nep-pbe New Economics Papers
on Public Economics
Issue of 2012‒10‒06
twenty papers chosen by
Keunjae Lee
Pusan National University

  1. The design of fiscal adjustments By Alberto F. Alesina; Silvia Ardagna
  2. Constructing The Tax-benefit Micro Simulation Model For Russia – RUSMOD By Popova, Daria
  3. A narrative analysis of post-World War II changes in federal aid By Gerald Carlino; Robert Inman
  4. Recent Marginal Labor Income Tax Rate Changes by Skill and Marital Status By Casey B. Mulligan
  5. The French tax credit dedicated to sustainable development: an econometric evaluation By A. MAUROUX
  6. Growth-Friendly Dictatorships By Giacomo De Luca; Jean-François Maystadt; Petros G. Sekeris
  7. Is Health Care a Necessity or a Luxury? New Evidence from a Panel of U.S. State-Level Data By Donald G. Freeman
  8. Beyond 2015: Maintaining Ireland’s Public Finances on a Sustainable Path By Cronin, David
  9. Income and Preventable Mortality: The Case of Youth Traffic Fatalities By Donald Freeman
  10. Incomplete contracts and optimal ownership of public goods By Schmitz, Patrick W
  11. Middle-income growth traps By Agenor, Pierre-Richard; Canuto, Otaviano
  12. Fooling the Nice Guys: The effect of lying about contributions on public good provision and punishment By Bernd Irlenbusch; Janna Ter Meer
  13. Fiscal Consolidation - Does it deliver? By Weymes, Laura
  14. The Cake-eating problem: Non-linear sharing rules By Eugenio Peluso; Alain Trannoy
  15. Government Spending, Subsidies and Economic Efficiency in the GCC By Raphael Espinoza
  16. An European Distribution of Income Perspective on Portugal-EU Convergence By João Sousa Andrade; Adelaide Duarte; Marta Simões
  17. On the Measurement of Indignation By Paul Makdissi; Myra Yazbeck
  18. Human Trafficking, a Shadow of Migration: Evidence from Germany By Seo-Young Cho
  19. Taxes, Cigarette Consumption, and Smoking Intensity: Reply By Jérôme Adda; Francesca Cornaglia
  20. Are public sector employees overcompensated? By Alexander Danzer; Peter Dolton

  1. By: Alberto F. Alesina; Silvia Ardagna
    Abstract: This paper offers three results. First, in line with the previous literature, we confirm that fiscal adjustments based mostly on the spending side are less likely to be reversed. Second, spending based fiscal adjustments have caused smaller recessions than tax based fiscal adjustments. Finally, certain combinations of policies have made it possible for spending based fiscal adjustments to be associated with growth in the economy even on impact rather than with a recession. Thus, expansionary fiscal adjustments are possible.
    JEL: H2 H3 H5 H62
    Date: 2012–09
  2. By: Popova, Daria
    Abstract: The Russian tax-benefit system consists of numerous types of support available to a large circle of beneficiaries; they are regulated by a number of legislative acts that focus on certain types of assistance rather than on vulnerable groups. In addition, the decentralization reform of social protection carried out in 2005 motivated many regional governments to implement their own social programs that differ in terms of design and generosity. So far, however, little is known about the impact of the tax-benefit policies on income distribution and poverty in Russia. This paper describes the construction of a tax-benefit microsimulation model for Russia (RUSMOD) which is based upon the EUROMOD platform. RUSMOD simulates the eligibility and receipt of most of the existing monetary policies at the federal and regional levels and assesses their potential redistributive effect. This paper aims to provide necessary background material on the construction of the model to anyone wishing to work with RUSMOD.
    Date: 2012–09–25
  3. By: Gerald Carlino; Robert Inman
    Abstract: Because of lags in legislating and implementing fiscal policy, private agents can often anticipate future changes in tax policy and government spending before these changes actually occur, a phenomenon referred to as fiscal foresight. Econometric analysis that fails to model fiscal foresight may obtain tax and spending multipliers that are biased. One way researchers have attempted to deal with the problem of fiscal foresight is by examining the narrative history of government revenue and spending news. The Great Recession and efforts by the federal government through the American Recovery and Reinvestment Act of 2009 (ARRA) to stimulate the economy returned fiscal policy, and in particular the role of state and local governments in such policies, to the center of macro-economic policymaking. In a companion paper, we use federal grants-in-aid to state and local governments to provide an evaluation of the effectiveness of the ARRA. The purpose of this paper is to develop narrative measures of the federal grants-in-aid programs beginning with the Federal Highway Act of 1956 through the ARRA of 2009. The narrative measures we develop will be used as instruments for federal grants-in-aid in our subsequent analysis of the ARRA.
    Keywords: Fiscal policy ; American Recovery and Reinvestment Act of 2009
    Date: 2012
  4. By: Casey B. Mulligan
    Abstract: This paper calculates monthly time series for the overall safety net’s statutory marginal labor income tax rate as a function of skill and marital status. Marginal tax rates increased significantly for all groups between 2007 and 2009, and dramatically so for unmarried household heads. The relationship between incentive changes and skill varies by marital status. Unemployment insurance and related expansions contribute to the patterns by skill while food stamp expansions contribute to the patterns by marital status. Remarkably, group changes in hours worked per capita line up with the statutory measures of incentive changes.
    JEL: E24 H31 I38 J22
    Date: 2012–09
  5. By: A. MAUROUX (Insee)
    Abstract: A tax credit dedicated to sustainable development was first introduced in France in 2005 in order to encourage households to invest in energy conservation and to install renewable energy equipments. It was a big success: between 2005 and 2008 about one primary residence in sixteen was renovated asking for this green tax credit (Clerc, Marcus, Mauroux 2010). In this article we take advantage of an exogenous increase of the tax credit rate to assess its incentive impact. In 2006 the tax credit rate on energy conservation expenditures was raised from 25% to 40% but only for the subset of homeowners living for less than 3 years in a building completed before 1977. We estimate on exhaustive fiscal data the impact of this marginal increase of the tax credit rate on the declaration rate of eligible households using a matching method combined with triple differences, based on Heckman, Ichimura, Smith and Todd (1998). If the tax credit rate had not been raised, in 2006 one eligible household in fifteen among the declarants living for less than three years in a dwelling completed between 1969 and 1976 would not have used this tax credit, one in eight in 2007 and in 2008. Between 2006 and 2008, the additional public cost due to the tax credit increase is at least 80 million euros for the sub-sample of homeowners living for less than 3 years in a dwelling completed between 1969 and 1976, i.e. an average cost between 6,550 and 10,360 euros per additional retrofitted dwelling. Except if the average CO2 emission reductions per household are greater than 10 tonnes each year over the equipment life span, the public cost of a tonne of CO2 avoided by additional declarant among the eligible living in a building completed between 1969 and 1973 would be higher than 32 ¬, the tutelary value of carbon in 2008.
    Keywords: tax credit, sustainable development, public policy evaluation, matching, difference-in-differences estimates
    JEL: H31 H23 D12
    Date: 2012
  6. By: Giacomo De Luca (University of York); Jean-François Maystadt (University of Luxembourg, Faculty of Law, Economics and Finance); Petros G. Sekeris (Center for Research in the Economics of Development, University of Namur)
    Abstract: In this paper we show that in highly unequal societies, different societal groups may support a rent-seeking dicator serving their interests better than the median voter in a democratic regime. Importantly, it is the stakes of dictator in the economy, in the form of capital ownership, that drives the support of individuals. In particular, in highly societies ruled by a capital-rich dictator endowed with the power to tax and appropriate at will, the elites support dictatorial policies that generate higher growth rates than the ones obtained under democracy. Such support arises despite the total absence of checks and balances on the dictator.
    Keywords: Regime type, capital distribution, growth
    JEL: O11 D72 H41
    Date: 2012–09
  7. By: Donald G. Freeman (Department of Economics and International Business, Sam Houston State University)
    Abstract: This paper estimates the income elasticity of health care expenditures using annual data on health spending by state in the U.S. from 1966-2009. Panel stationarity tests incorporating structural breaks in the levels and trends in Health Care Expenditures and Disposable Personal Income yield inconsistent results, with stationarity rejected for HCE but not for DPI. Regression results using levels estimation robust to orders of integration differed considerably depending on time period, and the cross-state variation in elasticity estimates was quite large. Results of the first difference models provide more consistent estimates across time periods, whether expressed as averages of individual state estimates or as pooled time series. Income elasticities for the full sample fall in the range 0.21-0.22, below that of recent research.
    Date: 2012–08
  8. By: Cronin, David (Central Bank of Ireland)
    Abstract: In this note, three mechanical fiscal rules that are designed to maintain a sustainable path for the public finances are examined. Adherence to a strict numerical target for the deficit ratio has a procyclical effect on the economy’s growth rate. Building a safety margin into deficit targets in the manner of the Stability and Growth Pact allows the public finances to have a stabilising influence on the growth cycle and ensures a lower average government debt ratio is achieved over time. A debt target rule would result in a different path for the structural primary budget balance and the debt ratio over time even when the long run targets for those variables were the same as under the Pact.
    Date: 2011–07
  9. By: Donald Freeman (Department of Economics and International Business, Sam Houston State University)
    Abstract: The income-health gradient is a well-established finding in public health. This paper explores the gradient between income and different types of mortality: mortality that can be ameliorated via specific public policy measures, namely traffic fatalities, and mortality that is due to more “natural” causes, such as infectious disease. Using U.S. state-level data, growth in traffic mortality for 15-19 year-olds is shown to be more sensitive to initial levels of median income than growth in non-injury mortality. In addition, some but not all traffic safety legislation aimed at this age group is shown to be associated with lower mortality. Results are established via cross-section estimates, panel-data type models, and tests of one-step-ahead prediction
    Date: 2012–01
  10. By: Schmitz, Patrick W
    Abstract: The government and a non-governmental organization (NGO) can invest in the provision of a public good. In an incomplete contracting framework, Besley and Ghatak (2001) have argued that the party who values the public good most should be the owner. We show that this conclusion relies on their assumption that the parties split the renegotiation surplus 50:50. If the generalized Nash bargaining solution is applied, then for any pair of valuations that the two parties may have, there exist bargaining powers such that either ownership by the government or by the NGO can be optimal.
    Keywords: incomplete contracts; investment incentives; ownership; public goods
    JEL: D23 D86 H41 L31
    Date: 2012–09
  11. By: Agenor, Pierre-Richard; Canuto, Otaviano
    Abstract: This paper studies the existence of middle-income growth traps in a two-period overlapping generations model of economic growth with two types of labor and endogenous occupational choices. It also distinguishes between"basic"and"advanced"infrastructure, with the latter promoting design activities, and accounts for a knowledge network externality associated with product diversification. Multiple steady-state equilibria may emerge, one of them taking the form of a low-growth trap characterized by low productivity growth and a misallocation of talent -- defined as a relatively low share of high-ability workers in design activities. Improved access to advanced infrastructure may help escape from that trap. The implications of other public policies, including the protection of property rights and labor market reforms, are also discussed.
    Keywords: Economic Theory&Research,Political Economy,Labor Policies,Economic Growth,Debt Markets
    Date: 2012–09–01
  12. By: Bernd Irlenbusch (University of Cologne); Janna Ter Meer (University of Cologne)
    Abstract: Our study takes an individual perspective on receiver credulity in a public good setting with deceptive messages. In a laboratory experiment, subjects play a public good game with punishment in which feedback on actual contributions is obscured. Instead, subjects can communicate what they have contributed through a post-hoc announcement mechanism. Using subject’s social value orientation, we show that those highest on the measure are too optimistic towards announcements of their fellow group members. This, in turn, influences payoff-relevant decisions: those high on social value orientation contribute more to the public good and punish their fellow group members less.
    Keywords: public goods, punishment, lying, receiver credulity
    JEL: C92 D03 H41 D02
    Date: 2012–08
  13. By: Weymes, Laura (Central Bank of Ireland)
    Abstract: This note examines recent experiences of fiscal consolidation in a selection of euro area countries. It illustrates the pace and composition of consolidation, together with expected budgetary impacts over 2008 to 2015. The effectiveness of consolidation measures is assessed through the lens of change in the structural budget balance and headline debt ratios. The assessment takes into account efforts undertaken to date (2008-2011), together with consolidation plans over 2012 to 2014 announced as of end April 2012. Country-specific examples focus on EU-IMF Programme countries; Greece (GR), Ireland (IE), Portugal (PT), together with Spain (ES) and Cyprus (CY).
    Date: 2012–08
  14. By: Eugenio Peluso (Department of Economics (University of Verona)); Alain Trannoy (EHESS, GREQAM-IDEP, Marseille)
    Abstract: Consider the most simple problem in microeconomics, a maximization problem with an additive separable utility function over bundles of two goods which provide equal sat- isfaction to an agent. Although simple, this framework allows for a very wide range of applications, from the Arrow-Debreu contingent claims case to the risk-sharing problem, including standard portfolio choice, intertemporal individual consumption, demand for in- surance and tax evasion. We show that any Engel curve can be generated through such a simple program and the necessary and suffi cient restrictions on the demand system to be the outcome of such a maximisation process. Moreover, we identify three classes of utility function that generate non-linear sharing rules. The gap between the two expen- diture shares increases in absolute, average or marginal terms with the total amount of wealth, depending on whether DARA, DRRA and convex risk tolerance are considered. The extension of the different results to the case of more than two goods is provided.
    Keywords: Cake-eating problem; sharing rules; concavity; convex risk tolerance
    JEL: D11 D81 D90 G12
    Date: 2012–09
  15. By: Raphael Espinoza
    Abstract: Public investment and subsidies are typically inefficient but in the GCC these are crucial engines of growth. Subsidies are also used to redistribute oil windfalls in the region, and the problem of a government that wants to 'distribute' oil money is a problem fully symmetric to the one analyzed by Ramsey (1927) of optimal taxation. The second-best policy (when lump-sum transfers are not available) is to use subsidies across a wide range of goos (as opposed to the focus on energy chosen by the GCC). In addtion, the 'inverse' Ramsey model implies that commodities for which demand is least elastic to prices should be subsidized at higher rates. This suggests subsidizing basic needs at higher rates, in particular food, healthcare and education. In addition, when subsidies are very large, they create additional distortions because households prefer to queue for subsidies (e.g. public service jobs, subsidized mortgages in Saudi Arabia) rather than participate in private markets. As an example, we draw a model where recruitment of public servants can induce a large diincentive to take private sector positions and compute the conditions under which the disincentive is so strong that overall employment is actually decreased as public servants are being hired.
    Keywords: Gulf Cooperation Council, Middle East and North Africa, Resource Curse
    JEL: Q32 Q38 O53
    Date: 2012
  16. By: João Sousa Andrade (GEMF and Faculty of Economics, University of Coimbra); Adelaide Duarte (GEMF and Faculty of Economics, University of Coimbra); Marta Simões (GEMF and Faculty of Economics, University of Coimbra)
    Abstract: Growth and real convergence in Portugal are usually analyzed after EU accession on January 1st 1986 based on real GDP per capita. There is however a lack of literature approaching the subject from an European distribution of income perspective and for a longer time period. We fill this gap by using all available time series information on real GDP per capita and population covering a longer period from 1950 until 2009 in order to get a broader picture of the convergence process. The analysis is based on the income distribution for the countries that compose the EU-14 group computed using each country’s mean income weighted by the respective population so that we have a distribution of income by individual. This cross-section distribution of income approach allows us to determine the shape of the distribution at each point in time and to study its evolution, and in this way to search for different convergence patterns, and thus analyze within a broader framework the Portuguese-EU convergence process. The results point to a bimodal EU-14 income distribution in 1950 and again in 2009, thus to two convergence clubs, and to two distinct convergence patterns over the whole period. From 1950 to 1974 convergence takes place, while from 1975 onwards it comes to a halt when considering the whole group. However, the same does not apply to Portugal from the 1980s until 2006, a country with a mean income lower than the EU-14 median income that continued to converge, although not necessarily due to European integration.
    Keywords: real convergence, income distribution, ?-convergence, concentration and inequality measures
    JEL: O15 O52
    Date: 2012–09
  17. By: Paul Makdissi (Department of Economics, University of Ottawa, 120 University St., Ottawa,Ontario); Myra Yazbeck (CIRPÉE and Department of Epidemiology Biostatistics and Occupational Health, McGill University, Montreal, Canada,)
    Abstract: Recently, a lot of attention is given to income variations occurring at the top of the income distribution. “What happens to the top 1%?” is a question of crucial importance on the political level (Occupy Wall Street Movement) as well as on income inequality measurement level. Despite this increased interest, there is no rigorous measurement framework available in the literature for the measurement of “indignation”. To fill this gap, this paper proposes a simple framework for the measurement of indignation. It exposes the ethical principles underlying an indignation index and develops restricted positional dominance conditions that produce robust orderings of indignation between income distributions. It also proposes a parametric class of indignation indices that may be used to produce complete orderings when the restricted positional dominance tests do not lead to satisfactory orderings. Finally, the paper offers a brief empirical illustration using the World Top Incomes Database.
    Keywords: Indignation, Inequality, Positional Dominance, Lorenz Curve
    JEL: I39
    Date: 2012
  18. By: Seo-Young Cho
    Abstract: This paper empirically analyzes the causal relationship between migration and human trafficking inflows into Germany during the period between 2001 and 2010. My results suggest that migrant networks, measured by migrant stocks from a specific source country, increase the illicit, exploitative form of migration - human trafficking - from that respective country. However, the network effect varies across different income levels of source countries. The significant, positive effect of migrant networks decreases as the income level increases, and furthermore the effect is insignificant for high income countries.
    Keywords: Human trafficking, Migration, Network effects
    JEL: F22 J23 J61
    Date: 2012
  19. By: Jérôme Adda; Francesca Cornaglia
    Abstract: This paper shows that smoking intensity, i.e. the amount of nicotine extracted per cigarette smoked, responds to changes in excise taxes and tobacco prices. We exploit data covering the period 1988 to 2006 across many US states. Moreover, we provide new evidence on the importance of cotinine measures in explaining long-run smoking behaviour and we investigate the sensitivity of smoking cessation to changes in excise taxes and their interaction with smoking intensity.
    Keywords: Tobacco, public health, compensatory behavior, excise taxes
    JEL: D12 H25 I12
    Date: 2012–09
  20. By: Alexander Danzer; Peter Dolton
    Abstract: Alexander Danzer and Peter Dolton use the concept of 'total reward' to assess whether public sector pay and pensions are too high relative to the private sector.
    Keywords: Public sector, private sector, pay, pensions
    Date: 2012–09

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