nep-pbe New Economics Papers
on Public Economics
Issue of 2010‒11‒13
23 papers chosen by
Oliver Budzinski
University of Southern Denmark

  1. The gains from preferential tax regimes reconsidered By Carl Gaigné; Ian Wooton
  2. A Flat Rate Financial Transaction Tax to replace all taxes? By Simon J Thorpe
  3. Legitimate Punishment, Feedback, and the Enforcement of Cooperation By Marco Faillo; Daniela Grieco; Luca Zarri
  4. Government and the provision of public goods: from equilibrium models to mechanism design By Monique Florenzano
  5. Fiscal Decentralization and Development: How Crucial is Local Politics? By Pal, Sarmistha; Roy, Jaideep
  6. An analysis of farmersâ behaviour and rewarded provision of public goods By Roel, Jongeneel; Ge, Lan
  7. Competitive Private Supply of Public Goods / Provision privée des biens publics en compétition By Arnaud Dragicevic; Guy Meunier
  8. Norms, Culture and Local Infrastructure: Evidence from a Decentralised Economy By Pal, Sarmistha
  9. Taxation and More Representation? On Fiscal Policy, Social Mobility and Democracy in Latin America By Christian Daude; Angel Melguizo
  10. Heterogeneous Tiebout communities with private production and anonymous crowding By Jaime Luque
  11. How Should Financial Intermediation Services be Taxed? By Lockwood, Ben
  12. Personal Income Tax Gap for Business Income Earners In New York State: From the Real Estate Tax Perspective By Niu, Yongzhi; Cohen, Roger
  13. Combining the contributions of behavioral economics and other social sciences in understanding taxation and tax reform By James, Simon
  14. Public R&D Subsidies and Productivity: Evidence from Firm-Level Data in Quebec By Baghana, Rufin
  15. Comparing Regulatory Oversight Bodies Across the Atlantic: The Office of Information and Regulatory Affairs in the US and the Impact Assessment Board in the EU By Alemanno, Alberto; Wiener, Jonathan B.
  16. Efficient Development Portfolio Design for Sub Saharan Africa By Zon, Adriaan van; Wiebe, Kirsten
  17. Voting on traffic congestion policy with two levels of government By Russo, Antonio
  18. Budget Consolidation in a Difficult Environment – Ten Guidelines Plus a Preliminary Reality Check By Karl Aiginger; Margit Schratzenstaller
  19. Leadership and Innovation under Decentralization : A Case Study of Selected Local Governments in the Philippines By Joseph J. Capuno
  20. Tackling the Infrastructure Challenge in Indonesia By Mauro Pisu
  21. Public Debt, Distortionary Taxation, and Monetary Policy By Piergallini, Alessandro; Rodano, Giorgio
  22. Legislative malapportionment and institutional persistence By Bruhn, Miriam; Gallego, Francisco; Onorato, Massimiliano
  23. Iceland: After the Fall By Gylfason, Thorvaldur

  1. By: Carl Gaigné; Ian Wooton
    Abstract: The EU policy against harmful tax competition aims at eliminating tax policies targeted at attracting the internationally mobile tax base. We construct an imperfectly competitive model of costly trade between two countries. In setting their corporate taxes, governments non-cooperatively decide whether to discriminate between internationally mobile and immobile firms. We find the Nash equilibrium tax regimes. When trade costs are high countries impose a uniform tax on all firms while nations will discriminate between mobile and immobile firms when costs are low. At some trade costs, fiscal competition results in tax discrimination despite uniform taxation being socially preferable.
    Keywords: preferential tax regimes; tax competition; imperfect competition; trade costs
    JEL: H87 F12
    Date: 2010
  2. By: Simon J Thorpe (CERCO - Centre de recherche cerveau et cognition - CNRS : UMR5549 - Université Paul Sabatier - Toulouse III)
    Abstract: In this paper I propose a very radical reform of the taxation system, in which a single flat rate financial transaction tax (FTT) is used to replace the vast majority of existing taxes (including VAT, income tax, taxes on profits...). Existing economic data indicates that a flat rate FTT of 1% would generate far more revenue that is currently generated by all existing taxes, and would allow governments to rapidly repay debts and restore programs of public expenditure as well as allowing resources to be allocated to globally important challenges such as third world development, climate change and health issues.
    Keywords: Economy, Finacial Crisis, Financial Transaction Tax
    Date: 2010–10–29
  3. By: Marco Faillo (Department of Economics, University of Trento); Daniela Grieco (Department of Economics (University of Verona)); Luca Zarri (Department of Economics (University of Verona))
    Abstract: In the framework of a finitely repeated public goods game with costly punishment options, we introduce a novel restrictive setup where a principle of legitimacy holds, in the sense that only virtuous behavior (that is, being a high contributor) allows one to gain access to sanctioning opportunities (‘entitlement’) and only wrongful behavior (that is, being a low contributor) makes one a potential target of peer punishment (‘desert’). As a consequence, acting virtuously guarantees that it will not be possible to be punished by less virtuous subjects (‘immunity’). These restrictions, by allowing for ‘legitimate punishment’ only, rule out by construction so called antisocial punishment as well as vengeful behavior. Moreover, we manipulate the amount of information over others’ contributions that subjects receive before making their punishment decisions. Our preliminary results show that restrictions lead to an increase of cooperation levels and virtuous restrictions combined with detailed feedback on peers’ contribution significantly increase contribution levels and make cooperation sustainable over time.
    Keywords: Experimental Economics, Public Good Games, Costly Punishment, Cooperation, Legitimacy, Immunity
    JEL: C72 C91 C92 D23 D72
    Date: 2010–11
  4. By: Monique Florenzano (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I)
    Abstract: Focussing on their analysis of the optimal public goods provision problems, this paper follows the parallel development of equilibrium models and mechanism design after the accommodation of Samuelson's definition of collective goods to the general equilibrium framework. Both paradigms lead to the negative conclusion of the impossibility of a fully decentralized optimal public goods provision throught market or market-like institutions.
    Keywords: general equilibrium, Lindahl-Foley equilibrium, Wicksell-Foley public competitive equilibrium, private provision equilibrium, mechanism design, free-rider problem, incentive compatibility, principal-agent models
    Date: 2010–10
  5. By: Pal, Sarmistha (Brunel University); Roy, Jaideep (University of Birmingham)
    Abstract: Does fiscal decentralization in a politically decentralized less developed country help strengthen democratic institutions at the grass root level? And is the impact of such decentralization on local politics important in determining local development? Our study on Indonesia suggests that fiscal decentralization enhanced free and fair local elections, though the incidence of elite capture, and the consequent breakdown of local democracy, was also present in significant proportions. Fiscal decentralization promoted development mostly in communities which transited out from elite capture to embrace free and fair elections. This was followed by communities that experienced the emergence of elite capture. Communities that continued to remain under either elite capture or free and fair elections did the worst. These findings suggest that while the emergence of elite capture exists, it may not necessarily be the most harmful. Instead, and surprisingly so, stability of local polity hurts development the most.
    Keywords: local politics, less developed nation, decentralization
    JEL: D72 H77 O18
    Date: 2010–10
  6. By: Roel, Jongeneel; Ge, Lan
    Abstract: Aiming to stimulate the role of agriculture as provider of public goods, the new CAP reform raises many theoretical and practical questions. The most relevant ones concern farmersâ response to the policy instruments. This paper uses a formal model to analyse the incentives and constraints generated by policy instruments and their potential impact on farmersâ participation decision. The analysis shows that, when choosing policy instruments to stimulate provision of public good, it is important to take into account different degrees and mechanisms of jointness between commodity and non-commodity (potentially public good) production, as they can enhance or erode the desired effect of the policy instruments. Some implications for modelling and policy analysis are discussed.
    Keywords: Farmersâ behaviour, provision of public goods, jointness, Common Agricultural Policy (CAP), Community/Rural/Urban Development, H41, Q12, Q18,
    Date: 2010–08
  7. By: Arnaud Dragicevic; Guy Meunier
    Abstract: This paper compares guilt alleviation and competition for social status in the private provision of a public good. When agents are intrinsically impulsed, that is, they mostly provide the public good in order to alleviate their guilt, they tend to free-ride. In contrast, when agents are extrinsically impulsed and compete for social status, their provisions become strategic complements. In the latter case, the aggregate level of the public good increases as the disparity between agents’ incomes shrinks. In the see-through scenario, subsidizing has an ambiguous impact on the aggregate level of the public good. In any case, injecting competition for social status into utility functions increases provisions to a public good, and hence its aggregate level. Market competition thus creates incentives to overcome the free-riding issue. <p> This Working Paper will be available soon. <P>Le papier fait la comparaison entre déculpabilisation et compétition pour le statut social dans la provision privée des biens publics. Lorsque les agents sont intrinsèquement impulsés, c’est-à-dire qu’ils contribuent essentiellement aux biens publics dans le but de soulager leur culpabilité d’avoir indirectement participé à leur dégradation, ils tendent à se comporter en passagers clandestins. En revanche, lorsque les agents sont extrinsèquement impulsés et se mettent en compétition pour atteindre du statut social qu’ils visent par le financement des biens publics à titre privé, leurs contributions deviennent des compléments stratégiques. Dans ce cas, le niveau agrégé des biens publics croît avec la réduction des écarts de revenus entre les agents. Dans un scénario de transparence fiscale, les subventions ont un impact ambigu sur le niveau global des biens publics. Dans tous les cas, injecter de la compétition pour le statut social dans des fonctions d’utilité augmente les contributions aux biens publics, et donc leur niveau global, faisant de la concurrence une incitation féconde pour résoudre le problème du passager clandestin. <p> Le cahier scientifique sera disponible ultérieurement.
    Keywords: public good private supply, guilt relieving, social status, competition, income transfer, subsidies, provision privée des biens publics, déculpabilisation, statut social, compétition, transfert de revenu, subventions
    JEL: A13 C7 H2 H41
    Date: 2010–01–01
  8. By: Pal, Sarmistha (Brunel University)
    Abstract: Culture as reflected in social and religious norms may be pivotal to social organization in a decentralised economy where local authorities are responsible for the provision of local public goods. We distinguish between individualist and collectivist cultures to argue that collectivist culture may promote rules to indulge in family, social and religious values at the cost of individual values promoting material objects and may thus result in inefficient choice of pubic goods. We use Indonesia as a case in point to classify communities strictly adhering to traditional adat laws and Islamic religion as promoting collectivist culture. Results using 1997 and 2007 Indonesian Family Life Survey community-level panel data highlight that, even after controlling for other variables, traditional collectivist communities strongly adhering to adat and Islam tend to have significantly greater access to social (rather than physical) infrastructural goods; similar pattern is reflected in the allocation of community spending to these goods.
    Keywords: decentralization, collectivist culture, adat law, Islam, social and physical infrastructure, allocation of spending, community development, Indonesia
    JEL: D02 H41 O43 P51
    Date: 2010–10
  9. By: Christian Daude; Angel Melguizo
    Abstract: Is the social contract in Latin America broken? Many authors have suggested this is the case, given the high levels of inequality, the low levels of taxation and the low quality of public services observed in the region. This paper analyses empirically the relationship between fiscal policy, social mobility and democratic consolidation in Latin America and the Caribbean, using the 2007 and 2008 rounds of the regional Latinobarómetro survey. In general, our results do not firmly support the prospect of upward mobility hypothesis, and show that the perception about the quality of public services, among others, matters for the willingness to pay taxes. All in all, we interpret our results as an indication of that – although there is still a long way to go – the potential basis for a stronger social contract in Latin America exists.<BR>Le contrat social est-il brisé (en crise) en Amérique latine ? C’est ce que de nombreux auteurs laissent entendre, qui s’appuient sur les fortes inégalités, le faible niveau de taxation et le manque de qualité des services publics de la région. Cet article analyse de façon empirique la relation entre la politique budgétaire, la mobilité sociale et la consolidation démocratique en Amérique latine et dans les Caraïbes, en utilisant les enquêtes régionales Latinobarómetro pour 2007 et 2008. D’une façon générale, nos résultats ne confortent pas complètement l’hypothèse de perspectives de mobilité sociale ascendante (POUM), et montrent l’influence de la perception de la qualité des services publics, entre autres choses, sur la disposition des contribuables à s’acquitter de leurs taxes et impôts. Bien qu’un long chemin reste encore à parcourir, nos résultats semblent globalement indiquer qu’il existe une base pour un renforcement du contrat social en Amérique Latine.
    Keywords: fiscal policy, Latin America, democracy, social mobility, politique budgétaire, Amérique latine, Démocratie, mobilité sociale
    JEL: E62 I38 P16
    Date: 2010–10–25
  10. By: Jaime Luque
    Abstract: Berlgas (1976), in his analysis of heterogeneous Tiebout (1956) communities, did not demonstrate existence of equilibrium and was subject to Bewley’s (1981) critique. In this paper we drop the unrealistic Tiebout's assumption of "no restrictions due to employment opportunities" and reshape Berglas’ model into a local public goods economy with anonymous crowding, local collaborative production of private goods and free trade. Heterogeneous communities arise if the gains from labor complementarities outweigh the utility cost of not consum- ing the most preferred public goods. Existence of equilibrium for our atomless economy is proved using a generalized game.
    Keywords: Local public goods, Collaborative production, Wages, Anonymous crowding, Visa permits, Societal stratification,Heterogeneous Tiebout communities,Generalized game
    JEL: C62 C70 D71 H40 R13
    Date: 2010–11
  11. By: Lockwood, Ben (CBT, CEPR and Department of Economics, University of Warwick)
    Abstract: This paper considers the optimal taxation of savings intermediation and payment services in a dynamic general equilibrium setting, when the government can also use consumption and income taxes. When payment services are used in strict proportion to final consumption, and the cost of intermediation services is fixed and the same across firms, the optimal taxes are generally indeterminate. But, when firms differ exogenously in the cost of intermediation services, the tax on savings intermediation should be zero. Also, when household time and payment services are substitutes in transactions, the optimal tax rate on payment services is determined by the returns to scale in the conditional demand for payment services, and is generally different to the optimal rate on consumption goods. In particular, with constant returns to scale, payment services should be untaxed. These results can be understood as applications of the Diamond-Mirrlees production efficiency theorem. Finally, as an extension, we endogenize intermediation, in the form of monitoring, and show that it may be oversupplied in equilibrium when banks have monopoly power, justifying a Pigouvian tax in this caseKeywords:
    Keywords: financial intermediation services ; tax design ; banks ; monitoring ;payment services JEL Classification: G21 ; H21 ; H25
    Date: 2010
  12. By: Niu, Yongzhi; Cohen, Roger
    Abstract: Based on the recognition that the evasion of real estate tax is much more difficult than the evasion of personal income tax and the assumption that, in general, taxpayers with similar income would consume a similar amount of housing and pay a similar amount of real estate tax, we build a model to estimate the personal income tax gap for business income earners in New York State. More specifically, we compare reported Federal adjusted gross income (AGI) between two groups of taxpayers: wage earners and business income earners. With the assumption that the wage income earners fully report their income, we find that there is a huge reporting gap of AGI for the business income earners in New York State as a whole. The income gap is $67.8 billion in 2007, which accounts for 26.2 percent of the total AGI the business income earners would have reported if they had been totally compliant with tax laws. If we apply the median of the New York State personal income tax rate, 5.25 percent, to the income gap, the personal income tax gap for the business income earners in the State in 2007 reaches $3.6 billion.
    Keywords: tax gap; PIT; personal Income Tax; business income; wage income; real estate tax; underreporting;
    JEL: H20 H24 H26
    Date: 2010
  13. By: James, Simon
    Abstract: This paper extends previous work presented at the SABE/IAREP conference at St Mary’s University, Halifax (James, 2009). In the earlier paper it was shown that conventional economic theory is used to make the case for tax reform but does not always adequately incorporate all the relevant factors. However, an approach based on behavioral economics can make the difference between success and failure. In this paper the contributions of other social sciences are also included. Taxation is a particularly appropriate subject to explore the integration of the social sciences since they have all devoted considerable attention to it. It can be seen that different social sciences suggest a range of variables that might be taken into account in addition to those included in mainstream economics. Other social sciences also offer different methodological approaches and consider the possibility of different outcomes of the fiscal process. The paper concludes that it is not easy to integrate the social sciences in a single approach to the study of tax and tax policy. There may also be the risk of encouraging inappropriate integration - researchers operating outside their expertise can produce results that are not helpful. However, comparing the contribution of behavioral economics with those of the social sciences more generally, it can be seen that behavioral economics can offer a framework within which these areas can be examined. Indeed, it may be a useful channel to add the contributions of other social sciences to mainstream economic research.
    Keywords: behavioral economics; social sciences; taxation; tax reform
    JEL: H20 H30 H71 H3
    Date: 2010–08
  14. By: Baghana, Rufin (Ministère des Finances, Québec)
    Abstract: This paper analyses empirically the impacts of public R&D grants on private R&D investments and on the productivity growth of the manufacturing firms in a context where fiscal incentives are present. Using the conditional semiparametric differenceindifferences estimator on longitudinal data from Quebec we show that firms that use public grants for R&D in conjunction with tax credits for R&D perform better in terms of R&D input additionality than firms that use only tax credits for R&D. We then use a production function to assess the effectiveness of public R&D grants in the productivity growth of firms. We find that for each additional dollar of public R&D grant, output increases by 0.134 dollars. We conclude that the additional return of direct subsidies is positive but lower than the return on the R&D financed by own funds or R&D tax credits.
    Keywords: R&D, Public subsidies, Quebec, Productivity, Difference-in-differences
    JEL: H25 O32
    Date: 2010
  15. By: Alemanno, Alberto; Wiener, Jonathan B.
    Abstract: ‘Quis custodiet ipsos custodes?’ asked the Roman poet Juvenal – ‘who will watch the watchers, who will guard the guardians?’1 As legislative and regulatory processes around the globe progressively put greater emphasis on impact assessment and accountability, (Verschuuren and van Gestel 2009, Hahn and Tetlock 2007), we ask: who oversees the regulators? Although regulation can often be necessary and beneficial, it can also impose its own costs. As a result, many governments have embraced, or are considering embracing, regulatory oversight--frequently relying on economic analysis as a tool of evaluation.We are especially interested in the emergence over the last four decades of a new set of institutional actors, the Regulatory Oversight Bodies (ROBs). These bodies tend to be located in the executive (or sometimes the legislative) branch of government. They review the flow of new regulations using impact assessment and benefit-cost analysis, and they sometimes also appraise existing regulations to measure and reduce regulatory burdens. Through these procedures of regulatory review, ROBs have become an integral aspect not only of regulatory reform programs in many countries, but also of their respective administrative systems. Although most academic attention focuses on the analytical tools used to improve the quality of legislation, such as regulatory impact assessment (RIA) or benefit-cost analysis, this chapter instead identifies the key concepts and issues surrounding the establishment and operation of ROBs across governance systems. It does so by examining and comparing the oversight mechanisms that have been established in the United States and in the EU and by critically looking into their origins, rationales, mandates, institutional designs and scope of oversight.
    Date: 2010–03
  16. By: Zon, Adriaan van (UNU-MERIT, Maastricht University); Wiebe, Kirsten (UNU-MERIT)
    Abstract: We use Financial Optimum Portfolio Theory to obtain Optimum Development (Policy) Portfolios for Sub Saharan African (SSA) Countries. We estimate a model linking public expenditures on health, education and general government expenditures to the Human Development Index (HDI). Given the uncertainty of the estimated impact parameters, we obtain optimum expenditure portfolios and use them to measure the effectiveness of actual public spending. Actual HDI performance is in part due to pure chance, but significant improvements in HDI performance could be realized through the reallocation of public spending towards health and education. For some SSA countries we find that a double dividend exists, since an expansion of public expenditures may lead to both a rise in HDI performance and a fall in its corresponding variance. We also find that HDI shortfalls due to chance are uncorrelated with governance indicators, while inefficient spending and good governance are negatively correlated.
    Keywords: Human Development Index, Public spending, Optimum Portfolio Theory
    JEL: H50 I00 O20
    Date: 2010
  17. By: Russo, Antonio
    Abstract: I study how the political decision process affects urban traffic congestion policy. First, I look at the case of a single government deciding, through majority voting, on a monetary charge to be paid to drive to a city's Central Business District (CBD): if the majority of individuals prefers to drive more (resp. less) than the average, a voting equilibrium with lower (higher) charge emerges. Next, I consider the case of two government levels involved in traffic policy: parking charges in (resp. cordon tolls around) a city's CBD and capacity investments are chosen by a local (resp. regional) government, through a majority voting process. While tax exporting motives and the imperfect coordination among the two governments may lead to higher overall charges than in the case of a single government, strong preferences for driving across the population can still bring to an equilibiurm with suboptimal total charges.
    Keywords: traffic congestion policy; cordon tolls; parking; voting; fiscal competition;
    JEL: H77 D78 H23 L98
    Date: 2010–11–06
  18. By: Karl Aiginger (WIFO); Margit Schratzenstaller (WIFO)
    Abstract: There is evidence that a budget consolidation strategy can work with only a small and short lived negative impact on growth. However, this time consolidation is taking place in the aftermath of a deep crisis which had lead to increased levels of uncertainty. In addition the financial sector, as well as its regulation is under reconstruction. Firms and consumers are deleveraging, and many countries are trying to consolidate at the same time. We develop ten guidelines for consolidation during such a difficult economic period. We compare them to other guidelines published and, to the extent possible, cross-check whether the upcoming consolidation programs being implemented or revealed in various countries comply with our guidelines. We propose to follow a "high road" on cutting deficits, which includes an active growth enhancing component during the consolidation period. The "active component" should be financed by deeper cuts in subsidies, by eliminating obsolete government expenditure as well as by increasing the efficiency of the public sector. Taxes should not be raised permanently – a temporary contribution to consolidation will be needed, but tax structures in general should be made more growth and employment friendly.
    Keywords: budget consolidation, financial crisis, tax and expenditure structure
    Date: 2010–10–22
  19. By: Joseph J. Capuno (School of Economics, University of the Philippines Diliman)
    Abstract: This study investigates the importance of leadership as a driver of local government innovations. Based on a survey of 209 innovations introduced in selected 48 local governments in the Philippines during the period June 2004-June 2008, the observable qualities and possible incentives of incumbent mayors are linked empirically with their reported number of innovations. The Poisson regression results show that the statistically relevant incumbentÂ’s characteristics are age, educational attainment, and experience in the public sector, re-election status and terms in office, controlling for other factors. Also, the fiscal capacity of the local government and the poverty status of the local population are found statistically significant. However, all these factors vary in relative importance across types of innovations. Several policy inputs are suggested to hone the leadership qualities of incumbent mayors for greater adoption of innovations.
    Keywords: Spatial development, land values, convergence, Philippines
    Date: 2010–11
  20. By: Mauro Pisu
    Abstract: Indonesia.s infrastructure is in poor shape, having suffered from protracted under-investment since the Asian financial crisis of the late 1990s, and constraints growth potential. This paper focuses on the current state of the regulatory framework and discusses different options for improvement in order to attract needed private investment. It recognises the ambitious reforms undertaken by the government thus far, but suggests that further efforts are needed. The authorities should establish a simple regulatory environment based on effective regulatory agencies resulting in lower regulatory uncertainty and realign prices to cost-recovery levels. This Working Paper relates to the 2010 OECD Economic Review of Indonesia (<P>Relever le défi de l’infrastructure en Indonésie<BR>L.infrastructure indonesienne est en mauvais etat, ce qui tient au sous-investissement persistant dont elle a souffert depuis la crise financiere asiatique de la fin des annees 90, et bride le potentiel de croissance. Le present chapitre analyse l.etat actuel du cadre reglementaire et examine les differents moyens de l.ameliorer de maniere a attirer les investissements prives necessaires. Il tient compte des reformes ambitieuses auxquelles les autorites ont procede jusqu.a present, mais tend a demontrer que de nouveaux efforts s.imposent. Les autorites devraient etablir un cadre reglementaire simple s.appuyant sur des organismes de reglementation efficaces, ce qui attenuerait l.incertitude en la matiere et alignerait les prix sur le niveau de recuperation des couts. Ce Document de travail se rapporte a l.Etude economique de l¡¯OCDE de l¡¯Indonesie 2010 (
    Keywords: infrastructure, Indonesia, PPPs, regulatory framework, infrastructure, Indonésie, PPPs, cadre réglementaire
    JEL: H43 H54 H81 K23
    Date: 2010–10–26
  21. By: Piergallini, Alessandro; Rodano, Giorgio
    Abstract: Since Leeper's (1991, Journal of Monetary Economics 27, 129-147) seminal paper, an extensive literature has argued that if fiscal policy is passive, i.e., guarantees public debt stabilization irrespectively of the inflation path, monetary policy can independently be committed to inflation targeting. This can be pursued by following the Taylor principle, i.e., responding to upward perturbations in inflation with a more than one-for-one increase in the nominal interest rate. This paper analyzes an optimizing framework in which the government can only finance public expenditures by levying distortionary taxes. It is demonstrated that households' market participation constraints and Laffer-type effects can render passive fiscal policies unfeasible. For any given target inflation rate, there exists a threshold level of public debt beyond which monetary policy independence is no longer possible. In such circumstances, the dynamics of public debt can be controlled only by means of higher inflation tax revenues: inflation dynamics in line with the fiscal theory of the price level must take place in order for macroeconomic stability to be guaranteed. Otherwise, to preserve inflation control around the steady state by following the Taylor principle, monetary policy must target a higher inflation rate.
    Keywords: Public Debt; Distortionary Taxation; Monetary and Fiscal Policy Rules
    JEL: H31 E63 H63
    Date: 2010–10–30
  22. By: Bruhn, Miriam; Gallego, Francisco; Onorato, Massimiliano
    Abstract: This paper argues that legislative malapportionment, denoting a discrepancy between the share of legislative seats and the share of population held by electoral districts, serves as a tool for pre-democratic elites to preserve their political power and economic interests after a transition to democracy. The authors claim that legislative malapportionment enhances the pre-democratic elite’s political influence by over-representing areas that are more likely to vote for parties aligned with the elite. This biased political representation survives in equilibrium as long as it helps democratic consolidation. Using data from Latin America, the authors document empirically that malapportionment increases the probability of transitioning to a democracy. Moreover, the data show that over-represented electoral districts are more likely to vote for parties close to pre-democracy ruling groups. The analysis also finds that overrepresented areas have lower levels of political competition and receive more transfers per capita from the central government, both of which favor the persistence of power of pre-democracy elites.
    Keywords: Parliamentary Government,Labor Policies,Emerging Markets,Political Economy,Political Systems and Analysis
    Date: 2010–11–01
  23. By: Gylfason, Thorvaldur
    Abstract: Iceland’s three main financial institutions, which accounted for 85 percent of its banking system, crashed within a single week in October 2008. All three (along with the government that had encouraged their forays into the Himalayas of global finance) claimed that they were merely pawns caught in Wall Street’s nefarious games. But the truth is more sobering. For this crisis has exposed the fundamental weakness of Iceland’s economic and political cultures, which are hobbled by institutions more akin to those of the Third World than the First.
    Date: 2010–01

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.