nep-pbe New Economics Papers
on Public Economics
Issue of 2011‒10‒15
nine papers chosen by
Keunjae Lee
Pusan National University

  1. The Effects of Tax Salience and Tax Experience on Individual Work Efforts in a Framed Field Experiment By Martin Fochmann; Joachim Weimann
  2. Relative Consumption Concerns and the Optimal Tax Mix By Paul Eckerstorfer
  3. Competition for foreign capital: Endogenous objective, public investment and tax By Rupayan Pal; Ajay Sharma
  4. Decentralizing Spending More than Revenue: Does It Hurt Fiscal Performance? By Lusine Lusinyan; Luc Eyraud
  5. Efficiency-Adjusted Public Capital and Growth By Abdoul Aziz Wane; Chris Papageorgiou; Alvar Kangur; Sanjeev Gupta
  6. On the optimal size of local jurisdictions: new evidence from Italian provinces By Guglielmo Barone
  7. From Taxes to Politics, from Politics to Taxes: Evidence of Yardstick Competition in the Italian Municipalities By Ilaria Petrarca, IMT Lucca, Lucca Italy; Fabio Padovano, University of Rennes I, CREM-CNRS, Condorcet Center
  8. The Political Economy of Decentralization in Thailand - Does Decentralization Allow for Peasant Participation? By Dufhues, Thomas; Theesfeld, Insa; Buchenrieder, Gertrud; Munkung, Nuchanata
  9. R&D investment responses to R&D subsidies: A theoretical analysis and a microeconometric study By Klette, Tor Jakob; Møen, Jarle

  1. By: Martin Fochmann (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg); Joachim Weimann (Faculty of Economics and Management, Otto-von-Guericke University Magdeburg)
    Abstract: We conduct a framed field experiment with 245 employed persons (no students) as subjects and a real tax, which is levied on the subjects' income from working in our real effort task. In our first three treatments, the net wage is constant but gross wages are subject to different constant marginal tax rates (0, 25%, 50%). It turns out that the effort is significantly higher under the tax than in the no tax treatment. Subjects perceive a too high net wage because they underestimate the tax. We conjecture that tax perception depends on the tax rate, the presentation of the tax and the experience subjects have with taxation. These conjectures are confirmed in four further treatments employing a direct and an indirect progressive tax scale. It turns out that simple flat taxes are particularly prone to being misperceived because their simplicity reduces the tax salience.
    Keywords: Field experiment, real effort experiment, tax perception, tax salience, tax experience, behavioral economics
    JEL: C91 D14 H24
    Date: 2011–08
  2. By: Paul Eckerstorfer (Department of Economics, Johannes Kepler University Linz, Austria)
    Abstract: This articles studies the optimal tax mix (taxes on income and commodities) under asymmetric information in a two-type model, when individuals make relative consumption comparisons. The model includes both positional and nonpositional goods, taking into account the fact that relative concerns matter for some but not for all commodities. We find that in general the whole tax system is affected by the externalities caused by the consumption of positional goods, notably also the taxes on income and on a non-positional good. The tax rates on positional goods are higher than in the absence of status effects, reflecting their Pigouvian role. The sign of the Pigouvian part in the income tax schedule is ambiguous and depends crucially on whether status goods are complements or substitutes to leisure.
    Keywords: Optimal Taxation, Externalities, Relative Consumption
    JEL: D62 H21 H23
    Date: 2011–10
  3. By: Rupayan Pal (Indira Gandhi Institute of Development Research); Ajay Sharma (Indira Gandhi Institute of Development Research)
    Abstract: In this paper we endogenize the objective functions of the regions as well as their decision to provide public investment in a model of competition for foreign owned mobile capital. We demonstrate that the competing regions can `restrict race-to-the-bottom' in tax rates by deviating away from social welfare to net tax revenue. It is optimal for a region to be fully revenue oriented even if that region's ultimate goal is to maximize social welfare, irrespective of whether the rival region is concerned about social welfare or net tax revenue. Moreover, we demonstrate that the regions have unilateral incentive to spend on public investment, except in case of perfect spillover. In equilibrium, both the regions spend on public investment and end up with Pareto inferior outcomes.
    Keywords: Mobile Capital, Tax Competition, Public Investment, Revenue Orientation, Social Welfare
    JEL: F21 H25 R50 H40 D60
    Date: 2011–09
  4. By: Lusine Lusinyan; Luc Eyraud
    Abstract: In many countries the decentralization of spending responsibilities has outpaced the decentralization of revenue powers. Sub-national governments have then to rely on transfers from the center and borrowing to finance their spending. When this occurs, we find that the overall fiscal deficit tends to increase. This result is based on cross-country econometric evidence from OECD countries, and is particularly strong in the presence of regional disparities. Fiscal discipline can be strengthened by ensuring that sub-national taxing powers are adequate to meet spending obligations.
    Keywords: Cross country analysis , Economic models , Fiscal policy , Fiscal reforms , Governance , Government expenditures , OECD , Revenues ,
    Date: 2011–09–29
  5. By: Abdoul Aziz Wane; Chris Papageorgiou; Alvar Kangur; Sanjeev Gupta
    Abstract: This paper constructs an efficiency-adjusted public capital stock series and re-examines the public capital and growth relationship for 52 developing countries. The results show that public capital is a significant contributor to economic growth. Although the estimated coefficient for the income share of public capital is larger in middle- than in low-income countries, the opposite is true for the marginal product of public capital. The quality of public investment, as measured by variables capturing the adequacy of project selection and implementation, are statistically significant in explaining variations in economic growth, a result mainly driven by low-income countries.
    Keywords: Capital , Developing countries , Economic growth , Governance , Low-income developing countries , Public investment ,
    Date: 2011–09–16
  6. By: Guglielmo Barone (Bank of Italy)
    Abstract: This paper examines the creation of some new provinces in Italy in the 1990s to assess whether the reduction in the size of the local jurisdiction led to benefits in terms of local development, human capital and road quality, which are three public goods provided by the Italian provinces in tandem with other levels of government. By employing a difference-in-differences empirical strategy, and comparing the municipalities belonging to the new provinces (treatments) with other comparable municipalities (controls), I show that the reduction of the size of a province did not generate any benefits in terms of the outcome variables. This result is robust to a number of checks, including the definition of treatment and different functional specifications.
    Keywords: local government, difference-in-differences
    JEL: D24 H11 H26 H72
    Date: 2011–09
  7. By: Ilaria Petrarca, IMT Lucca, Lucca Italy; Fabio Padovano, University of Rennes I, CREM-CNRS, Condorcet Center
    Abstract: Strategic interaction in local tax setting is motivated with yardstick competition only when the fiscal decision influences the incumbents’ probability of being re-elected. Most of the previous analyses draw conclusions on yardstick competition without estimating this link or failing to find any empirical support for it. This paper, on the contrary, conducts a comprehensive test of yardstick competition on Italian Municipalities during the period 1995-2004. First, a vote popularity function is estimated. The empirical findings verify the economic voting behavior and are robust to alternative empirical specifications of the dependent variable. Then, a spatial tax setting equation is estimated. The results show a pattern of mimicking driven by a positive spatial lag coefficient and a negative spatial error coefficient. Finally, the estimated spatial correlation coefficients in time are used to investigate the dynamics of strategic interaction. The results depict a quasi monotonic pattern of convergence of the coefficients towards the lowest levels of spatial interaction, suggesting that a progressive reduction of the mimicking behavior of the incumbents has taken place.
    Keywords: Yardstick competition, vote popularity function, spatial panel regression
    JEL: C21 D72 H71
    Date: 2011–07
  8. By: Dufhues, Thomas; Theesfeld, Insa; Buchenrieder, Gertrud; Munkung, Nuchanata
    Abstract: One of the most important issues in rural development is empowerment and entitlement of farmers through participation. Decentralisation and participation are seemingly interdependent. Therefore, the paper begins with a theoretical discussion on the cause and effects of this interdependence. Decentralisation is often advertised as means to better incorporate the views and wishes of local actors. Yet, a decentralization process is no guaranty for political participation of local actors. The state induced decentralisation process in rural Thailand serves as an example to investigate forces that hamper or facilitate political participation. Change and uncertainty are inherent of political systems and the agricultural sector. Hence, this paper focuses in particular, on the last two politically turbulent decades in Thailand and its impact on political participation in rural Thailand. The Tambon Administration Organization (TAO) as one means of and likewise outcome of the decentralization process will serve as an example to discuss the effects of decentralisation on participation in the TAOs, using the concept of accountability. After increasing decentralization at the end of the 90s the last decade was coined by centralization policies. The ongoing political unrest could potentially trigger a new wave of political decentralization. However, the real reason for decentralization is not to distribute power but to maintain central effectiveness. Thus, we expect to see more decentralization without participation.
    Keywords: Agricultural and Food Policy,
    Date: 2011
  9. By: Klette, Tor Jakob (Department of Economics, University of Oslo); Møen, Jarle (Dept. of Finance and Management Science, Norwegian School of Economics and Business Administration)
    Abstract: Subsidies to the Norwegian high-tech industries have traditionally been given as "matching grants", i.e. the subsidies are targeted, and the firms have to contribute a 50 % own risk capital to the subsidized projects. Our results suggest that grants do not crowd out privately financed R&D, but that subsidized firms do not increase their privately financed R&D either. Hence, the own risk capital seems to be taken from ordinary R&D budgets. We also investigate possible long-run effects of R&D subsidies, and show that conventional R&D investment models predict negative dynamic effects of subsidies. Our data, however, do not support this claim. On the contrary, there are indications of a positive dynamic effects, i.e. temporary R&D subsidies seem to stimulate firms to increase their R&D investments even after the grants have expired. We propose learning-by-doing in R&D activities as a possible explanation for this, and present a theoretical analysis showing that such effects may alter the predictions of the conventional models. A structural, econometric model of R&D investments incorporating such learning effects is estimated with reasonable results.
    Keywords: Technology policy; R&D subsidies; matching grants; short run additionality; long run additionality; Norwegian IT-industry
    JEL: H25 H32 L53 O32 O38
    Date: 2011–09–06

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