nep-pbe New Economics Papers
on Public Economics
Issue of 2013‒09‒06
twenty-two papers chosen by
Keunjae Lee
Pusan National University

  1. A set of estimated fiscal rules for a cross-section of countries: Stabilization and consolidation through which instruments? By Christopher Reicher
  2. Are financial advisors useful? Evidence from tax-motivated mutual fund flows By Cici, Gjergji; Kempf, Alexander; Sorhage, Christoph
  3. Tax Limits and Local Democracy By Revelli, Federico
  4. How large are fiscal multipliers? A panel-data VAR approach for the Euro area By Ricardo Silva; Vitor Manuel Carvalho; Ana Paula Ribeiro
  5. Tax Credits Response to Tax Enforcement: Evidence from a Quasi-Experiment in Chile By Claudio Agostini
  6. Anticipation, Learning and Welfare: the Case of Distortionary Taxation By Emanuel Gasteiger; Shoujian Zhang
  7. Efficient Fiscal Spending by Supranational Unions International Debt Deleveraging By Jenny Simon; Justin Valasek
  8. Economic Growth and Inequality: Evidence from the Young Democracies of South America By Manoel Bittencourt
  9. A Note on Commodity Taxation and Economic Growth By Kunihiko Konishi
  10. Religious identity, public goods and centralization: Evidence from Russian and Israeli cities By Grigoriadis, Theocharis; Torgler, Benno
  11. Does Early Life Exposure to Cigarette Smoke Permanently Harm Childhood Health? Evidence from Cigarette Tax Hikes By David Simon
  12. Efficiency of Public Sector Organizations: Perspectives from Theories of Bureaucracy By Erkoc, Taptuk Emre
  13. A political theory of Russian orthodoxy: Evidence from public goods experiments By Grigoriadis, Theocharis
  14. "Reorienting Fiscal Policy: A Critical Assessment of Fiscal Fine-Tuning" By Pavlina R. Tcherneva
  15. Political Competition, Political Donations, Economic Policy and Growth By John Maloney; Andrew Pickering
  16. Too many charities? Insight from an experiment with multiple public goods and contribution thresholds By Luca Corazzini; Christopher Cotton; Paola Valbonesi
  17. Investment Frictions and the Aggregate Output Loss in China By Guiying (Laura) Wu
  18. The Dynamic Relationship between House Prices and Output: Evidence from US Metropolitan Statistical Areas By Nicholas Apergis; Beatrice D. Simo-Kengne; Rangan Gupta; Tsangyao Chang
  19. Education, income, and the distribution of happiness By Owen, Ann; Phillips, Anne
  20. Birthplace Diversity and Economic Prosperity By Alesina, Alberto; Harnoss, Johann; Rapoport, Hillel
  21. The evolution of economic convergence in the European Union By Borsi, Mihály Tamás; Metiu, Norbert
  22. Top Incomes, Rising Inequality, and Welfare By Kevin J. Lansing; Agnieszka Markiewicz

  1. By: Christopher Reicher
    Abstract: This paper provides a set of detailed estimated fiscal reaction functions for a panel of twenty industrialized countries, and it discusses commonalities and differences with regard to systematic fiscal policies across countries. In general, the countries in the panel adjust tax revenues strongly in response to the public debt, and they adjust tax revenues and transfer payments, but, interestingly, not tax rates, strongly in response to output fluctuations. Some countries such as Germany appear to adjust government consumption and investment relatively strongly in response to the public debt, while the United States adjusts capital tax rates relatively strongly. In general, an increased emphasis in the theoretical literature on the effects of procyclical tax revenues and countercyclical transfer payments as automatic stabilizers may be warranted
    Keywords: Fiscal policy, fiscal rule, deficits, taxes, government purchases, transfer payments
    JEL: E62 E63 H20 H62
    Date: 2013–08
  2. By: Cici, Gjergji; Kempf, Alexander; Sorhage, Christoph
    Abstract: We are the first to show that financial advisors generate tangible benefits for their clients in the form of useful tax advice. Investors who purchase mutual funds through financial advisors exhibit a stronger tendency of avoiding taxable distributions than those who do not. Our calculations imply that this tendency could generate after-tax returns that are higher by 63 basis points per year, on average. The benefits from financial advice increase when investors face large and hard to predict tax liabilities and pay more for advice. Evidence from December distributions is consistent with financial advisors also helping clients with tax-loss selling. --
    Keywords: Mutual funds,Taxable fund distributions,Financial advisors,After-tax returns
    JEL: D14 G11 G24 H24
    Date: 2013
  3. By: Revelli, Federico (University of Turin)
    Abstract: Based on a theoretical model where state limits on local government policy elicit a move from private value (position issue) to common value (valence issue) voting, I exploit exogenous variation in tax limitation rules in over 7,000 Italian municipalities during the 2000s to show that fiscal restraints provoke a fall in voter turnout and number of mayor candidates, and a rise in elected mayors’ valence proxy and win margins. The evidence is compatible with the hypothesis of hierarchical tax imitations fading the ideological stakes of local elections and favoring valence-based party line crossing, thus questioning the influential accountability postulate of the fiscal decentralization lore
    Date: 2013–07
  4. By: Ricardo Silva (Faculdade de Economia, University of Porto); Vitor Manuel Carvalho (Faculdade de Economia, University of Porto and CEF.UP); Ana Paula Ribeiro (Faculdade de Economia, University of Porto and CEF.UP)
    Abstract: In the current context where the limited role for monetary policy instruments apparently endows fiscal policy with higher effectiveness, European fiscal policy authorities are rather constrained by the fact of most countries being struggling against recessions together with the need to put public finances in a sustainable path. In this context, we assess how large are fiscal multipliers in Europe, for both aggregated and disaggregated spending and revenue variables. Moreover, we analyze how cycle phases and fiscal consolidation episodes shape the size of fiscal multipliers. We present evidence for the Euro area, relying on a VAR model with pooled annual data from 1998 to 2008. Estimation results show that, on average, transfers are the main driving force for the overall expenditure dynamics; moreover, wages exhibit negative impacts on output while positive effects are strongly driven by shocks in public investment and, to a lesser extent, by intermediate consumption. On the revenue side, all items impinge negatively on output growth. Additionally, our results show that public spending multiplier is positive in recessions while in expansions is smaller, inclusively, negative. Similarly, the effectiveness of the tax multiplier is, also, higher in recessions. Finally, we have found that consolidation phases affect negatively the size of multipliers.
    Keywords: Fiscal policy; Fiscal multipliers; Fiscal shocks; Business-cycle fluctuations; Public debt; Euro area; VAR analysis
    JEL: E32 E62 E65 H60
    Date: 2013–08
  5. By: Claudio Agostini (Escuela de Gobierno, Universidad Adolfo Ibáñez)
    Date: 2013–01
  6. By: Emanuel Gasteiger (Instituto Universitario de Lisboa); Shoujian Zhang (University of St Andrews)
    Abstract: We study the impact of anticipated fiscal policy changes in a Ramsey economy where agents form long-horizon expectations using adaptive learning. We ex- tend the existing framework by introducing distortionary taxes as well as elastic labour supply, which makes agents' decisions non-predetermined but more realistic. We detect that the dynamic responses to anticipated tax changes under learning have oscillatory behaviour that can be interpreted as self-fullling waves of optimism and pessimism emerging from systematic forecast errors. Moreover, we demonstrate that these waves can have important implications for the welfare consequences of fiscal reforms.
    Keywords: Fiscal Policy, Adaptive Learning, Oscillations
    JEL: E32 E62 D84
    Date: 2013–08–26
  7. By: Jenny Simon; Justin Valasek
    Abstract: We study fiscal spending by supranational unions, where participation is voluntary and countries bargain over contributions to and the allocation of a central budget. We establish and explore the link between the budget's allocation and nations' contributions that occurs since bargaining power is endogenous, and a country's outside option during budget negotiations is to withdraw its contribution and consume its full income. Generically, it follows that unstructured bargaining gives an inefficient result in the presence of income asymmetry between member nations. Interestingly, redistribution arises endogenously, despite nations being purely self-interested. However, there exists a trade-off between increasing equality and decreasing efficiency, which becomes more severe as the centralized budget increases. We also analyze partial ex-ante commitment through alternative decision-making institutions: Both majority rule and exogenous tax rules can improve efficiency. JEL classification: H77, H87, D71
    Keywords: Supranational Unions, Efficiency, Public Goods, Redistribution, Federalism, Legislative Bargaining
    Date: 2013–06–10
  8. By: Manoel Bittencourt
    Abstract: We investigate in this paper whether income growth has played any role on inequality in all nine young South American democracies during 1970-2007. The results, based on dynamic panel time-series analysis, suggest that income growth has played a progressive role in reducing inequality during the period. Moreover, the results suggest that this negative relationship is stronger in the 1990s and early 2000s, a period in which the continent achieved macroeconomic stabilisation, political consolidation and much improved economic performance. On the contrary, during the 1980s (the so-called "lost decade"), the negative income growth experienced by the continent at the time has hit the poor the hardest, which has consequently lead to an increase in inequality. All in all, we suggest that consistent growth, and all that it encompasses, is an important equaliser which should not be discarded as a plausible option by policy makers interested in a more equal income distribution.
    Keywords: Growth, inequality, South America
    JEL: E20 O11 O15 O54
    Date: 2013
  9. By: Kunihiko Konishi (Graduate School of Economics, Osaka University)
    Abstract: This note reexamines the growth effects of commodity taxation and a manufacturing subsidy. By incorporating endogenous labor supply into a variety expansion model following Grossman and Helpman (1991), we derive new results. First, if households consider leisure to be important, an increase in the commodity tax rate can decrease the growth rate in the short run. Second, a small elasticity of substitution and a small manufacturing subsidy halt economic growth. Third, when the elasticity of substitution is small and sustained growth is possible, a decrease in the subsidy raises the short-run growth rate and decreases the long-run growth rate.
    Keywords: Commodity taxation, Subsidy, Labor supply, Endogenous growth
    JEL: E62 O41
    Date: 2013–09
  10. By: Grigoriadis, Theocharis; Torgler, Benno
    Abstract: In this paper, we analyze the effects of religious identity - defined both as personal identification with a religious tradition and institutional ideas on the provision of public goods - on attitudes toward central government. We explore whether citizens belonging to collectivist rather than individualist religious denominations are more likely to evaluate their central government positively. Moreover, we explore whether adherence to collectivist norms of economic and political organization leads to a positive evaluation of central government. Surveys were conducted in Russia and Israel as these countries provide a mosaic of three major world religions - Judaism, Eastern Orthodoxy and Sunni Islam. The information gathered also allows us to study whether attitudes towards religious institutions such as the Russian Orthodox Church, the Chief Rabbinate in Jerusalem, the Jerusalem Islamic Waqf, and the Greek-Orthodox Patriarchate of Jerusalem in Israel are able to predict positive attitudes toward centralized forms of governance. We find strong support for the proposition that collectivist norms and an institutional religious identity enhance positive attitudes towards central government. --
    Keywords: Religious identity,public goods,collectivism,individualism,local government,centralization,Russia,Israel
    JEL: P16 P17 P21 P35 P51 P52 Z12
    Date: 2013
  11. By: David Simon (University of Connecticut)
    Abstract: Recent evidence suggests that smoking during pregnancy has adverse effects on fetal health. However, it remains unknown if smoke exposure causes lasting harm to health through childhood. To mitigate omitted variables bias, I exploit variation in cigarette taxes. By leveraging cigarette tax hikes, I shed light on the ability of these taxes to change health behavior in a way that improves long-term child outcomes. In-utero exposure to a tax hike leads to large and significant improvements to a child’s wellbeing. I find that a one dollar increase (in 2009 dollars) in the state cigarette excise tax causes a 10% decrease in sick days from school, and a 4.5% decrease in the likelihood of having two or more doctor visits in the past 12 months. I also find suggestive evidence that early life exposure to a cigarette tax hike decreases hospitalizations and asthma attacks. I find support for my identifying assumptions in a number of falsification tests. This study supports the hypothesis that that in-utero exposure to cigarette smoke caries significant medium-term costs.
    JEL: J13 J18 I14
    Date: 2013–08
  12. By: Erkoc, Taptuk Emre
    Abstract: Economic insights on the provision of public goods and services by public sector organizations went hand in hand with probing questions on the efficient allocation of resources within them concerning neo-classical assumptions on the theory of firm (Coase, 1937; Alchian and Demsetz, 1972). The rationale behind the unprecedented divergences from the neo-classical firm postulations on the basis of not-to-operate at the efficient production frontier has attracted attentions of researchers working not only on the private firms but also on the public sector. This paper investigates theoretical underpinnings of efficient allocation of resources within public sector organizations on the basis of a variety of arguments. Before examining the (in) efficient usage of resources in the public sector that is mostly based on the theory of bureaucracy, methodological and practical challenges to measure the efficiency performances of public intuitions are visited. Subsequently, institutional framework on the public provision of goods and services is scrutinised referring particularly to the discussion on incentive schemes and efficiency.
    Keywords: Efficiency, Government Output, Public Sector Organizations, Bureaucracy
    JEL: D73 H11
    Date: 2013–08–30
  13. By: Grigoriadis, Theocharis
    Abstract: In this paper, I test the effects of religious norms on the provision of public goods. My evidence is drawn from public goods experiments that I ran with regional bureaucrats in Tomsk and Novosibirsk, Russia. I introduce three treatments, which I define as degrees of Eastern Orthodox collectivist enforcement: 1. Solidarity, 2. Obedience, and 3. Universal discipline. I argue for the existence of an Eastern Orthodox hierarchy in the Russian bureaucracy that facilitates the delivery of public goods under conditions of universal discipline and the principal´s overfulfillment. Eastern Orthodox hierarchy is enforced through universal disciplinary monitoring, which induces collective punishment when the public good is not delivered. Contrary to conventional wisdom about freeriding in administrative institutions, higher ranks in Russian bureaucracies are associated with less freeriding. --
    Keywords: public goods experiments,bureaucracy,enforcement,Russia,religion,incomplete information,hierarchy
    JEL: C91 C92 D72 D73 P21 P26 P32 P51 Z12
    Date: 2013
  14. By: Pavlina R. Tcherneva
    Abstract: The present paper offers a fundamental critique of fiscal policy as it is understood in theory and exercised in practice. Two specific demand-side stabilization methods are examined here: conventional pump priming and the new designation of fiscal policy effectiveness found in the New Consensus literature. A theoretical critique of their respective transmission mechanisms reveals that they operate in a trickle-down fashion that not only fails to secure and maintain full employment but also contributes to the increasing postwar labor market precariousness and the erosion of income inequality. The two conventional demand-side measures are then contrasted with the proposed alternative--a bottom-up approach to fiscal policy based on a reinterpretation of Keynes's original policy prescriptions for full employment. The paper offers a theoretical, methodological, and policy rationale for government intervention that includes specific direct-employment and investment initiatives, which are inherently different from contemporary hydraulic fine-tuning measures. It outlines the contours of the modern bottom-up approach and concludes with some of its advantages over conventional stabilization methods.
    Keywords: Full Employment; Fiscal Policy; Aggregate Demand; Business Cycles; Income Distribution; New Consensus
    JEL: E24 E25 E62 E63 J68
    Date: 2013–08
  15. By: John Maloney; Andrew Pickering
    Abstract: Greater political competition reduces the extent of rent-seeking or resource diversion by politicians in government. However, the potency of this effect depends on whether or not there are limits on donations to candidates standing for election, and on the objectives of donors themselves. Data from the US states suggest that the corruption-political competition gradient is stronger under laissez-faire regimes. Consistent with our notion of 'weakly benign' donors, limits are associated with better policies and stronger growth performance at low levels of political competition, whilst laissez-faire is preferred when political competition is high.
    Keywords: political competition, political donations, rent-seeking, economic policy, growth
    JEL: D72 H11 H70
    Date: 2013–08
  16. By: Luca Corazzini (University of Padova); Christopher Cotton (University of Miami); Paola Valbonesi (University of Padova)
    Abstract: We present results from an experiment with multiple public goods, where each good produces benefits only if total contributions to it reach a minimum threshold. The experiment allows us to compare contributions in a benchmark treatment with a single public good and in treatments with more public goods than can be funded. The presence of multiple public goods makes coordination among participants more diffcult, discouraging contributions, and decreasing the likelihood of any public good being effectively funded. Multiplicity decreases funding unless one public good stands out as being the most efficient alternative. Applied to the case of philanthropy, the results show how overall donations and the number of effectively funded charities may both decrease as the total number of charities increase. This is true even if the new charities offer higher potential benefits than previous options.
    Keywords: Threshold public goods, multiple public goods, laboratory experiment, fundraising. JEL: C91, C92, H40, H41.
    Date: 2013–08
  17. By: Guiying (Laura) Wu (Division of Economics, School of Humanities and Social Sciences, Nanyang Technological University, Singapore, 637332.)
    Abstract: Investment frictions reduce, delay or protract investment expenditure that is necessary for ?rms to capture growth opportunities. Using a capital adjust- ment costs framework, this paper estimates the gap between China?s actual and frictionless aggregate output. It applies the method of simulated moments to a fully structural investment model on a panel of Chinese ?rms; and takes into ac- count potential unobserved heterogeneities and measurement errors in the data. The estimated capital adjustment costs are substantial and vary across ?rms of di¤erent sizes, and across regions with di¤erent investment environments. If Chinese ?rms had faced a lower level of adjustment costs such as in the U.S., China?s aggregate output would be 25% higher.
    Keywords: Investment, Capital Adjustment Costs, Method of Simulated Moments
    JEL: E22 D92 C15
    Date: 2013–07
  18. By: Nicholas Apergis (Department of Banking and Financial Management, University of Piraeus, Greece); Beatrice D. Simo-Kengne (Department of Economics, University of Pretoria); Rangan Gupta (Department of Economics, University of Pretoria); Tsangyao Chang (Department of Finance, Feng Chia University, Taichung, Taiwan)
    Abstract: This paper investigates the long-run and short-term dynamics of 351 US metropolitan statistical area housing prices in relation to personal income. We apply a panel cointegration approach on annual data from 1993 to 2011 and find a long-run relationship between local house prices and per capita personal income. The causal direction is then assessed based on an autoregressive distributed lag specification that also accommodates for error-correction. Results from Granger-causality tests reveal the existence of a bi-directional causality between real house prices and real per capita personal income over both long- and short-horizons. We conclude that changes in personal income can predict house price movements and vice versa.
    Keywords: Real house prices, Real personal income per capita, Panel cointegration, Panel causality
    JEL: C33 D31 R31
    Date: 2013–06
  19. By: Owen, Ann; Phillips, Anne
    Abstract: We study happiness inequality in the United States using data from the 2005 to 2010 Behavioral Risk Factor Surveillance System (BRFSS). We aggregate individual level data to the state level and study how the average life satisfaction of various income, education, and life satisfaction groups changes with the average life satisfaction of the state. We find that the life satisfaction of the least happy does not increase in equal proportion with the average happiness of society, suggesting that increasing happiness levels are likely to lead to greater happiness inequality. However, the life satisfaction of the poorest and least educated does increase in equal proportions with average life satisfaction. Taken together, these results indicate that directed policies aimed at increasing the income of the poor or education levels of the least educated could result in less inequality in the distribution of welfare.
    Keywords: happiness inequality; happiness of poor; happiness of educated
    JEL: D3 I0 I24
    Date: 2013–07
  20. By: Alesina, Alberto (Harvard University); Harnoss, Johann (Harvard University); Rapoport, Hillel (Bar-Ilan University)
    Abstract: We use recent immigration data from 195 countries and propose an index of population diversity based on people's birthplaces. This new index is then decomposed into a size (share of foreign born) and a variety (diversity of immigrants) component and is available for 1990 and 2000 disaggregated by skill level. We show that birthplace diversity is largely uncorrelated with ethnic, linguistic or genetic diversity. Our main result is that the diversity of skilled immigration relates positively to economic development (as measured by income and TFP per capita and patent intensity) even after controlling for ethno-linguistic and genetic fractionalization, geography, trade, education, institutions, and origin-effects capturing income/productivity levels in the immigrants home countries. We make progress towards addressing endogeneity by specifying a gravity model to predict the share and diversity of immigration based on exogenous bilateral variables. The results are robust across various OLS and 2SLS specifications and suggestive of skill complementarities between native workers and immigrants, especially when the latter come from richer countries at intermediate levels of cultural proximity.
    Keywords: economic development, cultural diversity, genetic diversity, ethnic diversity, birthplace diversity, productivity, immigration
    JEL: O1 O4 F22 F43
    Date: 2013–08
  21. By: Borsi, Mihály Tamás; Metiu, Norbert
    Abstract: This paper investigates economic convergence in real income per capita between 27 European Union countries. We employ a non-linear latent factor framework to study transitional behavior among economies between 1970 and 2010. Our results offer important insights on the economic catch-up exhibited by the new EU members in light of the institutional changes and macroeconomic adjustment processes undertaken over the last 40 years. Our main findings suggest no overall real income per capita convergence in the EU, however, we identify subgroups that converge to different steady states using an iterative testing procedure. Regional linkages play a significant role in determining the formation of convergence clubs. The empirical evidence suggests a clear separation between the new and old EU member states in the long run. --
    Keywords: Club convergence,Dynamic factor model,Economic integration,Growth,New member states
    JEL: C33 O47
    Date: 2013
  22. By: Kevin J. Lansing (FRB San Francisco and Norges Bank); Agnieszka Markiewicz (Erasmus University Rotterdam)
    Abstract: This paper develops a general-equilibrium production model of skill-biased technological change that approximates the dramatic upward shift in the share of total income going to the top decile of U.S. households since 1980. Under realistic assumptions, we show that all agents in the economy can benefit from the technology change, provided that the observed rise in U.S. redistributive transfers over this period is taken into account. We show that the increase in capital?'s share of total income and the presence of capital-entrepreneurial skill complementarity are two key features that help support the wages of ordinary workers as the new technology diffuses.
    Keywords: Income Inequality, Skill-biased Technological Change, Capital-skill Complementarity, Redistribution, Welfare
    JEL: D31 E32 E44 H23 O33
    Date: 2013–07–01

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