nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒07‒01
27 papers chosen by
Keunjae Lee
Pusan National University

  1. Social capital, government expenditures, and growth By Giacomo Ponzetto; Ugo Troiano
  2. Income inequality, tax base and sovereign spreads By Joshua Aizenman; Yothin Jinjarak
  3. Regressivity of environmental taxation: myth or reality? By Katri Kosonen
  4. Does It Pay to Be a Cadre? Estimating the Returns to Being a Local Official in Rural China By Zhang, Jian; Giles, John T.; Rozelle, Scott
  5. Tax Filing Choices for the Household under Separable Spheres Bargaining* By E. da Costa, Carlos; Érica, Diniz
  6. Donor Assistance and Political Reform in Tanzania By , Aili Mari
  7. The Sovereign Debt Crisis: Placing a curb on growth By Brender,Anton; Pisani, Florence; Gagna, Emile
  8. Is It Money or Brains? The Determinants of Intra-Family Decision Power By Bertocchi, Graziella; Brunetti, Marianna; Torricelli, Costanza
  9. Life Satisfaction, Household Income and Personality Theory By Eugenio Proto; Aldo Rustichini
  10. Productivity and the welfare of nations By Susanto Basu; Luigi Pascali; Fabio Schiantarelli; Luis Serven
  11. Composition of Public Education Expenditures and Human Capital Accumulation By Naito, Katsuyuki; Nishida, Keigo
  12. Fiscal Policy and Learning By Kaushik Mitra; George W. Evans; Seppo Honkapohja
  13. Income Inequality, Redistribution and Poverty: Contrasting rational choice and behavioural perspectives By Luebker, Malte
  14. Combating Money Laundering and the Financing of Terrorism: A Survey By Stefan Haigner; Friedrich Schneider; Florian Wakolbinger
  15. Aid and Growth Accelerations: Vulnerability Matters By Guillaumont, Patrick; Wagner, Laurent
  16. Stepping up Growth Policies By Micossi, Stefano
  17. The Euro Crisis: Implications for the Internal Market and Harmonisation of Corporate Taxes By Ruding, H. Onno
  18. Review of Current Practices for Taxation of Financial Instruments, Profits and Remuneration of the Financial Sector By PriceWaterhouseCoopers
  19. The Effect of Trade and Migration on Income By Francesc Ortega; Giovanni Peri
  20. Fiscal Consolidation Strategy By John Taylor; John Cogan; Volker Wieland; Maik Wolters
  21. An Alternative Framework for Empirically Measuring the Size of Counterfeit Markets By Rosalie Liccardo Pacula; Srikanth Kadiyala; Priscillia Hunt; Alessandro Malchiodi
  22. Investing where it matters: An EU Budget for Long-Term Growth By Ferrer, Jorge Núñez
  23. Female parlamentarians and economic growth: Evidence from a large panel By Dinuk Jayasuriya; Paul J. Burke
  24. When Educators Are the Learners: Private Contracting by Public Schools By Silke J. Forbes; Nora E. Gordon
  25. Knowledge assets and regional performance By Raffaele Paci; Emanuela Marrocu
  26. Beyond Electoral Democracy: Foreign Aid and the Challenge of Deepening Democracy in Benin By Gazibo, Mamoudou
  27. On the Impact of External Debt and Aid on Public Expenditure Allocation in Sub-Saharan Africa after the Launch of the HIPC Initiative By Quattri, Maria; Fosu, Augustin Kwasi

  1. By: Giacomo Ponzetto; Ugo Troiano
    Abstract: Countries with greater social capital have higher economic growth. We show that social capital is also highly positively correlated across countries with government expenditure on education. We develop an infinite-horizon model of public spending and endogenous stochastic growth that explains both facts through frictions in political agency when voters have imperfect information. In our model, the government provides services that yield immediate utility, and investment that raises future productivity. Voters are more likely to observe public services, so politicians have electoral incentives to underprovide public investment. Social capital increases voters' awareness of all government activity. As a consequence, both politicians' incentives and their selection improve. In the dynamic equilibrium, both the amount and the efficiency of public investment increase, permanently raising the growth rate.
    Keywords: Social Capital, Government Expenditures, Economic Growth, Public Investment, Elections, Imperfect Information
    JEL: D72 D83 H50 H54 O43 Z13
    Date: 2012–02
  2. By: Joshua Aizenman; Yothin Jinjarak
    Abstract: This paper investigates the association between greater income inequality, de-facto fiscal space, and sovereign spreads. Using data from 50 countries in 2007, 2009 and 2011, we find that higher income inequality is associated with a lower tax base, lower de-facto fiscal space, and higher sovereign spreads. The economic magnitude of these effects is large: at the margin, a one point of the Gini coefficient of inequality (in a scale of 0-100), is associated in 2011 with a lower tax base of 2 percent of the GDP, and with a higher sovereign spread of 45 basis points.
    JEL: F36 F41 H20
    Date: 2012–06
  3. By: Katri Kosonen (European Commission)
    Abstract: This paper first presents an overview of the various factors that in light of the economic literature should be taken into account in the analysis of tax incidence of environmental taxation. It then explores the main empirical findings, in particular those which make a distinction between the distributional effects of transport-related taxes and those of other environmental taxes. This includes also some less well-known evidence from the Nordic countries. In the final section it presents some recent evidence on the distributional impact of energy taxation in the EU member states included in the impact assessment of the revision of the European Union’s Energy Tax Directive.
    Keywords: European Union; taxation; environmental taxes, redistribution
    JEL: H23
    Date: 2012–06
  4. By: Zhang, Jian (Central University of Finance and Economics); Giles, John T. (World Bank); Rozelle, Scott (Stanford University)
    Abstract: Recruiting and retaining leaders and public servants at the grass-roots level in developing countries creates a potential tension between providing sufficient returns to attract talent and limiting the scope for excessive rent-seeking behavior. In China, researchers have frequently argued that village cadres, who are the lowest level of administrators in rural areas, exploit personal political status for economic gain. Much existing research, however, compares the earnings of cadre and non-cadre households in rural China without controlling for unobserved dimensions of ability that are also correlated with success as entrepreneurs or in non-agricultural activities. The findings of this paper suggest a measurable return to cadre status, but the magnitudes are not large and provide only a modest incentive to participate in village-level government. The paper does not find evidence that households of village cadres earn significant rents from having a family member who is a cadre. Given the increasing returns to non-agricultural employment since China‘s economic reforms began, it is not surprising that the returns to working as a village cadre have also increased over time. Returns to cadre-status are derived both from direct compensation and subsidies for cadres and indirectly through returns earned in off-farm employment from businesses and economic activities managed by villages.
    Keywords: returns to political status, public sector labor markets, village political economy, rural China
    JEL: O16 O17 J45 P25 P26
    Date: 2012–06
  5. By: E. da Costa, Carlos; Érica, Diniz
    Abstract: If household choices can be rationalized by the maximization of a well defined utilityfunction, allowing spouses to file individually or jointly is equivalent to offeringthe envelope of the two tax schedules. If, instead, household ’preferences’ are constantlybeing redefined through bargaining, the option to file separately may affectoutcomes even if it is never chosen. We use Lundberg and Pollak’s (1993) separatespheres bargaining model to assess the impact of filing options on the outcomes ofprimary and secondary earners. Threat points of the household’s bargain are givenfor each spouse by the utility that he or she attains as a follower of a counter-factualoff-equilibrium Stackelberg game played by the couple. For a benchmark tax systemwhich treats a couple’s average taxable income as if it were that of a single individual,we prove that if choices are not at kinks, allowing couples to choose whether to filejointly or individually usually benefits the secondary earner. In our numeric exercisesthis is also the case when choices are at kinks as well. These findings are, however,quite sensitive to the details of the tax system, as made evident by the examinationof an alternative tax system.
    Date: 2012–06–18
  6. By: , Aili Mari
    Abstract: Tanzania has been a relative success story in Africa in terms of political reform. While foreign aid has helped strengthen institutions that advance accountability, it simultaneously supports a status quo that undermines accountability and democratization
    Keywords: Tanzania, democratization, accountability, foreign aid, decentralization, public goods
    Date: 2012
  7. By: Brender,Anton; Pisani, Florence; Gagna, Emile
    Abstract: To ward off the threat of a worldwide depression that loomed at the end of the 2000s, governments opted to run up substantial fiscal deficits. In doing so, they sowed the seeds of the sovereign debt crisis. Saddled with often high debt burdens and modest growth prospects, developed countries’ governments must now rebalance their budgets. Doing so too rapidly, however, will choke growth. Faced with this dilemma, Japan and the United States have pursued growth policies while the euro area members are quickly trying to rebalance their budgets. This book explores the respective risks associated with these two strategies. It further investigates the consequences for the international monetary and financial system of developing countries’ public debts ceasing to be risk-free.
    Date: 2012–05
  8. By: Bertocchi, Graziella (University of Modena and Reggio Emilia); Brunetti, Marianna (University of Rome Tor Vergata); Torricelli, Costanza (University of Modena and Reggio Emilia)
    Abstract: We empirically study the determinants of intra-household decision power with respect to economic and financial choices using a suitable direct measure provided in the 1989-2010 Bank of Italy Survey of Household Income and Wealth. Focusing on a sample of couples, we evaluate the effect of each spouse's characteristics, household characteristics, and background variables. We find that the probability that the wife is in charge is affected by household characteristics such as family size and total income and wealth, but more importantly that it increases with the difference between hers and her husband's characteristics in terms of age, education, and income. The main conclusion is that decision-making power over family economics is not only determined by strictly economic differences, as suggested by previous studies, but also by differences in human capital and experience. Finally, exploiting the time dimension of our dataset, we show that this pattern is increasing over time.
    Keywords: family economics, intra-household decision power, gender differences
    JEL: J12 D13 E21 G11
    Date: 2012–06
  9. By: Eugenio Proto; Aldo Rustichini
    Abstract: We show that personality traits mediate the e ect of income on Life Satisfaction. The e ect is strong in the case of Neuroticism, which measures the sensitivity to threat and punishment, in both the British Household Panel Survey and the German Socioeconomic Panel. Neuroticism increases the usually observed concavity of the relationship: Individuals with higher Neuroticism score enjoy income more than those with lower score if they are poorer and enjoy income less if they are richer. When the interaction between income and neuroticism is introduced, income does not have signi cant e ect on his own. To interpret the results, we present a simple model where we assume that (i) Life Satisfaction is dependent from the gap between aspired and realized income, and this is modulated by Neuroticism and (ii) income increases in aspirations with a slope less than unity, so that the gap between aspired and realized income increase with aspirations. From the estimation of this model we argue that poorer tend to overshoot in their aspiration, while rich tend to under-shoot. The estimation of the model also shows substantial effect of traits on income.
    Keywords: Life satisfaction, household income, personality theory, neuroticism
    JEL: D03 D87 C33
    Date: 2012
  10. By: Susanto Basu; Luigi Pascali; Fabio Schiantarelli; Luis Serven
    Abstract: We show that the welfare of a representative consumer can be related to observable aggregate data. To a first order, the change in welfare is summarized by (the present value of) the Solow productivity residual and by the growth rate of the capital stock per capita. We also show that productivity and the capital stock suffice to calculate differences in welfare across countries, with both variables computed as log level deviations from a reference country. These results hold for arbitrary production technology, regardless of the degree of product market competition, and apply to open economies as well if TFP is constructed using absorption rather than GDP as the measure of output. They require that TFP be constructed using prices and quantities as perceived by consumers. Thus, factor shares need to be calculated using after-tax wages and rental rates, and will typically sum to less than one. We apply these results to calculate welfare gaps and growth rates in a sample of developed countries for which high-quality TFP and capital data are available. We find that under realistic scenarios the United Kingdom and Spain had the highest growth rates of welfare over our sample period of 1985-2005, but the United States had the highest level of welfare.
    Keywords: Productivity, Welfare, TFP, Solow Residual.
    JEL: D24 D90 E20 O47
    Date: 2012–03
  11. By: Naito, Katsuyuki; Nishida, Keigo
    Abstract: This paper provides a simple theory to study how the allocation of public funds between primary and higher education affects human capital accumulation. The allocation is endogenously determined through majority voting. Public funding for higher education is not supported when a majority is poor. In some cases, higher education starts to be realized as a majority of individuals accumulate enough human capital through primary education. Although the emergence of higher education can accelerate aggregate human capital accumulation, it widens income inequality because the very poor are excluded from higher education and the declined budget share for primary education decreases its quality.
    Keywords: Public Education; Economic Development; Income Inequality; Majority Voting
    JEL: O11 O15 D72 O40
    Date: 2012–06–22
  12. By: Kaushik Mitra; George W. Evans; Seppo Honkapohja
    Abstract: Using the standard real business cycle model with lump-sum taxes, we analyze the impact of fiscal policy when agents form expectations using adaptive learning rather than rational expectations (RE). The output multipliers for government purchases are significantly higher under learning, and fall within empirical bounds reported in the literature (in sharp contrast to the implausibly low values under RE). Effectiveness of fiscal policy is demonstrated during times of economic stress like the recent Great Recession. Finally it is shown how learning can lead to dynamics empirically documented during episodes of "fiscal consolidations."
    Keywords: Government Purchases, Expectations, Output Multiplier, Fiscal Consolidation, Taxation.
    JEL: E62 D84 E21 E43
    Date: 2012–01–17
  13. By: Luebker, Malte
    Abstract: Based on the standard axiom of individual utility maximization, rational choice has postulated that higher income inequality translates into greater redistribution by shaping the median voter?s preferences. While numerous papers have tested this propositi
    Keywords: income distribution, redistribution, median voter theorem, behavioural economics
    Date: 2012
  14. By: Stefan Haigner; Friedrich Schneider; Florian Wakolbinger
    Abstract: Policy programs on anti-money laundering and combating the financing of terrorism (AML/CFT) have largely called for preventive measures like keeping record of financial transactions and reporting suspicious ones. In this survey study, we analyze the extent of global money laundering and terrorist financing and discuss the preventive policies and their evaluations. Moreover, we investigate whether more effective tax information exchange would bolster AML/CFT policies in that it reduced tax evasion, thus the volume of transnational financial flows (i.e. to and from offshore financial centres) and thus in turn cover given to money laundering and terrorist financing. We conclude that such a strategy can reduce financial flows, yet due to a "weakest link problem" even a few countries not participating can greatly undo what others have achieved.
    Keywords: money laundering, terrorist financing, tax information exchange
    JEL: K42 H26 H56
    Date: 2012
  15. By: Guillaumont, Patrick; Wagner, Laurent
    Abstract: This paper confronts three conundrums. First, does the relationship between aid and growth fade over time when aid is successful? Second, why are aid inflows neglected in the literature on growth acceleration (or episodes). Third, why is country vulnerabi
    Keywords: official development assistance, growth acceleration, economic vulnerability, probit estimations
    Date: 2012
  16. By: Micossi, Stefano
    Abstract: The eurozone is in recession and will show negative growth in 2012, notes Stefano Micossi in this new CEPS Policy Brief. Hopes that fiscal consolidation could spur growth by improving household and business confidence are not materialising, because in reality, domestic demand has been hit too hard by fiscal consolidation, and investment throughout the Union remains well below pre-crisis levels. The author calls upon the European Council to consider launching a new growth initiative, centered on mobilising vast resources at EU level for investment in worthy projects of common interest Europe-wide. The key goal is to make sure that there is light at the end of the tunnel, lest at some stage the unbearable social and political costs of adjustment lead to a breakdown of domestic political systems and disorderly default.
    Date: 2012–03
  17. By: Ruding, H. Onno
    Abstract: This CEPS Policy Brief looks at the ways in which the euro crisis has impacted the successful functioning of the internal market of the EU and the state of play with respect to the creation of a common consolidated corporate tax base in corporate taxation.
    Date: 2012–05
  18. By: PriceWaterhouseCoopers
    Abstract: the Commission has instructed PwC to provide a review of the current tax provisions directed at the Financial Sector and financial instruments. The content of the Study is limited to the questions raised by the Commission in the questionnaires provided and is subject to certain limitations in terms of scoping as agreed by the Commission and detailed below in introduction of the respective Chapters. The Study covers 4 different Chapters, namely: Corporate Taxation of the Financial Sector – Banks, Value-Added Taxation of the Financial Sector, Labour Taxation in the Financial Sector, Taxation of Financial Instruments
    Keywords: European Union; taxation; financial transaction tax; financial activities tax;financial institutions
    JEL: G20 H21 H22 H23 H25 H27
    Date: 2012–06
  19. By: Francesc Ortega; Giovanni Peri (Department of Economics, University of California Davis)
    Abstract: This paper explores the relationship between economic openness and income per person using cross-country data. To address endogeneity concerns we extend the instrumental-variables strategy first used by Frankel and Romer (1999). First, we show that bilateral geographic characteristics of countries such as distance, contiguity and commonality of language are successful in predicting openness to immigration and to trade. Equipped with these instruments we then establish a robust, positive effect of openness to immigration on long-run income per capita across countries using econometric specifications that include a comprehensive set of variables controlling for geography, climate, disease environment, and colonial past. In contrast the positive effect of trade openness on income vanishes once the control variables are included in the specification. Our main finding is robust to explicitly including institutional quality as an (endogenous) regressor, controlling for measures of early economic development, and measuring the share of immigrants in terms of efficiency units of labor. We also show that the main effect of migration operates through total factor productivity but not through institutional quality. This is consistent with the idea that immigration increases the variety of skills and ideas available for production. We also provide some more direct evidence of this channel by building an index of the degree of diversity in immigration flows by country of origin. Immigration also increases linguistic fractionalization which, in turn, has a negative effect on income per capita, however the direct gains from greater skill diversity are much larger than the costs arising from increased fractionalization due to immigrants. We do not find evidence of increased income inequality due to openness to immigration or trade. Finally we find evidence that immigration benefits the amount of innovation produced in a country as measured by patents.
    Keywords: International Migration, Trade, Income per person, Productivity, Geography, Institutions, Diversity.
    JEL: F22 E25 J61
    Date: 2012–06–19
  20. By: John Taylor (Stanford University); John Cogan (Stanford University); Volker Wieland (Goethe University Frankfurt); Maik Wolters (Goethe University Frankfurt)
    Abstract: In the aftermath of the global financial crisis and great recession, many countries face substantial deficits and growing debts. In the United States, federal government outlays as a ratio to GDP rose substantially from about 19.5 percent before the crisis to over 24 percent after the crisis. In this paper we consider a fiscal consolidation strategy that brings the budget to balance by gradually reducing this spending ratio over time to the level that prevailed prior to the crisis. A crucial issue is the impact of such a consolidation strategy on the economy. We use structural macroeconomic models to estimate this impact. We consider two types of dynamic stochastic general equilibrium models: a neoclassical growth model and more complicated models with price and wage rigidities and adjustment costs. We separate out the impact of reductions in government purchases and transfers, and we allow for a reduction in both distortionary taxes and government debt relative to the baseline of no consolidation. According to the initial model simulations GDP rises in the short run upon announcement and implementation of this fiscal consolidation strategy and remains higher than the baseline in the long run. Creation Date: 2012-06 Revision Date:
  21. By: Rosalie Liccardo Pacula; Srikanth Kadiyala; Priscillia Hunt; Alessandro Malchiodi
    Abstract: This paper develops a new method for estimating trends in the size of counterfeit markets. The method draws on principles of microeconomic theory and uses aggregated product-level data to estimate counterfeiting activities in various geographic markets. Using confidential firm unit forecasts and actual sales information, a two stage approach is employed that first accounts for unexpected but observable factors that could lead to forecasting error and then, in the second stage, considers the influence of market susceptibility to IPR infringement. Data are analysed for 45 related products sold by a single firm operating in 16 countries during the period 2006-2011. Our models predict larger amounts of counterfeiting in countries with higher corruption norms, lower government control and effectiveness. Predictions of the level of counterfeiting obtained from the second stage are then compared to estimates of counterfeiting derived internally by the firm using shadow-shopping methods. While our two stage model generally under-predicts the level of counterfeiting in each year, it generates trends in counterfeiting that are broadly consistent with those obtained using more costly and intensive methods.
    JEL: H32 K42
    Date: 2012–06
  22. By: Ferrer, Jorge Núñez
    Abstract: What share of the EU’s collective GDP should the EU budget represent? 1%? 1.05%? 0.95%? A Task Force set up by CEPS to explore this question finds that the EU member states, once again, are locked in a pointless battle. Their report argues that the amount is not decisive when it comes to EU spending, but that quality matters far more than quantity. And it is on the quality side that the most significant improvements can be made. This report warns that obsession with net balances is bound to lead to bad decisions and exhorts Europe’s decision-makers to unleash the potential of the EU budget to make a significant contribution to long-term growth. To achieve this end, the report calls for enhanced investment in innovation, infrastructure that reinforces the single market and key European public goods, such as the management of environmental resources.
    Date: 2012–02
  23. By: Dinuk Jayasuriya (Development Policy Centre, Crawford School of Public Policy, The Australian National University); Paul J. Burke (Arndt-Corden Department of Economics, Australian National University, Canberra, ACT Australia 0200)
    Abstract: This article investigates whether female political representation affects economic growth. Panel estimates for 119 democracies using fixed effects specifications and a system generalized method of moments approach suggest that, over recent decades, countries with higher shares of women in parliament have had faster growing economies.
    JEL: D72 J16 O11 O43
    Date: 2012–05
  24. By: Silke J. Forbes; Nora E. Gordon
    Abstract: We investigate decision-making and the potential for social learning among school administrators in the market for school reform consulting services. Specifically, we estimate whether public schools are more likely to choose given Comprehensive School Reform service providers if their “peer” schools—defined by common governance or geography—have performed unusually well with those providers in the past. We find strong evidence that schools tend to contract with providers used by other schools in their own districts in the past, regardless of past performance. In addition, our point estimates are consistent with school administrators using information from peers to choose the plans they perceive to have performed best in the past. Despite choosing a market with an unusually comprehensive data source on contracts between public schools and private firms, our statistical power is sufficiently weak that we cannot reject the absence of social learning.
    JEL: H52 I2 L14
    Date: 2012–06
  25. By: Raffaele Paci; Emanuela Marrocu
    Abstract: Regional competitiveness, especially in the industrialised countries, is increasingly reliant on the availability of an adequate endowment of knowledge assets at the local level, like technological and human capital. These intangible factors enhance regional efficiency directly as inputs of the production function, but they also play a crucial role in allowing the territory to absorb the potential knowledge spillovers from the neighbouring regions. The aim of this paper is to analyse the role of the internal and external factors in determining the productivity level for a large set of regions belonging to the EU27 plus Norway and Switzerland. We estimate a Cobb-Douglas production function over the period 2000-2008 where, in addition to the traditional inputs of physical capital and units of labour, we consider innovation activities and human capital endowments as relevant knowledge assets. We also control for other geographical and industrial features of the regions. In order to take into account the commonly found geographic association across regions, our analysis is carried out within the spatial panel econometric framework. Main results, robust to a wide array of sensitivity checks, show that knowledge assets exhibit positive and significant coefficients and the impact of human capital on GDP is higher than the one found for technological capital in most of the estimated empirical models. Moreover, we find evidence of spatial spillovers directly associated with the two immaterial assets, which turn out to be much more effective in the regions of the 12 new accession countries with respect to all other European regions. The significant presence of such spillovers emphasizes the important role played by highly educated labour forces in increasing the regions’ absorptive capacity of new external knowledge and in ensuring its effective use in the production process.
    Keywords: knowledge; innovation; human capital; production function; spatial spillovers; European regions
    JEL: C23 O33 R11
    Date: 2012
  26. By: Gazibo, Mamoudou
    Abstract: In the 1990s, analysts were almost unanimous in considering Benin to be one of the most important aid recipients among the newly democratizing African countries. After more than two decades of democratic practice, the country has clearly completed the pha
    Keywords: Benin, foreign aid, democratic consolidation, accountability, corruption, elections
    Date: 2012
  27. By: Quattri, Maria; Fosu, Augustin Kwasi
    Abstract: In the wake of the current financial and economic crises, the economies of sub-Saharan Africa find themselves squeezed between likely reductions in official development assistance and the pressing challenge to eradicate poverty. Public expenditure allocat
    Keywords: SSA, HIPC, public expenditure allocation, external debt and aid
    Date: 2012

This nep-pbe issue is ©2012 by Keunjae Lee. 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.