state liquor licensing implicit contracting and dry wet counties local option liquor laws are generally interpreted as granting voters the right to choose between allowing and prohibiting alcoholic beverage sales this paper argues that the real choice confronting voters is between legal sales according to state prescribed rules and illegal sales according to an informal set of locally determined rules given this choice rational voters will choose the option with the lower relative price state laws restricting the number of licenses that can be issued in legally wet jurisdictions prove to be more powerful than religious preferences in explaining the pattern of dry counties

nonlinear pricing in an oligopoly market the case of specialty coffee firms that use nonlinear pricing may distort product characteristics away from their efficient levels this paper offers the first empirical study of this issue using data from a specialty coffee market i estimate a structural utility model to compute consumers benefits from changing products sizes i then compare the estimated benefits to cost data design distortions are relatively large for products not targeted to the highest demand consumers distortions decrease toward zero with drink size for products with the largest profit margins these results support some of the central predictions from nonlinear pricing theory including no distortion at the top

estimating the foreclosure effect of exclusive dealing evidence from the entry of specialty beer producers this paper estimates an entry model to study the effect of exclusive dealing between anheuser busch and its distributors on rival brewers entry decisions and consumer surplus the entry model accounts for post entry demand conditions and strategic spillover effects i recover a brewer s fixed costs using a two step estimator and find spillover effects on brewers entry decisions i find that a brewer has higher fixed costs at locations where anheuser busch employ exclusive distributors but the effect is only statistically significant in certain local areas the estimates also show that a brewer is less likely to enter a location that is farther from its brewery has lower expected demand or is smaller in store size i implement counterfactual experiments to study the effect of banning exclusive contracts between anheuser busch and its distributors the results show that the welfare improvement associated with banning such contracts is very small

do mergers increase product variety evidence from radio broadcasting mergers can reduce costs and alter incentives about how to position products so that theory alone cannot predict whether mergers will increase product variety we document the effect of mergers on variety by exploiting the natural experiment provided by the1996 telecommunications act we find that consolidation reduced station entry and increased the number of formats available relative to the number of stations we find some evidence that increased concentration increases variety absolutely based on the programming overlap of jointly owned stations we can infer that the effects operate through product crowding that is consistent with spatial preemption

optimal self employment income tax enforcement abstract most models of optimal income tax enforcement assume that income is either random or solely remunerates labor neglecting that auditing strategies may depend on observable inputs this paper outlines a model to optimally monitor self employed entrepreneurs when in addition to reported profits the tax collection agency also observes the number of workers employed or any other input variable at each firm we show that by conditioning the monitoring strategy only on labor input it is optimal for the irs to audit firms in a way that generates some empirical regularities like the missing middle we also show that the optimal direct mechanism can be implemented by an indirect monitoring strategy that is consistent with actual irs practices in particular the irs calculates inputted income as function of labor whenever an entrepreneur reports profits that are lower than inputted income she is randomly monitored finally we formalize a model of optimal presumption taxation in which inputted income is the tax base to compare revenue collection across tax systems

inflation and elections theory and evidence for six oecd economies i introduction political business cycle pbc models feature the idea that governments stimulate demand prior to elections in order to improve election prospects while the first generation of pbc models developed by nordhaus 1975 and macrae 1977 assume that voters are naive and retrospective rogoff and sibert 1988 and rogoff 1990 have developed a rational pbc rpbc model where voters are rational and forward looking most empirical studies of political business cycles examine whether unemployment falls the growth rate increases or fiscal and monetary policies become more expansive prior to elections 1 to my knowledge only alesina and roubini 1992 and alesina cohen and roubini 1992 have studied election cycles on inflation based on a large number of elections in 18 oecd countries the authors find evidence of a post election surge in the inflation rate lasting for 3 5 quarters this paper examines whether the existence of election cycles on inflation can be interpreted as supportive evidence of the rpbc theory by focusing on the theory s implications for the relation between post election inflation and the government s re election chances prior to the election in the theoretical part of the paper it is shown that the rpbc theory does not produce unambiguous predictions the functional form of the relation depends on the government s preferences and the election date if electoral terms are fixed or the election takes place close to the mandatory election date average post election inflation will be higher the closer is the election race provided the government always cares about the social costs of election cycles in the empirical part of the paper i generate estimates of the incumbent s election win probability for a sample of 50 elections in six oecd countries three alternative probability series are generated the probability estimates are interacted with dummies turned on after each election and included as regressors in panel data regressions on inflation the three probability series produce the same conclusion the relation between post election inflation and the incumbent s election win probability is hump shaped if the election race is close the inflation rate increases by 0 014 0 018 during the first year after an election i find no indication of an upward jump in inflation after elections when the incumbent s win probability is close to zero or one as noted in the theoretical part of the paper these results are consistent with the rpbc theory the paper is organized as follows the theoretical model is developed in section ii section iii presents the data sample election win probabilities are computed in section iv section v presents the panel data regressions section vi concludes ii theoretical model the theoretical framework is the signalling game developed by persson and tabellini 1990 extended to accommodate the fact that governments always face some uncertainty about the election outcome i first examine a two period game with fixed electoral terms where the election takes place at the end of period one i then consider a three period game where the incumbent chooses whether to call an election in the first or in the second period the output level and the inflation rate in each period t are denoted x sub t and pi sub t respectively pi sub t is determined by the policymaker output is given by the following supply function 1 mathematical expression omitted where mathematical expression omitted are inflation expectations and mu sub t is the policymaker s competence mu sub t is private information for the policymaker and follows a ma 1 process mu sub t eta sub t eta sub t 1 mathematical expression omitted theta with probability 0 5 eta sub t theta with probability 0

alcohol prices consumption and traffic fatalities we examine the relationships among alcohol prices consumption and traffic fatalities using data across u s states from 1982 to 2000 some previous studies have found large negative associations between alcohol taxes and fatalities however commonly used price data suggest little or no connection between alcohol prices and fatalities these apparently conflicting findings may result from measurement error and or endogeneity in the price data which biases ordinary least squares estimators toward a finding of no price effects using alcohol taxes as instrumental variables fatali ties are found to be negatively related to prices in addition alcohol consumption is strongly posi tively related to fatalities however biases may still remain because taxes are not entirely suitable as instruments

the impact of maximum markup regulation on prices markup regulation is a common yet understudied type of regulation we analyze the repeal of maximum wholesale and retail markup regulation in an oligopolistic and vertically non integrated market by comparing the prices of products affected by regulation before and after the policy change and using unregulated products as a control group we find that abolishing regulation led to a significant decrease in both retail and wholesale prices the results provide indirect but consistent evidence that markup ceilings provided a focal point for collusion among wholesalers

labor market rigidities and informality in colombia informality is at the center of the economic debate in colombia fueled by the high level prevalent in the country and its substantial increase during the 1990s we study the effect of labor market rigidities namely the increase in non wage costs and the minimum wage on the size of the informal sector the transition into and out of informality and wages our results indicate that rises in non wage costs and the minimum wage increase the probability of transition into informality as well as the size of the informal sector the business cycle has second order effects the analysis across education groups points towards strong exclusion motives for low skilled informal workers mainly driven by labor demand adjustments in response to increasing hiring costs and argues somehow in favor of exit motives for workers with higher educational attainment in addition we document facts regarding the evolution and characteristics of the informal sector across alternative definitions of informality

politicians as experts electoral control and fiscal restraints we propose an argument for fiscal restraints that is based on the premise that the services of politicians are credence goods politicians are experts who specialize in observing the true state of the economy budget maximizing politicians are better informed than the electorate about the level of public spending necessary to manage public affairs voters who are able to observe the size of the budget but not the necessary level of spending affect the government s spending behavior via electoral control a fiscal restraint limits the maximum spending a government can choose we identify conditions under which such a fiscal restraint improves voter welfare and discuss the role of the political opposition as a second expert in situations in which the state of the economy requires a level of spending which exceeds the fiscal restraint

electoral uncertainty fiscal policy and macroeconomic fluctuations abstract in this paper we study the link between elections fiscal policy and aggregate fluctuations the setup is a stylized dynamic stochastic general equilibrium model incorporating both technology and political re election shocks the latter are incorporated via a two party model with elections the main theoretical prediction is that forward looking incumbents with uncertain prospects of re election find it optimal to follow relatively shortsighted fiscal policies and that this hurts capital accumulation our econometric estimation using u s data finds a statistically significant link between electoral uncertainty and policy instruments and in turn macroeconomic outcomes

real exchange rate overvaluation and currency crises evidence from thailand this article examines real exchange rate rer misalignment in thailand in the lead up to the 1997 1998 currency crisis the methodology involves estimating the long run equilibrium rer based on the internal and external balance approach rer misalignment is measured by comparing the actual rer with the estimated long run equilibrium rer the results suggest that there was a persistent rer overvaluation from 1991 up to the onset of the crisis in 1997 too much net short term capital inflows and government expenditure expansion were the main contributory factors after the massive depreciation of nominal exchange rate during the crisis the rer seems to have gradually returned to its long run equilibrium level

testing the positive theory of government finance researchers characterizing optimal tax policies for dynamic economies have reasoned that tax rates should follow a random walk we conduct a frequency domain examination of u s tax rates and reject the hypothesis that the first difference in the series is white noise the source of the rejection is pronounced activity of tax changes at an eight year cycle regression analysis confirms the finding that there is a cyclical component to tax changes corresponding to changes in political party administration the results suggest that the positive theory of government finance needs to be refined to incorporate features of political equilibrium

informal firms in developing countries entrepreneurial stepping stone or consolation prize the potential dynamic benefits of a firm having the option to adopt informal status are analysed informality may be a stepping stone without which formality may never be achieved this result is obtained for a broad range of realistic parameter values suggesting a potential dynamic case for government support of informal firms informality may alternatively play a converse role as a consolation prize with a firm only entering an industry formally because it recognizes that if profitability is disappointing it can switch to informality however this result is obtained for a range of parameter values so narrow as to be of no practical significance

public debt stabilization the relevance of policymakers time horizons policymakers are stuck in time political short termism policy myopia policy short sightedness and similar words have been coined to emphasize the present centric policy thinking politics tends to produce short time horizons and as a result policymakers often fail to use present opportunities to mitigate future harms focusing on fiscal and monetary strategic interactions given different separate decision makers our paper aims to explore the effects of policymakers time horizons on debt stabilization to formalize our ideas we use the novel concept of nonlinear model predictive control feedback nash equilibrium nfne and find that present centric policy thinking and decision horizons matters under several dimensions

political uncertainty and public financing costs evidence from u s gubernatorial elections and municipal bond markets this research investigates how political uncertainty around u s gubernatorial elections in uences the borrowing costs of public debt measured by yields of municipal bonds our evidence from both the new issuance market and the secondary market shows that yields of municipal bonds increase sharply by 6 to 8 basis points before elections and then reverse afterward elections have more pronounced impact during economic downturns when outcomes are less predictable and when states have more outstanding debt several state institutions such as gaap budgeting spending limits and tax increase limits help to mitigate the adverse impact of political uncertainty

nonlinear strategies in dynamic duopolistic competition with sticky prices abstract we discuss nonlinear strategies in an infinite horizon duopoly game with sticky prices where firms maximize their discounted sum of profit we construct a stationary feedback equilibrium without guessing value functions and feedback strategies that solve the hamilton jacobi equation for this purpose we study the auxiliary equation that is derived from the hamilton jacobi equation we show that the domain of the state space plays an crucial role in characterizing feedback equilibria and discuss several implications of this observation in particular we find that when the upper bound of the state space is not very high previously unknown feedback equilibria emerge

wage inflation electoral uncertainty and the exchange rate regime theory and uk evidence the authors extend the rational partisan model of inflation to allow for the effects of unemployment persistence on the dynamics of inflation the authors combine this model with the exchange rate regime model of inflation and examine the experience of the united kingdom outside the fixed exchange rate regime of bretton woods persistently high inflation can be attributed to the failure of political parties to precommit to price stability in the light of unemployment persistence election times are associated with higher inflation with the exception of the thatcher period there is no evidence that the labour party is in general more tolerant to inflation than the conservatives copyright 1992 by royal economic society

public sector debt dynamics the persistence and sources of shocks to debt in 10 eu countries this paper characterises the time series properties of debt gdp ratios in ten eu countries over the period 1982 2009 it establishes that shocks to debt ratios persist and measures the size and source of the permanent effects of shocks as they evolve over time the analysis shows that debt dynamics in the eu10 are complicated involving important inter country interactions and protracted adjustment periods of the order of ten years we find evidence of asymmetries in the effects of different forms of fiscal consolidation with unanticipated reductions in government spending having a more permanent effect than unanticipated increases in government revenue unanticipated business cycle fluctuations also have important long term effects on the ratio

spatial differentiation and vertical mergers in retail markets for gasoline this paper studies an empirical model of spatial competition applied to gasoline markets the main feature is to specify commuting paths as the locations of consumers in a hotelling style model as a result spatial differentiation depends in an intuitive way on the structure of the road network and the direction of traffic flows the model is estimated using panel data on the quebec city gasoline market and used to evaluate the consequences of a recent vertical merger difference in difference and counterfactual simulation methods are compared and the results to a large extent validate the assumptions of the demand model jel g34 l13 l42 l81 q41 r41

political business cycles and macroeconomic credibility a survey there is clear evidence that government popularity and election performance is affected in part by economic performance suggesting that governments may manipulate the economy to political advantage simple models incorporating adaptive expectations which allowed the government to exploit this relationship were developed in the 1970s but fell out of fashion with the advent of new classical economics however modern theories of the political business cycle which are closely related to the macroeconomic policy game literature assume rational expectations and lead to forms of political business cycle driven by the existence of uncertainty of one type or another the international evidence suggests that some aspects of the theories apply although definitive conclusions are as we might expect hard to come by

legitimacy and the benefits of firm formalization entrepreneurs in many emerging economies start their firms informally without registering with the state we examine how informality at the time of founding affected the performance of 12 146 firms in 18 countries across sub saharan africa our findings indicate that entrepreneurs who registered their firms at founding enjoyed greater success in terms of sales and employment but these benefits varied widely across countries consistent with the idea that legitimation processes account for these benefits countries in which people trust their government more had larger advantages associated with being formal

optimal policies with an informal sector abstract this paper characterizes optimal policies in the presence of tax evasion and undocumented workers in equilibrium domestic workers may work exclusively in the formal sector or also in the informal sector surprisingly in equilibrium wages are always equalized between domestic and undocumented workers even if they do not work in the same sectors of the economy this is driven by the interaction of firm level decisions with optimal government policy we also find that enforcement may not always be decreasing in its cost and that governments will optimally enforce labour market segmentation if enforcement costs are not too high

a competitive model of the informal sector abstract in developing nations formal workers tend to be more experienced more educated and earn more than informal workers these facts are often interpreted as evidence that low skill workers face barriers to entry into the formal sector yet there is little empirical evidence that such barriers are important this paper describes a model where in equilibrium the characteristics of formal and informal workers differ systematically even though labor markets are perfectly competitive the informal sector emphasizes low skill work as in the data because informal managers have access to less outside financing and choose to substitute low skill labor for physical capital

applied welfare economics with discrete choice models economists have been paying increasing attention to the study of situations in which consumers face a discrete rather than a continuous set of choices such models are potentially very important in evaluating the impact of government programs upon consumer welfare but very little has been said in general regarding the tools of applied welfare economics indiscrete choice situations this paper shows how the conventional methods of applied welfare economics can be modified to handle such cases it focuses on the computation of the excess burden of taxation and the evaluation of quality change the results are applied to stochastic utility models including the popular cases of probit and logit analysis throughout the emphasis is on providing rigorous guidelines for carrying out applied work this abstract was borrowed from another version of this item

free entry and social inefficiency our goal is to provide a simple yet general exposition of the conditions under which the number of entrants in a free entry equilibrium is excessive insufficient or optimal our analysis compares the number of firms that enter a market when there is free entry with the number that would be desired by a social planner who is unable to control the behavior of firms once they are in the market that is we consider the second best problem of choosing the welfare maximizing number of firms while we take as given their noncompetitive behavior after entry we demonstrate that the crucial conditions for establishing the presence of an entry bias can be stated quite simply in terms of the outcome of the postentry game played by entrants in contrast to previous work we do not need to model this postentry game explicitly

fiscal policy public debt stabilisation and politics theory and uk evidence this paper presents a two party model of fiscal and debt policy in which the parties do not care about policy outcomes when out of office unlike other models of this type our model has predictions that are largely consistent with existing empirical findings about partisan and electoral effects on government expenditure tax revenue and debt it also yields new predictions about how the feedback of fiscal policy on lagged debt may depend on partisan and electoral effects these new predictions are not rejected by a test of the model on uk data in multi party democracies the motives of the party in power undoubtedly affect fiscal and monetary policy many economists and political scientists believe that economic policy makers are driven by two not mutually exclusive motives first they wish to remain in office as long as possible the survival or opportunistic motive second they wish to benefit their constituencies partisan motive the effects of these motives may show up in two ways in the data first there may be effects of ideological differences of the parties in power on fiscal and monetary policy so called partisan effects for example we might expect left wing governments to tax and spend more and possibly accumulate more debt second there may be attempts by the incumbent party to use fiscal and monetary policy to bribe the electorate prior to elections e g by cutting taxes and interest rates so called electoral effects recent econometric work has established some interesting stylised facts which are broadly consistent with these predictions several studies report evidence of electoral effects on various fiscal policy instruments for the united states tufte i978 for transfers bizer and durlauf i990 for taxes and macdonald i99i for state level public expenditure more recently alesina et al i 992 i 993 have found evidence of electoral effects on government debt in a panel study of oecd countries evidence of partisan effects on fiscal policy is scarcer alesina et al i 993 report partisan effects on debt and roubini and sachs i989 report in a study of oecd democracies that countries with a higher percentage of left wing governments have significantly higher longrun government spending to gnp ratios concurrently with the accumulation of this evidence a theoretical literature notably alesina and tabellini 1990 rogoff 1990 and rogoff and sibert i 988 has provided new explanations of observed electoral effects on

the effect of ownership structure on prices in geographically differentiated industries i analyze how ownership structure and market geography jointly influence fast food prices i estimate a model of demand and supply that accounts for the market geography and run counterfactual experiments that demonstrate how mergers affect prices i find that the impact of mergers can be large that this impact decreases as the merging outlets are farther apart that mergers among market leaders generally increase prices more than mergers among weaker firms and that mergers can increase prices even if the outlets are so far apart that neither outleti s presence affects prices at the other before the merger

equilibrium political budget cycles political business cycle theories generally rely on nominal rigidities and voter myopia this paper offers an equilibrium theory that preserves some basic insights from earlier models though with significant refinements the political budget cycle emphasized here is in fiscal policy rather than output and inflation it arises via a multidimensional signal process one can consider the welfare implications of proposals to mitigate the cycle and the effects of altering the electoral structure copyright 1990 by american economic association

unemployment insurance with a hidden labor market abstract we consider the problem of optimal unemployment insurance ui in a repeated moral hazard framework unlike existing literature unemployed individuals can secretly participate in a hidden labor market this extension modifies the standard problem in three dimensions first it imposes an endogenous lower bound for the lifetime utility that a contract can deliver second it breaks the identity between unemployment payments and consumption and third it hardens the encouragement of search effort the optimal unemployment insurance system in an economy with a hidden labor market is simple with an initial phase in which payments are relatively flat during unemployment and with no payments for long term unemployed individuals this scheme differs substantially from the one prescribed without a hidden labor market and resembles unemployment protection programs in many countries

regulating innovation with uncertain quality information risk and access in medical devices we study the impact of regulating product entry and quality information requirements on an oligopoly equilibrium and consumer welfare product testing can reduce consumer uncertainty but also increase entry costs and delay entry using variation between eu and us medical device regulations we document patterns consistent with valuable learning from more stringent us requirements to derive welfare implications we pair the data with a model of supply demand and testing regulation us policy is indistinguishable from the policy that maximizes total surplus in our estimated model while the european union could benefit from more testing post market surveillance could further increase surplus

tax evasion and the marginal cost of public funds tax evasion and deadweight loss have similar implications for the rules of public finance the optimal mix of taxes can be derived from the minimization of the sum of aggregate deadweight loss and aggregate cost of tax evasion similarly the marginal cost of public funds includes allowances for marginal deadweight loss and marginal cost of tax evasion per dollar of public revenue acquired

budget deficits and redistributive politics this paper proposes a new view of the forces in the political process that cause governments to accumulate debt the analysis builds on a model of redistributive politics that contrary to median voter models does not restrict the set of policies that politicians can propose i show that deficits occur even in an environment where voters and periods are homogeneous this is an environment where previous political theories of debt would predict budget balance in the model deficits are a way for candidates to better target promises to voters and are therefore used as tools of redistributive politics the main contribution of the analysis is to show that the same forces that push candidates to redistribute resources across voters to pursue political advantage are forces that generate budget deficits most countries have sizeable national debts indeed thinking of governments as debtors seems so customary that it feels awkward to talk about a national credit this suggests that there are systematic forces pushing governments to regularly borrow to cover the excess of spending over receipts at the same time a significant amount of government spending consists of transfers to special interest groups that are hard to justify on efficiency or equity grounds this paper presents a political economic model that suggests that these two phenomena are connected debt is at least in part caused by the fact that in order to get elected candidates need to appeal to groups of voters with promises of transfers debt allows candidates a finer control over the promises they make to these groups

why is fiscal policy often procyclical many countries especially developing ones follow procyclical fiscal policies namely spending goes up taxes go down in booms and spending goes down taxes go up in recessions we provide an explanation for this suboptimal fiscal policy based upon political distortions and incentives for less than benevolent government to appropriate rents voters have incentives similar to the starving the leviathan classic argument and demand more public goods or fewer taxes to prevent governments from appropriating rents when the economy is doing well we test this argument against more traditional explanations based purely on borrowing constraints with a reasonable amount of success

a positive theory of fiscal deficits and government debt this paper considers an economy in which policymakers with different preferences alternate in office as a result of elections government debt is used strategically by each policymaker to influence the choices of his successors if different policymakers disagree about the desired composition of government spending between two public goods the economy exhibits a deficits bias that is debt accumulation is higher than it would be with a social planner the equilibrium level of debt is larger the larger is the degree of polarization between alternating governments and the less likely it is that the current government will be re elected

income tax evasion an intersectoral analysis abstract this paper develops an intersectoral model of income tax evasion with general equilibrium effects key elements of the model are imperfectly substitutable outputs from the compliant and evading sectors and workers with heterogeneous evasion costs the model allows for biased public expenditures a wide range of behavioural responses and both legitimate and criminal activities evading tax as well as tax avoidance activities qualitative and quantitative assessments are undertaken for the effects of tax rate changes on evasion activity relative output prices and real tax revenues this approach offers useful findings for taxation policy and is amenable to further analytical extensions

fixed costs and the product market treatment of preference minorities we clarify the sense in which the market outcome may be biased against preference minorities and estimate the degree of bias using an empirical model of entry into american radio broadcasting markets listening model estimates are used to infer fixed costs and these estimates are then used to compute optimal station configurations as well as the welfare weights on different groups that rationalize the observed configuration welfare weights are 2 to 3 times higher for whites than for blacks and 1 5 to 2 times higher for non hispanic than for hispanic listeners we explore the role of importing and exporting patterns in generating these findings

optimal fiscal and monetary policy in an economy without capital abstract this paper is concerned with the structure and time consistency of optimal fiscal and monetary policy in an economy without capital in a dynamic context optimal taxation means distributing tax distortions over time in a welfare maximizing way for a barter economy our main finding is that with debt commitments of sufficiently rich maturity structure an optimal policy if one exists is time consistent in a monetary economy the idea of optimal taxation must be broadened to include an inflation tax and we find that time consistency does not carry over an optimal inflation tax requires commitment by rules in a sense that has no counterpart in the dynamic theory of ordinary excise taxes the reason time consistency fails in a monetary economy is that nominal assets should from a welfare maximizing point of view always be taxed away via an immediate inflation in a kind of capital levy this emerges as a new possibility when money is introduced into an economy without capital

modelling the informal sector formally abstract the theoretical characterization of formal informal sector dualism by labor market dualism is integrated with its empirical characterization by size dualism by supposing that the minimum formal sector wage is only enforced for firms greater than a certain size a firm s size varies directly with the talent of its enterpreneur manager and the choice between formal and informal sector entrepreneurship is determined endogenously it is then shown that the size gap between the smallest formal sector firm and largest informal sector firm varies directly with the formal informal sector wage differential which in turn is shown as expected to increase the further is the minimum wage above the market clearing wage the comparative statics of changes in the size of the firm above which the minimum wage is enforced are also examined

fiscal adjustment and labor market dynamics in an open economy this paper studies the labor market effects of fiscal adjustment in a two sector three good intertemporal framework key features of the model are an informal sector minimum wages unionized labor in the formal economy imperfect labor mobility and public production of intermediate inputs bluxuryq and wait unemployment prevail in equilibrium it is shown that if unions care sufficiently about employment and if the degree of openness is high an increase in the price of government services may reduce unemployment in the steady state a similar result would hold in an efficiency wage setting if the bdisciplinary effectq of unemployment is sufficiently strong d 2004 published by elsevier b v

mechanisms for the control of fiscal deficits abstract this paper shows that a simple two stage voting mechanism may implement a constrained optimal state dependent decision about the size of the fiscal deficit i consider a setup with strategic fiscal deficits similar to alesina and tabellini 1990 three groups of voters are informed about the relative desirability of current public spending voters differ in their preferences for public goods and swing voters preferences may change over time the current government decides on the current spending mix and it has an incentive to strategically overspend a simple two stage mechanism under which a deficit requires the approval by a supermajority in parliament approximates a constrained optimal decision and under certain conditions increases social welfare relative to both a strict rule and a laissez faire constitution when the current majority is small political bargaining may further increase social welfare however when the current majority is large a supermajority mechanism with bargaining leads to a biased spending mix and it may reduce welfare whereas the laissez faire mechanism may yield the first best an appropriately adjusted majority threshold can avoid inefficient bargaining whenever necessary

why a stubborn conservative would run a deficit policy with time inconsistent preferences a conservative government in favor of a low level of public consumption knows that it will be replaced by a government in favor of a larger level of public consumption we show that the resulting level of public consumption is in between the levels the two governments would choose if each were in power both in the present and in the future in particular we show that if the conservative government is more stubborn in a particular sense than the succeeding government the conservative government will borrow more than it would had it remained in power in the future

technical efficiency measurement within the manufacturing sector in cote d ivoire a stochastic frontier approach this article analyses the productive performance in four manufacturing sectors of the ivorian economy textiles and garments metal products food processing wood and furniture to appraise the productive performance econometric production frontier models are estimated illustrating the maximum output attainable from a given quantity of inputs the frontier and firm efficiency scores are derived from stochastic production functions estimated on cross sectional data the stochastic specification of the models allows for the decomposition of the error term into two components one the normal random effect and the other to account for technical inefficiency that we explain by various exogenous variables describing the economic and institutional environment firm size proves to be a statistically significant determinant of the productive performance across the four sectors the positive impact of being large compensates the negative effect of a formal institutional status in an environment where government

segmented or competitive labour markets a normal roy model with four sectors is developed it allows to derive tests of several assumptions on the working of the labor market strongly or weakly competitive or segmented it shows that more important a feature of labor markets than segmentation is the presence of comparative advantages for individuals between the various economic sectors the model is applied to data on women s labor force participation in the main towns of colombia in 1980 it uses multivariate probit and tobit techniques copyright 1991 by the econometric society

estimation of a model of entry in the airline industry this paper considers the effect of an airline s scale of operation at an airport on the profitability of routes flown out of that airport the empirical methodology uses the entry decisions of airlines as indicators of underlying profitability the results extend the empirical literature on airport presence by providing a new set of estimates of the determinants of city pair profitability these estimates imply that city pair profits increase in airport presence and decrease rapidly in the number of entering firms the literature on empirical models of oligopoly entry is also extended via a focus on the role of differences between firms

product differentiation and efficiencies in the retail banking industry abstract we empirically quantify the welfare implications of bank entry in the united states between 2000 and 2008 we use a fully structural framework that combines a differentiated demand model with an endogenous product model to investigate the market outcomes we find no evidence for under or over entry compared with the socially efficient outcome there is a mild welfare loss resulting from banks entering wrong locations in product space compared with the observed outcome consumer surplus drops by 20 38 and bank profits decline by 48 59 when banks are homogeneous therefore product differentiation significantly improves welfare under free entry

an empirical model of firm entry with endogenous product type choices i describe a model of entry with endogenous product type choices these choices are formalized as the outcomes of a game of incomplete information in which rivals differentiated products have nonuniform competitive effects on profits i estimate the model for location choices in the video retail industry using a nested fixed point algorithm solution the results imply significant returns to product differentiation simulations illustrate the tradeoff between demand and intensified competition and the extent to which markets with more scope for differentiation support greater entry

modeling informality formally households and firms i introduction recent estimates indicate that around 10 of gross domestic product gdp in the united states is produced by individuals or firms that evade taxes schneider and enste 2000 in latin america approximately 50 of all salaried employees work informally an important question is therefore what are the determinants of informality unfortunately three decades of research have not yet yielded a consensus opinion on this point the traditional explanation initiated with the work of lewis 1954 assumes the existence of segmented labor markets in which some workers do not have access to jobs in the regulated formal sector these workers are forced to accept lower paying informal sector jobs that usually involve inferior working conditions while this view has become prevalent in the development literature direct empirical tests of the premise that informal workers would expect higher wages in the formal sector yield mixed results for instance magnac 1991 maloney 2004 and pratap and quintin 2004 do not find compelling evidence of segmentation between the formal and the informal sectors using data from colombia mexico and argentina respectively it is nonetheless certainly plausible that the presence of unions might segment the labor market layard et al 1991 however even if we believe that unionization has been an important factor in determining labor market segmentation in the past the pronounced decline of unionization throughout latin america over the last two decades seems to be a less satisfactory explanation of the phenomenon at the present time especially since informality increased in most countries in latin america during the same period gasparini and tornarolli 2006 another approach emphasizes the role of labor market regulation and taxation as the main cause of informality a pioneering study by de soto 1989 describes how informal workers develop their own laws and institutions to make up for the shortcomings of the official legal system it is certainly true that the size of the shadow economy is affected by the burden of taxes and social security contributions as well as by the many other regulations governing the official economy the problem with adopting this explanation of informality unreservedly however is that it overlooks the fact that workers have nonpecuniary preferences for the sector they work for and these preferences play a role in determining the equilibrium level of formality of an economy in particular workers in the informal sector are not eligible for socially mandated benefits three stylized facts characterize informality 1 small firms tend to operate informally while large firms tend to operate formally 2 unskilled workers tend to be informal while skilled ones have formal jobs 3 ceteris paribus secondary workers a worker other than the household head are less likely to operate formally than primary workers in this paper we present a model of an economy in which the sizes and wages of the formal and informal sectors are endogenously determined that accounts for these three facts our model entails a continuum of types on both sides of the labor market i e firms and workers firms choose whether to operate formally or informally and workers choose in what sector they work in equilibrium managerial talent determines size dualism at the firm level and human capital is the factor that determines whether workers are employed in the formal or informal sector in our model both heterogeneous firms and workers have preferences over the sectors they operate and choose optimally whether to function formally or informally by contrast a prominent feature of the preexisting literature is the idea that workers decisions play no role in determining the equilibrium of the economy thus our model is the first one in which policies that affect workers preferences as well of course as firm preferences over the formal or the informal sector such as pension plans public health issues and unemployment and any social benefits will affect the sizes and wages of the formal and the informal sectors

tax design in the alcohol market abstract alcohol consumption generates negative externalities that are non linear in the total amount of alcohol consumed if tastes for products are heterogeneous and correlated with marginal externalities then varying tax rates on different products can lead to welfare gains we study this problem in an optimal tax framework and empirically for the uk market we find that heavy drinkers have systematically different patterns of alcohol demands and welfare gains from optimally varying rates are higher the more concentrated externalities are among heavy drinkers

public monopoly and economic efficiency evidence from the pennsylvania liquor control board s entry decisions we estimate a spatial model of liquor demand to analyze the impact of government controlled retailing on entry patterns in the absence of the pennsylvania liquor control board the state would have roughly 2 5 times the current number of stores higher consumer surplus and lower payments to liquor store employees with just over half the number of stores that would maximize welfare the government system is instead best rationalized as profit maximization with profit sharing government operation mitigates but does not eliminate free entry s bias against rural consumers we find only limited evidence of political influence on entry jel d42 d72 l11 l12 l43 l81

credible communication in dynastic government abstract this paper studies information disclosure in a model of dynastic government when information about past policy choices comes exclusively from the reports of previous administrations each administration has an incentive to choose its suboptimal one shot expenditure policy and then misrepresent its choice to its successor consequently it has been suggested that horizontal accountability i e a system of governance where auditing functions lie outside the executive branch can ensure credible disclosure of a government s activities this paper suggests a cautious approach to that view the baseline model examines the reporting incentives of an external auditor who can independently verify the information each period even with auditing credible disclosure is shown to be problematic various extensions to this baseline model are examined in one extension liberal i e those prefering larger government expenditures and conservative those prefering smaller expenditures regimes and auditors evolve over time it is shown that conservative liberal auditors are not credible when the current regime is also conservative liberal moreover because information transmission stops when the auditor s and the regime s biases coincide effective deterrents even in the good periods when the auditor s and the administration s biases differ are difficult to construct in all periods the equilibrium requirement of auditor neutrality constrains the dynamic incentives for efficient policy choices these constraints are shown to bind away from optimal policies in standard constructions of equilibrium various ways in which auditing protocols can overcome these problems are discussed

consumer s surplus without apology the purpose of this paper is to settle the controversy surrounding consumer s surplus and by so doing to validate its use as a tool of welfare economics i will show that observed consumer s surplus can be rigorously utilized to estimate the unobservable compensating and equivalent variations the correct theoretical measures of the welfare impact of changes in prices and income on an individual i derive precise upper and lower bounds on the percentage errors of approximating the compensating and equivalent variations with consumer s surplus these bounds can be explicitly calculated from observable demand data and it is clear that in most applications the error of approximation will be very small in fact the error will often be overshadowed by the errors involved in estimating the demand curve the results in no way depend upon arguments about the constancy of the marginal utility of income consequently this paper supplies specific empirical criteria which can replace the apologetic caveats frequently employed by those who presently apply consumer s surplus moreover the results imply that consumer s surplus is usually a very good approximation to the appropriate welfare measures to preview below i establish the validity of these rules of thumb for a

second best optimal taxation of capital and labor in a developing economy abstract as commercial integration reduces the reliance on foreign trade taxation raising tax revenue has become a major concern for the governments of developing economies this paper examines how the tax burden in a developing economy should be distributed between capital income and labor income we study a two sector model where the traditional sector is informal and consequently cannot be taxed by the government in this setup we find that the optimal second best tax structure in order to raise a certain amount of revenue requires to tax capital income at least as much as labor income and possibly more

the formal sector wage premium and firm size abstract we show theoretically that when larger firms pay higher wages and are more likely to be caught defaulting on labor taxes then large high wage firms will be in the formal and small low wage firms will be in the informal sector the formal sector wage premium is thus just a firm size wage differential using data from ecuador we illustrate that firm size is indeed the key variable determining whether a formal sector premium exists

taxes inequality and the size of the informal sector abstract in this note we develop a simple heterogeneous agent model with incomplete markets to explain the prevalence of a large low productivity informal sector in developing countries in our model taxes levied on formal sector agents are used to finance the provision of a productive public infrastructure which creates a productivity premium from formalization our model offers endogenous differentiation of rich and poor countries complete formalization is an equilibrium only in countries with the appropriate initial conditions we discuss the existence of this equilibrium and highlight the ambiguous effect of taxes

incentive contracts and elections for politicians with multi task problems abstract we consider a model with a politician facing a multi task problem while in office the reelection mechanism distorts the allocation of effort in favor of tasks whose outcomes can be measured more precisely than others we show that a combination of elections and incentive contracts can alleviate this inefficiency the incentive contract does not require direct information about the performance of the politician and is self financing across terms

are labor markets segmented in developing countries a semiparametric approach abstract we test the hypothesis that observably similar workers earn higher wages in the formal sector than in the informal sector in developing nations using data from argentina s household survey and various definitions of informal employment we find that on average formal wages are higher than informal wages parametric tests suggest that a formal premium remains after controlling for individual and establishment characteristics however this approach suffers from several econometric problems which we address with semiparametric methods the resulting formal premium estimates prove either small and insignificant or negative neither do we find significant differences in measures of job satisfaction between the two sectors we invoke these results to question the mainstream view that labor markets are segmented along formal informal lines in developing nations such as argentina

taxation wage controls and the informal sector abstract in this paper we study the effects of taxation and wage controls in a developing economy with an informal sector for that purpose we build a model with firm heterogeneity in which a formal and an informal sector endogenously emerge in some productive branches of the economy based on the assumption that the marginal cost of tax and regulation evasion increases with the size of the firm our model offers an explanation for the observed discontinuity in the distribution of firms size the missing middle three forms of dualism scale wage and evasion consistent with market segmentation are obtained the model accounts for the presence of waiting unemployment that seems particularly pervasive in urban regions a computable general equilibrium cge model for cameroon is built incorporating these features various reforms of the tax and regulation system are simulated and their effects on the extent of the informal sector are analyzed

an investigation of the labor market earnings of panamanian males evaluating sources of inequality this paper presents empirical evidence on the determinants of labor market earnings and inequality for males in panama using newly available microdata we estimate earnings equations based on the measurement framework of mincer 1974 and compare them with those for other countries at various stages of economic development we present evidence on two aspects of inequality in less developed economies labor market segmentation and social stratification we present tests of the segmentation hypothesis including several of the dual labor market hypotheses and discuss their inherent ambiguity we also present evidence on the importance of family background for earnings determination and educational attainment

lyapunov stability in an evolutionary game theory model of the labour market in this paper the existence and stability of equilibria in an evolutionary game theory model of the labor market is studied by using the lyapunov method the model display multiple equilibria and it is shown that the nash equilibria of the static game are evolutionary stable equilibria in the game theory evolutionary set up in this vein a complete characterization of the dynamics of an evolutionary model of the labor market is provided

minimum wage legislation in a dual labor market the paper studies the equilibrium effects of minimum wage legislation in an economy with coexisting primary and secondary labor markets owing to difficulties in monitoring relative wages and the threat of job loss play a functional role in eliciting effort from primary sector workers minimum wage laws hence affect the primary wage and employment level even if the law only binds in the secondary labor market furthermore interaction between the two sectors can also alter the secondary outcome relative to the standard analysis and has implications for participation decisions and for the level of unemployment

short long and spatial dynamics of informal employment di caro p and nicotra g short long and spatial dynamics of informal employment regional studies this paper analyses regional shadow labour markets cross regional migration flows are introduced in a stochastic two sector model used to study the effects of regional interactions on informality empirical results show that informal activities across italian regions are driven by the inefficient provision of public goods and high taxes regional connections are found to be significant place specific reactions of informal employment to national shocks in the official economy are investigated finding that the informal sector can act as a complement to or a substitute for formal activities the summary of the results and policy conclusions are then discussed

an econometric model of location and pricing in the gasoline market abstract the authors propose an econometric model of both the geographic locations of gasoline retailers in singapore and price competition among retailers conditional on their geographic locations although market demand for gasoline is not observed the authors are able to infer the effects of such demand from stations locations and pricing decisions using available data on local market level demographics using the proposed location model which is based on the assumption of social welfare maximization by a policy planner the authors find that local potential gasoline demand depends positively on the local demographic characteristics of the neighborhood using the proposed pricing model which is based on the assumption of bertrand competition between retail chains the authors find that retail margins for gasoline are approximately 21 the authors also find that consumers are willing to travel up to a mile for a savings of 03 per liter using the estimates of the proposed econometric model the a

on existence of location equilibria in the 3 firm hotelling problem it is well known that the hotelling model of spatial competition with three firms admits no equilibrium solution see chamberlin 1933 and lerner and singer 1937 apparently this non existence result is associated with the assumption that customers patronize the nearest firm now empirical evidence supports the idea that consumers do not necessarily choose to buy from the closest firm since they also take variables other than distance into account as these variables are often unobservable firms cease to be fully informed about consumers motivations consequently they can at best determine the shopping behavior of a particular customer up to a probability distribution the purpose of this note is to reconsider the 3 firm hotelling problem within a probabilistic framework it is shown that two different types of equilibria emerge centrally agglomerated equilibria in which the three firms are clustered and symmetric dispersed equilibria in which the three firms have distinct locations these equilibria are compared to the socially optimal locations

globalization and developing countries a shrinking tax base abstract this paper evaluates the impact of globalisation on tax bases of countries at varying stages of development we see globalisation as a process that induces countries to embrace greater trade and financial integration this in turn should shift their tax revenue from easy to collect taxes tariffs and seigniorage towards hard to collect taxes value added and income taxes we find that trade and financial openness have a positive association with the hard to collect taxes and a negative association with the easy to collect taxes

sovereign default interest rates and political uncertainty in emerging markets abstract a large body of the empirical literature shows that high turnover rates length of tenure of policymakers and the degree of conflict within a country affects sovereign spreads debt and default rates we help to rationalize such claims by including these political features in a dynamic stochastic small open economy model of sovereign debt and default in this way we offer a complementary approach to the econometric analyses in the literature consistent with the data the quantitative analysis shows that politically unstable and more polarized economies experience higher default rates and larger level and volatility of sovereign interest rate spreads

an idea in good currency and how it grew the informal sector abstract the informal sector is an exceedingly fuzzy concept which has come into wide use because it seemed to address the interests of a number of very diverse groups those interested in growth planning those interested in alleviating poverty marxist structuralists and those interested in economic accounting the use of the concept has been helpful in directing attention to phenomena previously ignored but adopting the term obscures analysis of central issues and is counterproductive we should rather specify critical policy issues and design field research around these

tax rates governance and the informal economy in high income countries i introduction informal economic activity was long thought to be a feature of developing countries formalization of business was supposed to go hand in hand with economic development however even among high income countries a large part of economic activity is informal according to schneider 2002 16 7 of gross domestic product gdp in high income oecd organisation for economic cooperation and development countries was informally produced in 2001 2002 the author defines the informal economy as all economic activities which would generally be taxable were they reported to the state tax authorities p 4 in this sense both the informal economy and tax evasion are measures of the same phenomenon while tax evasion refers to the amount of forgone tax revenues the term informal economy encompasses the amount of production that escapes taxation 1 schneider s 2002 estimates of the informal economy of 21 high income oecd countries are reproduced in figure 1 2 these numbers have been obtained by the so called currency demand approach which estimates currency demand as a function of interest rate per capita income proportion of wages and salaries in aggregate output and tax rates excess demand of currency caused by a rise in tax rates is attributed to an increase in the informal economy 3 thus while the currency demand approach establishes a relationship between increasing tax rates and increasing informality within a country it does not imply any built in relationship between tax rates and the size of the informal economy across countries figure 1 omitted numbers in figure 1 show that there are large differences in the size of the informal economy even across high income countries in greece the informal economy amounted to 28 5 of gdp while in the united states the estimate was 8 7 4 put differently the production of legal final goods and services worth 892 billion about 3 090 per capita went untaxed in the united states while in greece 49 billion about 4 380 per capita escaped taxation given these large differences in the size of the informal economy even across high income countries the following two questions arise what are the driving forces behind informal economic activity in high income countries and to what extent can differences in these driving forces account for cross country differences in informality a paper by davis and henrekson 2005 suggests a natural answer to the first question across 14 high income oecd countries the authors find a positive and significant relationship between tax rates and the size of the informal economy figure 2 replicates their results and shows the relationship between tax rates on income and consumption and social security contributions and the size of the informal economy however despite a positive relationship between tax rates and informality countries with equally high tax rates have strikingly different estimates of their informal economies in 1995 1996 spain and the netherlands had similar total tax rates on income and consumption and social security contributions of around 67 the netherlands informal economy was estimated to amount to 13 7 of gdp while the estimate for spain was 22 4 apart from tax rates additional forces seem to drive informality in high income countries low institutional quality and corruption are possible suspects their close relationship to the size of the informal economy has been highlighted by various empirical studies friedman et al 2000 chong and gradstein 2007 and johnson kaufmann and zoido lobaton 1998 all find a positive relationship between low institutional quality a large regulatory burden corruption and the size of the informal economy the relationship between institutional quality and informality also holds across the sample of 21 high income countries figure 3 shows the negative relationship between the size of the informal economy and the commonly used world bank governance indicators on government effectiveness regulatory quality rule of law and control of corruption

the demand for alcohol the differential response to price although several studies indicate that drinking is responsive to price little work has focused on whether prices have a differential effect on light moderate or heavy drinking this study examines the price responsiveness of the demand for alcohol whether heavy drinkers are less sensitive to price than light or moderate drinkers the study uses data on alcohol consumption on the 1983 national health interview survey the results indicate that both light and heavy drinkers are much less price elastic than moderate drinkers further we cannot reject the hypothesis that the very heaviest drinkers have perfectly price inelastic demands