as an "early warning" mechanism and also as a communication device with the public. Current estimates indicate that, on existing policies, the intertemporal net worth of the EU27 is deeply negative, even in excess of its GDP level, and is projected to worsen further over time. This suggests that Europe’s current policies need to be significantly strengthened to bring future liabilities in line with the EU governments’ capacity to generate assets.
    Date: 2010–07–30
  19. By: Dimitrios, Koumparoulis
    Abstract: The present paper discusses the issue of sustainability of fiscal policy in Greece for the entire time span of 1960 – 2005. It will be argued that the fiscal policy is sustainable on condition that the intertemporal budget constraint (IBC) is satisfied. For this purpose, two variables were used namely, the total revenue and the total public expenditure. After having conducted unit root and cointegration tests it will be concluded that the fiscal policy of Greek economy is sustainable for the above period.
    Keywords: Sustainability; Fiscal Policy; Intertemporal Budget Constraint; Cointegration
    JEL: H19 C22
    Date: 2010
  20. By: James Andreoni; A. Abigail Payne
    Abstract: When the government gives a grant to a private charitable organization, do the donors to that organization give less? If they do, is it because the grants crowd out donors who feel they gave through taxes (classic crowd out), or is it because the grant crowds out the fund-raising of the charities who, after getting the grant, reduce efforts of fund-raising (fund-raising crowd out)? This is the first paper to separate these two effects. Using a panel of more than 8,000 charities, we find that crowding out is significant, at about 72 percent. We find this crowding out is due primarily to reduced fund-raising. Depending on which types of organizations are included in the analysis, crowding out attributable to classic crowd-out ranges from 30% to a slight crowd-in effect, while fund-raising crowd out ranges from 70% to over 100% of all crowd out. Such a finding could have important consequences for how governments structure grants to non-profits. Our results indicate, for example, that requirements that charities match a fraction of government grants with increases in private donations might be a feasible policy that could reduce the detrimental effects of crowding out.
    Keywords: charitable giving; fundraising; crowd-out
    JEL: H00 H32 H50
    Date: 2010–09
  21. By: Georgios Kossioris (Department of Mathematics, University of Crete); Michael Plexousakis (Department of Applied Mathematics, University of Crete); Anastasios Xepapadeas (Athens University of Economics and Business and Beijer Fellow); Aart de Zeeuw (TSC, Tilburg University and Beijer Fellow)
    Abstract: Recent research developments in common-pool resource models emphasize the importance of links with ecological systems and the presence of non-linearities, thresholds and multiple steady states. In a recent paper Kossioris et al. (2008) develop a methodology for deriving feedback Nash equilibria for non-linear differential games and apply this methodology to a common-pool resource model of a lake where pollution corresponds to benefits and at the same time affects the ecosystem services. This paper studies the structure of optimal state- dependent taxes that steer the combined economic-ecological system towards the trajectory of optimal management, and provides an algorithm for calculating such taxes.
    Keywords: Differential Games, non-linear Feedback Nash Equilibria, Ecosystems, Optimal State-dependent Tax
    JEL: Q25 C73 C61
    Date: 2010–09
  22. By: Lawrence H. Goulder (Stanford University National Bureau of Economic Research Resources for the Future); Robert N. Stavins (John F. Kennedy School of Government, Harvard University, Resources for the Future National Bureau of Economic Research)
    Abstract: Federal action addressing climate change is likely to emerge either through new legislation or via the U.S. EPA’s authority under the Clean Air Act. The prospect of federal action raises important questions regarding the interconnections between federal efforts and state-level climate policy developments. In the presence of federal policies, to what extent will state efforts be cost-effective? How does the co-existence of state- and federal-level policies affect the ability of state efforts to achieve emissions reductions? This paper addresses these questions. We find that state-level policy in the presence of a federal policy can be beneficial or problematic, depending on the nature of the overlap between the two systems, the relative stringency of the efforts, and the types of policy instruments engaged. When the federal policy sets limits on aggregate emissions quantities, or allows manufacturers or facilities to average performance across states, the emission reductions accomplished by a subset of U.S. states may reduce pressure on the constraints posed by the federal policy, thereby freeing facilities or manufacturers to increase emissions in other states. This leads to serious “emissions leakage” and a loss of cost-effectiveness at the national level. In contrast, when the federal policy sets prices for emissions or does not allow manufactures to average performance across states, these difficulties are usually avoided. Even in circumstances involving problematic interactions, there may be other attractions of state-level climate policy. We evaluate a number of arguments that have been made to support state-level climate policy in the presence of federal policies, even when problematic interactions arise.
    Keywords: Global Climate Change, Federalism, Cap-And-Trade, Carbon Tax, Regulation
    JEL: H11 H77 K32 L51 Q48 Q54
    Date: 2010–07

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