nep-pbe New Economics Papers
on Public Economics
Issue of 2013‒12‒06
25 papers chosen by
Keunjae Lee
Pusan National University

  1. Fiscal illusion and the shadow economy: Two sides of the same coin? By Andreas Buehn; Roberto Dell'Anno; Friedrich Schneider
  2. Fiscal policy in a Real-Business-Cycle model with labor-intensive government services and endogenous public sector wages and hours By Aleksandar Vasilev
  3. Revenue autonomy preference in German state parliaments By Heinemann, Friedrich; Janeba, Eckhard; Moessinger, Marc-Daniel; Schröder, Christoph
  4. Electoral rules and public expenditure;composition: Evidence from Italian regions By Raffaella SANTOLINI
  5. Fiscal Externalities and Optimal Unemployment Insurance By Nicholas Lawson
  6. Taxes, agglomeration rents and location decisions of firms. By Crabbé, Karen; De Bruyne, Karolien
  7. Political institutions and income (re-)distribution: Evidence from developed economies By Feld, Lars P.; Schnellenbach, Jan
  8. Tax Incentives and the Demand for Private Health Insurance By Olena Stavrunova; Oleg Yerokhin
  9. Effects of territorial and worldwide corporation tax systems on outbound M&As By Feld, Lars P.; Ruf, Martin; Scheuering, Uwe; Schreiber, Ulrich; Voget, Johannes
  10. Panel data evidence on the effects of fiscal impulses in the EU New Member States By Paweł Borys; Piotr Ciżkowicz; Andrzej Rzońca
  11. Cyclical and welfare effects of public sector unions in a Real-Business-Cycle model By Aleksandar Vasilev
  12. Prospect Theory and Tax Evasion: A Reconsideration of the Yitzhaki Puzzle By Piolatto, Amedeo; Rablen, Matthew D.
  13. Decentralization, Vertical Fiscal Imbalance, and Political Selection By Massimo Bordignon; Matteo Gamalerio; Gilberto Turati
  14. Fiscal stimulus and distortionary taxation By Thorsten Drautzburg; Harald Uhlig
  15. The Impact of Tax Substitution on the price of pharmaceutical products in the state of São Paulo By André Luis Squarize Chagas
  16. On the cost of rent-seeking by government bureaucrats in a Real-Business-Cycle framework By Aleksandar Vasilev
  17. Unemployment Benefits in EU Member States By Palme, Joakim
  18. The dynamics of public investment under persistent electoral advantage By Marina Azzimonti
  19. Relationship of Income Inequality and Labor Productivity on Fertility in the Philippines: 1985-2009. By Macan, Vaneza Jean; Deluna, Roperto Jr
  20. Fiscal Policy: Its Role in an Independent Scotland By Anthony J Laramie; Douglas Mair
  21. Creating jobs via the 2009 recovery act: state medicaid grants compared to broadly-directed spending By William Dupor
  22. Polarized business cycles By Marina Azzimonti
  24. South-North convergence from a new perspective By Hübler, Michael
  25. Why Doesn't the Kuznets Curve on Income Distribution Hold in Ancient China? By Qichun He; Heng-fu Zou

  1. By: Andreas Buehn; Roberto Dell'Anno; Friedrich Schneider
    Abstract: This paper presents an empirical analysis of the relationship between fiscal illusion and the shadow economy for 104 countries over the period 1989–2009. We argue that both unobservable phenomena are closely linked to each other, as the creation of a fiscal illusion may be helpful if governments want to control shadow economic activities. Using a MIMIC model with two latent variables we confirm previous findings on the driving forces of the shadow economy and identify the main determinants and indicators of fiscal. Most importantly, we find that fiscal illusion negatively affects the shadow economy: Concealing the real tax burden through fiscal illusion potentially contributes to the government’s efforts to repress shadow economic activities.
    Keywords: Fiscal illusion; shadow economy; MIMIC model; latent variables, tax burden, tax complexity
    JEL: O17 K42 O54 N16
    Date: 2013–12
  2. By: Aleksandar Vasilev
    Abstract: Motivated by the high public employment, and the public wage premia observed in Europe, a Real-Business-Cycle model, calibrated to German data (1970-2007), is set up with a richer government spending side, and an endogenous private-public sector labor choice. To illustrate the effects of fiscal policy, two regimes are compared and contrasted to one another - exogenous vs. optimal (Ramsey) policy case. The main findings from the computational experiments performed in this paper are: (i) The op- timal steady-state capital tax rate is zero; (ii) A higher labor tax rate is needed in the Ramsey case to compensate for the loss in capital tax revenue; (iii) Under the optimal policy regime, public sector employment is lower, but government employees receive higher wages; (iv) The benevolent Ramsey planner provides the optimal amount of the public good, substitutes labor for capital in the input mix for public services produc- tion, and private output; (v) Government wage bill is smaller, while public investment is three times higher than in the exogenous policy case.
    Keywords: optimal policy, government spending, public employment and wages
    JEL: E69 E62 E32 H40
    Date: 2013–05
  3. By: Heinemann, Friedrich; Janeba, Eckhard; Moessinger, Marc-Daniel; Schröder, Christoph
    Abstract: Fiscal federalism in Germany is characterized by lacking sub-national tax autonomy and intensive fiscal equalization. Due to a sunset clause, the current equalization system has to be renegotiated by the year 2019. Against this backdrop, this contribution studies the reform preferences of members of state parliaments. The study makes use of a self-conducted survey among the members of all 16 German state parliaments. It tests to which extent the preferences of these veto players for tax autonomy and fiscal equalization are driven by states' self-interest, party ideology and individual characteristics. The results are helpful to understand the political-economic constraints of federal reforms. They indicate that besides the individual ideological position higher state wealth and lower debt levels are linked to larger reform support. Therefore, a promising new reform would have to address budgetary legacies like high pre-existing debt. --
    Keywords: fiscal equalization,tax competition,fiscal federalism
    JEL: H63 H74 H77
    Date: 2013
  4. By: Raffaella SANTOLINI (Universit… Politecnica delle Marche, Dipartimento di Scienze Economiche e Sociali)
    Abstract: The paper investigates the effects produced by the electoral system on expenditure composition by exploring the case of Italian regions over the period 1986-2009. Empirical analysis shows that the regional current expenditure transfers distributed to families and firms significantly decrease when the regional electoral system moves from being proportional to mixed. Particularly striking is the reduction in pre-electoral years under the regional mixed-regime. Although not robust across different empirical specifications, an increase in the regional expenditure on local public goods is found when the regional electoral system becomes mixed.
    Keywords: local institutional design, panel data analysis, public expenditure composition, regional government
    JEL: D72 H30 H72
    Date: 2013–11
  5. By: Nicholas Lawson (Aix-Marseille University (Aix-Marseille School of Economics), CNRS & EHESS)
    Abstract: A common finding of the optimal unemployment insurance literature is that the optimal UI replacement rate is around 50%, implying that current levels in the US are close to optimal. However, a key assumption in the existing literature is that unemployment benefits are the only government spending activity. In this paper I show that recommendations for optimal UI levels are dramatically reduced when one incorporates the fact that UI spending is a small part of overall government spending. This occurs because the negative impact of UI on income tax revenues implies added welfare costs, a mechanism that I refer to as a fiscal externality. Using both a calibrated structural job search model and a "sufficient statistics" method that relies on reduced-form elasticities, I find that the optimal replacement rate drops to zero once fiscal externalities are incorporated. However, I also consider the possibility that more generous UI could increase reservation wages and thus potentially increase the tax base, and I show that this second fiscal externality could have important effects on the results, with an optimal replacement rate which could rise above 70%.
    Keywords: unemployment insurance, fiscal externality, job search, sufficient statistics, government spending
    Date: 2013–11–21
  6. By: Crabbé, Karen; De Bruyne, Karolien
    Abstract: The goal of this paper is to analyse the individual impact of tax rates and agglomeration rents as well as their interaction on location decisions of manufacturing firms within Belgium. Theoretically, both location determinants may weaken each other’s impact. Using a unique 10-year dataset concerning the number of newly setup firms at the sector level for 43 Belgian districts, we show that local effective tax rates have a negative impact on location decisions. Moreover, location-specific supply-side agglomeration rents attract new firms and their impact appears to be even stronger for more spatially concentrated sectors. Finally, we show that a higher effective tax rate in a district does not necessarily deter new firms in more agglomerated districts, pointing to the existence of taxable location-specific agglomeration rents.
    Keywords: Taxes; agglomeration rents;
    Date: 2013
  7. By: Feld, Lars P.; Schnellenbach, Jan
    Abstract: We discuss the effect of formal political institutions (electoral systems, fiscal decentralization, presidential and parliamentary regimes) on the extent and direction of income (re-) distribution. Empirical evidence is presented for a large sample of 70 economies and a panel of 13 OECD countries between 1981 and 1998. The evidence indicates that presidential regimes are associated with a less equal distribution of disposable incomes, while electoral systems have no significant effects. Fiscal competition is associated with less income redistribution and a less equal distribution of disposable incomes, but also with a more equal primary income distribution. Our evidence also is in line with earlier empirical contributions that find a positive relationship between trade openness and equality in primary and disposable incomes, as well as the overall redistributive effort. --
    Keywords: Redistribution,Formal Institutions,Fiscal Decentralization,Presidential and Parliamentary Regimes,Electoral Systems
    JEL: D31 H22 H11 H50 I38 P50
    Date: 2013
  8. By: Olena Stavrunova (Economics Discipline Group, University of Technology, Sydney); Oleg Yerokhin (University of Wollongong)
    Abstract: This paper studies the effect of an individual insurance mandate (Medicare Levy Surcharge) on the demand for private health insurance (PHI) in Australia. It uses the administrative income tax returns data to show that mandate has several distinct effects on taxpayers' behavior. First, despite the large size of the tax penalty for not having PHI cover relative to the cost of the cheapest eligible insurance policy, the compliance with mandate is relatively low: the proportion of population with PHI cover increases by 6.5 percentage points (15.6%) at the income threshold at which the tax penalty starts to apply. This effect is most pronounced for young age taxpayers, while the middle aged people seem to be least responsive to this specific tax incentive. Second, the discontinuous increase in the average tax rate at the income threshold created by the policy generates a strong incentive for tax avoidance which manifests itself through bunching in the taxable income distribution below the threshold. Finally, after imposing some plausible assumptions the effect of the policy is extrapolated to other income levels to show that overall this policy hasn't had a significant impact on the demand for private health insurance in Australia.
    Date: 2013–11–01
  9. By: Feld, Lars P.; Ruf, Martin; Scheuering, Uwe; Schreiber, Ulrich; Voget, Johannes
    Abstract: Repatriation taxes reduce the competitiveness of multinational firms from tax credit countries when bidding for targets in low tax countries. This comparative disadvantage with respect to bidders from exemption countries violates ownership neutrality, which results in production inefficiency due to second-best ownership structures. This paper empirically estimates the magnitude of these effects. The abolishment of repatriation taxes in Japan and in the U.K. in 2009 has increased the number of acquisitions abroad by Japanese and British firms by 31.9% and 3.9 %, respectively. A similar policy switch in the U.S. is simulated to increase the number of U.S. cross-border acquisition by 17.1 %. We estimate the yearly gain in efficiency to be around 525 million dollar due to the Japanese reform and 13.5 million dollar due to the U.K. reform. Simulating such a reform for the U.S. results in a yearly efficiency gain of 1134 million dollar. --
    Keywords: international mergers and acquisitions,business taxation,repatriation taxes,ownership neutrality
    JEL: H25 G34
    Date: 2013
  10. By: Paweł Borys (Warsaw School of Economics); Piotr Ciżkowicz (Warsaw School of Economics); Andrzej Rzońca (Warsaw School of Economics and Monetary Policy Council in Narodowy Bank Polski)
    Abstract: We identify fiscal impulses in the EU New Member States using four different methods and apply econometric panel data techniques to determine what is the response of the output and its components to those impulses. We also directly test the effects of fiscal impulses on labour costs and housholds’ expectations. The results confirm that the composition of impulses matters for output and its components’ response. Notably, we find evidence that investment and export growth accelerates after fiscal adjustment and decelerates after fiscal stimulus when the impulses are expenditure-based. In turn, private consumption seems not to respond to fiscal impulses regardless of their size. The analysis confirms that expenditure-based fiscal adjustments enhance wage moderation and thereby competitiveness of domestic enterprises, while expenditure-based fiscal stimuli weaken it. By contrast, we do not find evidence that fiscal impulses have an effect on households’ confidence.
    Keywords: fiscal consolidation, non-Keynesian effects, New Member States, panel data
    JEL: C23 D22 D81 E23 E32 E44 E62
    Date: 2013
  11. By: Aleksandar Vasilev
    Abstract: Motivated by the highly-unionized public sectors, the high public shares in total em- ployment, and the public sector wage premia observed in Europe, this paper examines the importance of public sector unions for macroeconomic theory. The model gen- erates cyclical behavior in hours and wages that is consistent with data behavior in an economy with highly-unionized public sector, namely Germany during the period 1970-2007. The union model is a significant improvement over a model with exogenous public employment. In addition, endogenously-determined public wage and hours add to the distortionary effect of contractionary tax reforms by generating greater tax rate changes, thus producing significantly higher welfare losses.
    Keywords: fiscal policy, public wages, public employment, public sector labor unions
    JEL: C68 E62 J45 J51
    Date: 2013–08
  12. By: Piolatto, Amedeo (Barcelona Institute of Economics); Rablen, Matthew D. (Brunel University)
    Abstract: The standard expected utility model of tax evasion predicts that evasion is decreasing in the marginal tax rate (the Yitzhaki puzzle). The existing literature disagrees on whether prospect theory overturns the puzzle. We disentangle four distinct elements of prospect theory and find loss aversion and probability weighting to be redundant in respect of the puzzle. Prospect theory fails to reverse the puzzle for various classes of endogenous specification of the reference level. These classes include, as special cases, the most common specifications in the literature. New specifications of the reference level are needed, we conclude.
    Keywords: prospect theory, tax evasion, Yitzhaki puzzle, stigma, diminishing sensitivity, reference dependence, endogenous audit probability, endogenous reference level
    JEL: H26 D81 K42
    Date: 2013–11
  13. By: Massimo Bordignon (Dipartimento di Economia e Finanza, Università Cattolica del Sacro Cuore); Matteo Gamalerio (University of Warwick); Gilberto Turati (Dipartimento di Scienze Economico-Sociali e Matematico-Statistiche, Università di Torino)
    Abstract: In a career-concern model of politics with endogenous candidacy and different types of politicians, following a decentralization reform, politicians with different skills are elected in municipalities characterized by different levels of autonomous resources. As an effect, consumer welfare increases only, or mainly, in richer municipalities. We test these predictions by exploiting the differentiated reduction in Vertical Fiscal Imbalance in Italian municipalities, due to the strong difference in the tax base, following the decentralization reforms of the '90s. Results strongly support our predictions and are robust to several alternative stories.
    Keywords: decentralization, vertical fiscal imbalance, quality of politicians
    JEL: D72 D78
    Date: 2013–11
  14. By: Thorsten Drautzburg; Harald Uhlig
    Abstract: We quantify the fiscal multipliers in response to the American Recovery and Reinvestment Act (ARRA) of 2009. We extend the benchmark Smets-Wouters (2007) New Keynesian model, allowing for credit-constrained households, the zero lower bound, government capital, and distortionary taxation. The posterior yields modestly positive short-run multipliers around 0.53 and modestly negative long-run multipliers around -0.36. We explain the central empirical findings with the help of a simple three equation New Keynesian model with sticky wages and credit-constrained households.
    Keywords: Keynesian economics
    Date: 2013
  15. By: André Luis Squarize Chagas
    Abstract: The mechanism of the Tax Subsitituion has been widely adopted by the Brazilian states in order to simplify tax colletion and combat evasion. Since mid-2007 the São Paulo State Treasury Office began adopting the tax substitution as means of receiving the ICMS due by the pharmaceutical sector. This work seeks to test the effects of the change in the form of taxation on consumer prices. For this, three alternative approaches are used to test the existence of structural break in the series of prices of pharmaceuticals in the state, and the relationship of co-integration of this series with the other states. The results suggest that, after the replacement tax, there was an increase of consumer prices.
    Keywords: tax substitution; tax incidence; co-integration; structural break
    JEL: C32 H22 I18
    Date: 2013–11–26
  16. By: Aleksandar Vasilev
    Abstract: This paper studies the wasteful effect of bureaucracy on the economy by addressing the link between rent-seeking behavior of government bureaucrats and the public sector wage bill, which is taken to represent the rent component. In particular, public officials are modeled as individuals competing for a larger share of those public funds. The rent-seeking extraction technology in the government administration is modeled as in Murphy et al. (1991) and incorporated in an otherwise standard Real-Business-Cycle (RBC) framework with public sector. The model is calibrated to German data for the period 1970-2007. The main findings are: (i) Due to the existence of a significant pub- lic sector wage premium and the high public sector employment, a substantial amount of working time is spent rent-seeking, which in turn leads to significant losses in terms of output; (ii) The measures for the rent-seeking cost obtained from the model for the major EU countries are highly-correlated to indices of bureaucratic inefficiency; (iii) Under the optimal fiscal policy regime,steady-state rent-seeking is smaller relative to the exogenous policy case, as the government chooses a higher public wage premium, but sets a much lower public employment, thus achieving a decrease in rent-seeking.
    Keywords: Rent-seeking, bureaucracy, public employment, government wages
    JEL: E69 E62 E32 J45
    Date: 2013–09
  17. By: Palme, Joakim (Uppsala Center for Labor Studies)
    Abstract: The background to this report is the growing variation between EU Member States' economic and social situation, which has been reinforced by the economic recession and subsequent fiscal consolidation measures. It is increasingly recognized that economic and social responses to the crisis will require strengthened solidarity between Member States, in the first place within the Eurozone but also beyond. While most decisions about taxes and spending remain at national level within the EU, it can equally be argued that continued successful European integration needs an elaborate risk-sharing system where various forms of automatic fiscal transfer mechanisms may have a key role, particularly in Eurozone countries. One strategy is to set up EU- or Eurozone wide unemployment provisions where resources are transferred to areas particularly hit by asymmetric shocks.
    Keywords: unemployment benefits; unemployment assistance
    JEL: J65 J68
    Date: 2013–11–29
  18. By: Marina Azzimonti
    Abstract: This paper studies the effects of asymmetries in re-election probabilities across parties on public policy and their subsequent propagation to the economy. The struggle between groups that disagree on targeted public spending (e.g., pork) results in governments being endogenously short-sighted: Systematic underinvestment in infrastructure and overspending on targeted goods arise, above and beyond what is observed in symmetric environments. Because the party enjoying an electoral advantage is less short-sighted, it devotes a larger proportion of revenues to productive investment. Hence, political turnover induces economic fluctuations in an otherwise deterministic environment. I characterize analytically the longrun distribution of allocations and show that output increases with electoral advantage, despite the fact that governments expand. Volatility is non-monotonic in electoral advantage and is an additional source of inefficiency. Using panel data from US states I confirm these findings.
    Keywords: Public investments
    Date: 2013
  19. By: Macan, Vaneza Jean; Deluna, Roperto Jr
    Abstract: This study investigates the relationship of income inequality (proxied by the Gini Coefficient), labor productivity (output per capita) on fertility rate in the Philippines. Specifically, this presents the trend of income inequality (ineq), labor productivity (lp) and fertility(tfr) in the Philippines from 1985 to 2009. The study uses Ordinary Least Square (OLS) estimates to study the relationship of the variables. Results revealed that income inequality and labor productivity has a negative relationship with fertility. Hence, an increase in this variable decreases fertility rate. This means that income inequality and labor productivity is significant in achieving the replacement level of fertility.
    Keywords: Income Inequality, Labor Productivity, Fertility, Ordinary Least Squares, Replacement level.
    JEL: J10 J11 J13
    Date: 2013–04–30
  20. By: Anthony J Laramie (Merrimack College, MA); Douglas Mair (Heriot-Watt University, Edinburgh)
    Abstract: In this paper we consider the implications for macroeconomic fiscal policy in Scotland if the Scottish electorate votes in favour of independence in the referendum on 18 September, 2014. We offer the paper in the spirit of the new thinking that the Scottish government's Fiscal Commission has argued will be required if the potential benefits from the exercise of independently determined macroeconomic policy instruments are to be achieved.
    Keywords: Scotland, fiscal policy, secession
    JEL: E62 F52 H77 R11
    Date: 2013–11
  21. By: William Dupor
    Abstract: Researchers have used cross-state differences to assess the jobs impact of the 2009 American Recovery and Reinvestment Act (the Recovery Act). Existing studies find that the Act's broadly- directed spending (i.e. excluding tax cuts) increased employment, at a cost-per-job of roughly three to five times that of typical employment compensation in the U.S. Other research finds that a particular component of the Act -emergency Medicaid grants to states -created jobs at a cost of 12% to 20% that of broadly-directed spending. This paper shows that these dif- ferences across the components' impacts can be explained by omitted variables in the existing work on the emergency Medicaid grants. Adjusting for the omissions, the jobs effect of the Act's Medicaid grants becomes substantially weaker. The omissions are: (i) not controlling the degree of (non-Recovery Act) federal dependency, (ii) not duly controlling for pre-Act housing and labor market conditions, and (iii) not conditioning on Recovery Act funding beyond that from the Act's Medicaid grants. Adjusting for any one of these omissions, by itself, results in a substantial increase in the cost of job creation and/or no statistically significant jobs effect.
    Keywords: Fiscal policy ; Job creation
    Date: 2013
  22. By: Marina Azzimonti
    Abstract: We are motivated by four stylized facts computed for emerging and developed economies: (i) business cycle movements are wider in emerging countries; (ii) economies in emerging countries experience greater economic policy uncertainty; (iii) emerging economies are more polarized and less politically stable; and (iv) economic policy uncertainty is positively related to political polarization. We show that a standard real business cycle (RBC) model augmented to incorporate political polarization, a `polarized business cycle' (PBC) model, is consistent with these facts. Our main hypothesis is that fluctuations in economic variables are not only caused by innovations to productivity, as traditionally assumed in macroeconomic models, but also by shifts in political ideology. Switches between left-wing and right-wing governments generate uncertainty about the returns to private investment, and this affects real economic outcomes. Since emerging economies are more polarized than developed ones, the effects of political turnover are more pronounced. This translates into higher economic policy uncertainty and amplifies business cycles. We derive our results analytically by fully characterizing the long-run distribution of economic and fiscal variables. We then analyze the effect of a permanent increase in polarization on PBCs.
    Keywords: Business cycles ; Economic policy ; Uncertainty
    Date: 2013
  23. By: Mitsukuni Nishida; Amil Petrin; T. Kirk White
    Abstract: Reallocation growth occurs when an input moves from a lower marginal product to a higher marginal product activity. Three recent studies use two distinct methodologies to examine the sources of the strong surge in aggregate productivity growth (APG) in India’s manufacturing sector since 1990 following significant economic reforms. They all conclude that APG was primarily driven by within-plant increases in technical efficiency and not between-plant reallocation of inputs. Given the nature of the reforms, where many barriers to input reallocation were removed, this finding has surprised researchers and been dubbed “India’s Mysterious Manufacturing Miracle.” In this paper we show that these findings may be an artifact of the way the studies estimate reallocation. One approach counts all reallocation growth arising from the movement of intermediate inputs as technical efficiency growth. The second approach introduces measurement error into estimated reallocation by using plant-level average products - total factor productivity residuals - as a proxy for marginal products, which could be problematic as economic theory suggests that average products and marginal products are unrelated in equilibrium. Using microdata on manufacturing from 4 countries — the U.S., Chile, Colombia, and Slovenia — we show that both approaches significantly understate the true role of reallocation in economic growth. In the U.S. almost 50% of reallocation growth is due to movements of intermediate inputs, meaning if India is similar to the U.S. then reallocation’s share of total Indian manufacturing APG since 1990 increases from the previous estimate of one-third to almost two-thirds.
    Date: 2013–11
  24. By: Hübler, Michael
    Abstract: This North-South model of Schumpeterian endogenous growth combines a market, productivity and knowledge effect. A set of various convergent and divergent growth paths is derived that is much richer than in the literature so far. South-North convergence based on North-South technology diffusion through intermediate goods trade is guaranteed if the knowledge effect dominates the productivity effect. Moreover, a larger Southern market expands the area of convergence and can prevent divergence. Not only a larger Southern market size, but also a higher Southern steady state growth rate benefit the North so that convergence is desirable for both, the South and the North. --
    Keywords: Schumpeter,endogenous growth,technology diffusion,convergence,poverty trap
    JEL: F18 O11 O33 O41
    Date: 2013
  25. By: Qichun He (Central University of Finance and Economics); Heng-fu Zou (Development Research Group, Work Bank; Central University of Finance and Economics)
    Abstract: We find robust evidence that in ancient China that consists of many consecutive dynasties, within each dynasty, the inequality demonstrates a "U" shape (or a "spoon" shape to be more precise). Therefore, as inequality hits an upper bound, war happens and a new dynasty replaces the old one. The cycle repeats itself. A simple explanation has been offered. Policy implications have also been presented.
    Keywords: Kuznets Curve, Income inequality, U shape, Ancient China
    JEL: C21 E65 N95 O11 O43
    Date: 2013–11

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