pressure groups and public expenditures the flypaper effect reconsidered a model of government budgeting is developed in which lobbying by interest groups can divert the allocation of funds away from the one preferred by the median voter the model is applied to state and local governments to show that the flypaper effect the tendency for lump sum grants to increase public expenditures by more than an equivalent increase in the community s pretax income can be explained without the customary assumption of voter fiscal illusion furthermore the model predicts variation in the extent of the flypaper effect among expenditure categories as found in previous empirical studies

cyclical ratcheting in government spending evidence from the oecd this paper studies the role of business cycles in the phenomenon of increasing government spending gdp ratios in the oecd countries an empirical framework that includes both long run and cyclical considerations in the determination of government spending is applied to panel data covering 1975 1998 the main finding is that the prolonged rise in the spending gdp ratio is partially explained by cyclical upward ratcheting due to asymmetric fiscal behavior the ratio increases during recessions and is only partially reduced in expansions the long run ratcheting effect is estimated as approximately 2 of gdp also analyzed are the cyclical changes in the composition of government spending government consumption transfers and subsidies and capital expenditure as well as a possible link between cyclical ratcheting and government weakness

pharmaceutical cost sharing systems and savings for healthcare systems from parallel trade this paper studies the consequences of parallel trade in a two country model it compares a coinsurance scheme consumers pay a percentage of the drug price and an indemnity insurance scheme reimbursement is independent of the drug price with respect to changes in copayments and public health expenditure in the destination country copayments for patients decrease to a larger extent under indemnity insurance whereas reductions in public health expenditure occur only under coinsurance in the source country copayments increase less under coinsurance whereas health expenditure is reduced more under indemnity insurance in both countries total expenditure under parallel trade is lower

parallel imports price controls and innovation the impact of parallel trade on innovation in r d intensive industries such as pharmaceuticals is a hotly debated question in antitrust and ip policy the well known argument that parallel trade dampens innovation by undermining firms ability to price discriminate has been challenged by recent literature the argument is that with endogenous price controls parallel trade increases innovation by reducing governments incentives to set particularly low price caps in this paper we show that this result crucially depends on the degree of homogeneity of the trading countries the result only holds if consumers in poorer countries have a relatively similar demand for medication as consumers in richer countries instead when countries are relatively heterogeneous parallel trade dampens innovation and lowers welfare by exporting price cap regulation from poorer to richer countries these findings are in line with recent case evidence we also show that when patent length is endogenous richer countries will tend to choose longer patent protection with parallel trade whereas equilibrium price caps tend to be tighter in that case

equilibrium parallel import policies and international market structure in a north south vertically differentiated duopoly the analysis in this paper derives equilibrium government policies towards parallel imports by incorporating strategic interaction at the policy setting stage and the product market the model sheds new light on i the effects of parallel import policies on pricing behavior of firms and ii the interdependence of national parallel import policies if demand asymmetry across countries is sufficiently large the north forbids parallel imports to ensure its firm sells in the south thereby generating international price discrimination the south s most preferred market outcome as the equilibrium when demand structures are relatively similar across countries the north permits parallel imports and uniform pricing its most preferred market outcome obtains

parallel imports and the pricing of pharmaceutical products evidence from the european union we consider policy issues regarding parallel imports pis of brand name pharmaceuticals in the european union where such trade is permitted we develop a simple model in which an original manufacturer competes in its home market with pi firms the model suggests that for small trade costs the original manufacturer will accommodate the import decisions of parallel traders and that the price in the home market falls as the volume of parallel imports rises using data from sweden we find that the prices of drugs subject to competition from parallel imports fell relative to other drugs over the period 1994 1999 econometric analysis finds that parallel imports significantly reduced manufacturing prices by 12 19 there is evidence that this effect increases with multiple pi entrants

the value of trade agreements in the presence of political pressures an argument often heard in favor of trade agreements is that by committing to free trade a government can credibly distance itself from domestic lobbies but several existing models of endogenous protection suggest that governments have no interest in foreclosing interest group pressures since governments derive rents from the political process we develop a small country model in which factors are sector specific in the short run but mobile in the long run we show that in this setting a government may be worse off in the political equilibrium than under commitment to free trade and hence it may value a trade agreement

tax base variability and procyclical fiscal policy in developing countries abstract based on a sample of 56 countries we show that fiscal policy in the g7 countries appears to be acyclical while fiscal policy in developing countries is procyclical i e fiscal policy is expansionary in good times and contractionary in bad times to explain this puzzle we develop an optimal fiscal policy model in which running budget surpluses is costly because they create pressures to increase public spending given this distortion a government that faces large fluctuations in the tax base as is the case for developing countries will find it optimal to run a procyclical fiscal policy

international trade bargaining and efficiency the holdup problem in the presence of product market imperfections and holdup we identify allocative and productive efficiency gains resulting from international trade under a bilateral monopoly in a closed economy inefficiencies arise in both input and output markets trade in final goods has a procompetitive effect in the product market this in turn triggers an increase in output which raises incentives for the upstream firm to invest and helps reduce the hold up problem

intergovernmental transfers and procyclical public spending this paper tests the predictions that i sub central government expenditures are procyclical and ii sub central government expenditures are likely to be more procyclical than central government spending the predictions are based on the importance of voracity effects and on the proposition that they are systematically more pervasive if spending is financed by intergovernmental transfers evidence from 23 oecd countries between 1995 and 2006 indicates that sub central government spending is more procyclical than central government expenditure

the flypaper effect what happens to a state s spending when it receives an unconditional grant from the federal government the standard theoretical analysis predicts that the increase in spending will be the same as that generated by an equivalent increase in local incomes or roughly 5 10 percent for most states in contrast numerous empirical analyses have found that spending increases by much more with some estimates near 100 percent this result is known as the flypaper effect since the money appears to stick where it hits the authors review this evidence as well as other studies that find similar behavior in firms

price regulation and parallel imports of pharmaceuticals abstract this paper studies the effects of price regulation and parallel imports in the on patent pharmaceutical market in a theory model where the producer price is subject to bargaining between the brand name producer and a distributor we show that the effects of stricter price regulation crucially depend on whether the producer faces competition from parallel imports while parallel imports improve the bargaining position of the distributor price regulation counteracts this effect and may even be profitable for the producer we test the implications of our model on a unique dataset with information on sales and prices at both producer and retail level for 165 substances over 4 years 2004 2007 we show that stricter price regulation reduces competition from parallel imports and has no strictly negative effect on producer profits in the presence absence of parallel imports our results suggest that price regulation might improve static efficiency without being harmful for dynamic efficiency in the presence of parallel imports

pharmaceutical innovation and parallel trade abstract this paper proposes a north south model to study the interaction between price regulation policies and parallel trade with a particular focus on the pharmaceutical sector we show that under parallel trade r d investment can rise only when the south government takes into full account its impact both on investment and on the firm s decision to supply the regulated country this arises because of a complete withdrawal from price regulation when policy choices are endogenized indeed the south wants to achieve this level of full commitment when it is large in size when instead it is smaller in size the south chooses an intermediate form of commitment whereby it anticipates its effect only on local distribution and delivery but not on global r d investment as a response to these credible levels of price control commitments the north reacts by allowing parallel imports from the south

budget deficits and social protection cyclical government expenditure in the oecd countercyclical government spending offers social protection to the vulnerable when economies move into recession this paper questions the extent to which governments are able to spend countercyclically and the extent to which social expenditures are likely to be countercyclical an analysis of public spending in oecd countries 1980 2005 suggests countercyclical social protection is constrained by the limits to public borrowing and the degree of political polarization

the voracity effect abstract we analyze an economy that lacks a strong legal political institutional infrastructure and is populated by multiple powerful groups powerful groups dynamically interact via a fiscal process that effectively allows open access to the aggregate capital stock in equilibrium this leads to slow economic growth and a voracity effect by which a shock such as a terms of trade windfall perversely generates a more than proportionate increase in fiscal redistribution and reduces growth we also show that a dilution in the concentration of power leads to faster growth and a less procyclical response to shocks jel f43 o10 o23 o40

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

the determinants of firms performance can finance constraints improve technical efficiency this paper analyses the mechanisms through which binding finance constraints can induce debt constrained firms to improve technical efficiency to guarantee positive profits this hypothesis is tested on a sample of firms belonging to the italian manufacturing technical efficiency scores are computed by estimating parametric production frontiers using the one stage approach as in battese and coelli battese g coelli t 1995 a model for technical efficiency effects in a stochastic frontier production function for panel data empirical economics 20 325 332 the results support the hypothesis that a restriction in the availability of financial resources can affect positively efficiency 2004 elsevier b v all rights reserved

on the determinants of fiscal centralization theory and evidence abstract this paper presents a simple model that unifies most of the results of the literature on fiscal federalism the model describes an economy characterized by two levels of government one public good and a private good the predictions of the model are tested by using a new set of measures of fiscal centralization the main findings are that country size income per capita ethnic fractionalization and level of democracy are negatively correlated with the degree of fiscal centralization the model is tested using ols tobit and semi parametric estimators the paper also shows that the variables included in the regression are helpful in the prediction of changes in the level of centralization

why do more polarized countries run more procyclical fiscal policy abstract we study the cyclical behavior of fiscal policy to explain why some countries exhibit procyclical fiscal policy stances being expansionary in good times and contractionary in bad times we develop a model that links the polarization of preferences over fiscal spending to the procyclicality bias we then present evidence that social polarization as measured by income inequality and educational inequality is consistently and positively associated with fiscal procyclicality even after controlling for other determinants from existing theories we also find a strong negative impact of fiscal procyclicality on economic growth

the power to tax analytical foundations of a fiscal constitution preface 1 taxation in constitutional perspective 2 natural government a model of leviathan 3 constraints on base and rate structure 4 the taxation of commodities 5 taxation through time income taxes capital taxes and public debt 6 money creation and taxation 7 the disposition of public revenues 8 the domain of politics 9 open economy federalism and taxing authority 10 toward authentic tax reform prospects and prescriptions epilogue notes selected bibliography index

the risky spread investment and monetary policy transmission evidence on the role of asymmetric information financing constraints can arise when there are important information asymmetries in financial markets using canadian panel data the authors reject a symmetric information specification of investment behavior in favor of an agency cost specification in which the shadow cost of finance can diverge from the market interest rate the authors empirical estimates suggest that shocks to net worth as reflected in the risky spread and firm specific balance sheet variables can dramatically increase the shadow cost of finance tests which draw on distinctive institutional features of the canadian economy show that it is firms in a weak informational position which tend to be responsible for this result copyright 1996 by mit press

procyclical government spending patterns of pressure and prudence in the oecd this paper tests for differences in the cyclicality of government spending across functional categories evidence from 20 oecd countries suggests that procyclicality is more likely in smaller functional budgets but capital spending is more likely to be procyclical for the larger spending categories

serial correlation and the fixed effects model this paper generalizes the durbin watson type statistics to test the ols residuals from the fixed effects model for serial independence also generalized are the tests proposed by sargan and bhargava for the hypothesis that the residuals form a random walk a method for efficient estimation of the parameters is also developed finally an earnings function is estimated using the michigan survey of income dynamics in order to illustrate the uses of the tests and the estimation procedures developed in this paper

the cyclical behaviour of fiscal policy evidence from the oecd this paper addresses the topic of cyclicality in scal policy in particular we show that the level of cyclicality varies across spending categories and across oecd countries in line with leading theories of scal cyclicality we show that countries with volatile output and dispersed political power are the most likely to run procyclical scal policies wage government consumption is highlighted as the most important channel by which these variables affect scal cyclicality

the flypaper effect identifying areas for further research the flypaper effect literature dates back three decades it is overwhelmingly neo classical in approach attempting to improve the median voter demand model and or temper it with public choice supply side perspectives whilst this approach provided valuable early substantial analytical insights more recent papers seem to have contributed only marginally to an understanding of the flypaper effect if indeed it exists at all hence as well as providing a long overdue comprehensive review of the literature on the flypaper effect this paper identifies more productive avenues for further research

procyclical government spending a public choice analysis procyclical government spending occurs when government expenditures increase at a faster rate than income in an economic upturn but fall at a faster rate in a recession voracity effects occur when competition for increased spending proves more effective as national income increases public choice theory can be applied to describe the distribution of fiscal power across different tiers of government to shed insight into competition for intergovernmental transfers politicians have electoral incentives to press for intergovernmental transfers but they also have electoral incentives to signal their ability to manage the economy with this mix of incentives the prediction is that intergovernmental transfers will be procyclical and that sub central government spending will be more procyclical than central government spending public choice analysis of pressure for increased public spending predicts a specific pattern of cyclical government spending this pattern can be observed when analyzing government expenditures in 20 oecd countries between 1995 and 2006

should the us allow prescription drug reimports from canada as a result of public outrage over lower prescription drug prices in canada congress passed legislation that would allow these drugs to be imported into the us the lower canadian prices reflect price regulation opponents of allowing these imports have argued that the us will import canadian price controls and that profits of pharmaceutical companies will be hurt in this paper a model is developed in which a good sold in the foreign country is subject to a negotiated price which is determined in a nash bargaining game when imports back into the home country are allowed this negotiated price also becomes the domestic price this causes the home firm to make fewer price concession in the nash bargaining game home firm profits are found to rise under the reimport regime for both of the demand functions analyzed in this paper

social spending and automatic stabilizers in the oecd the macroeconomic literature on automatic stabilization tends to focus on taxes and dismiss the relevance of government expenditure except for unemployment compensation our results go sharply contrary to this view we engage in an empirical analysis of 21 oecd countries from 1982 to 2003 and find that age and health related social expenditure as well as incapacity and sick benefits all react to the cycle in a stabilizing manner while possibly new in the macro literature this conforms to many results in studies in labour economics the policy implications are broad since much previous analysis of discretionary fiscal policy rests on official figures for automatic stabilization there are also major implications for efforts to incorporate automatic fiscal policy in simulation models julia darby and jacques melitz

price regulation of pharmaceuticals in canada abstract patent holding pharmaceutical firms are modeled as price discriminating international monopolies in an unregulated world market firms set monopoly prices in each national market three types of regulatory rules i reasonable relationship rule ii international price comparison rule and iii therapeutic class comparison rule are examined while price regulation may lead to lower introductory prices for new drugs the price of existing drugs may increase domestic price regulation may increase foreign prices canadian data supported the model s predictions policy makers should anticipate these responses that affects the entire vector of drug prices and not just those subject to specific regulations

the empirical analysis of fiscal illusion this paper examines the empirical analysis of the five main hypotheses subsumed under the generic term fiscal illusion after placing these hypotheses within a common theoretical framework the paper attempts to evaluate empirical research into the revenue complexity hypothesis the revenue elasticity hypothesis the flypaper effect renter illusion and debt illusion

a re examination of the q theory of investment using u s firm data investment models based on tobin s q are theoretically appealing but they have been an empirical disappointment when applied to aggregate time series data this paper explores two potential explanations for the poor empirical performance of q investment models problems arising from aggregation and imperfect competition the results suggest that aggregation is responsible for spurious evidence of dynamic misspecification and at least partially responsible for an upward bias in estimated adjustment costs the evidence also suggests that imperfect competition in output markets may have an effect on the investment behaviour of some firms