evasion and time consistency in the taxation of capital income evasion and time inconsistency have been prominent concerns in discussions of capital income taxation both theoretical and applied this paper establishes a link between them suggesting a potentially useful role for evasion additional to those previously identified by committing to relatively lax enforcement the government may be able to alleviate the welfare loss implied by its inability to commit to the tax rate the scope for this role proves strikingly wide it is optimal for the government to facilitate the evasion of the capital income taxes that it chooses to impose whenever the time consistent tax rate exceeds that which would be optimal if the government could commit to it copyright 1998 by economics department of the university of pennsylvania and the osaka university institute of social and economic research association

exchange rate management and manufactured exports in sub saharan africa this paper presents an overview of the evolution of exchange rate regimes in africa and then attempts to assess empirically the impact of exchange rate policy on manufactured export performance on a panel of major sub saharan africa countries over the 1970 92 period we examine the impact of three exchange rate policy indicators real effective exchangerate changes real exchange rate volatility and model based measures of real exchange rate misalignment export supply functions are estimated for three manufacturing industries textile chemicals and metals and two exchange rate regimes a fixed rates regime including six cfa franc countries and a more flexible regime represented by five non cfa countries our findings show that exchange rate management matters for export performance this is evidenced both by the significant impact of changes in the real effective exchange rate and by the negative influence exerted independently by real exchange rate misalignment on the

when is foreign aid policy credible aid dependence and conditionality the author studies foreign aid policy within a principal agent framework he shows that one reason for foreign aid s poor overall record may be a moral hazard problem that shapes the aid recipient s incentive to undertake structural reform the model s basic prediction is a two way relationship disbursements of foreign aid are guided in part by the needs of the poor anticipating this recipients have little incentive to improve the welfare of the poor preliminary econometric work shows that the data support this hypothesis in principle conditionality could partly solve this problem but only if the donor can make a binding commitment to increase disbursements in good relative to bad states without such a commitment technology aid disbursements remain guided by the needs of the poor and recipient countries maintain a low effort to reduce poverty contrary to the conventional wisdom found in the aid literature the author shows that the welfare of all parties might be improved by using tied project aid or by delegating part of the aid budget to an international agency with less aversion to poverty

efficient black markets abstract this paper investigates analytically the welfare effects of black market activities that firms undertake to evade taxes the desirability of a black market is linked to the attributes of the goods supplied by black market firms the analysis identifies cases where a black market reduces increases the distortionary impact of taxation on the allocation of resources across the goods that the government is attempting to tax leading to a welfare gain loss

exporting manufactures human resources natural resources and trade policy whether a country s exports consist mainly of manufactures or mainly of primary products depends fundamentally on the skills of its labour force relative to the extent of its natural resources this proposition derived from a modified version of heckscher ohlin theory is supported by a strong cross country correlation between the manufactured primary export ratio and the skill land ratio cross country variation in trade policies is now only a minor cause of variation in the manufactured primary export ratio

foreign direct investment intra firm trade and ownership structure abstract asymmetric information about true opportunity cost in trade between a multinational and its foreign affiliate can alleviate the hold up problem in foreign direct investment selling shares in the affiliate to locals is also beneficial because it increases the parent multinational s information rent that is protected from a host government s confiscatory taxation

privacy and time consistent optimal labor income taxation abstract incomplete information is a commitment device for time consistency problems in the context of time consistent optimal labor income taxation privacy can lead to a pareto superior outcome and increases the effectiveness of public education as a second best policy

terms of trade uncertainty and economic growth abstract this paper examines a stochastic endogenous growth model in which terms of trade uncertainty affects savings and growth the model explains the well known positive link between growth and the mean rate of change of terms of trade and predicts also that terms of trade variability affects growth increased terms of trade variability results in faster or slower growth depending on the degree of risk aversion but in either case it reduces social welfare these growth effects imply that welfare costs of macroeconomic uncertainty are much larger than first thought cross country panel regressions provide strong support for the model s key predictions

the ghost of financing gap testing the growth model used in the international financial institutions abstract the harrod domar growth model supposedly died long ago still today economists in the international financial institutions ifis apply the harrod domar model to calculate short run investment requirements for a target growth rate they then calculate a financing gap between the required investment and available resources and often fill the financing gap with foreign aid the financing gap model has two simple predictions 1 aid will go into investment one for one and 2 there will be a fixed linear relationship between growth and investment in the short run the data soundly reject these two predictions of the financing gap model

a model of aid impact in some south pacific microstates abstract this paper investigates the impact of foreign aid on the economic structure of the recipient economy using a two sector general equilibrium model underlying assumptions are designed to mirror a number of stylized facts about a group of south pacific microstates known as mirab countries two variants of the model are constructed to reflect these countries unequal access to overseas labor markets qualitative results reveal the likelihood of a structural transformation of the economy akin to that known as dutch disease namely the relative contraction of the tradables sector quantitative results confirm the plausibility of this outcome

aid volatility and donor recipient characteristics in difficult partnership countries one factor limiting aid effectiveness is its volatility we examine aid volatility in 66 countries over 1975 2004 paying particular attention to the characteristics of difficult partnership countries and making a distinction between sector aid and total aid we explore whether weak recipient institutions and policies are associated with greater volatility allowing for differences in donor characteristics institutional quality and macroeconomic stability affect the stability of all kinds of aid as does reliance on a small number of donors however the relative importance of these effects varies across different aid types

the commitment value of funding pensions abstract this paper studies how funding public pensions can improve policy outcomes when short sighted governments cannot commit we focus on sustainable plans where optimal nonlinear pensions are not reneged on by sequential governments funding pensions is a commitment mechanism it implies lower contributions than does the second best policy which reduces temptation to over redistribute later and to misuse revealed private information funding may be preferable even if the population growth rate is higher than the rate of return on assets second best optimal policies are also more likely to be renegotiation proof under fully funded pensions

foreign aid economic structure and dependence abstract an inflow of foreign capital leads to structural changes in the economy by lowering the relative price of tradable to non tradable goods it induces a decline of the relative share of tradables in the country s production the effect on consumption shares is less obvious since price and income effects may tend to be offsetting the existence of foreign aid also establishes a dependence of the economy on the outside world estimates of the degree of such dependence through the use of national accounts aggregates would be biased by the afore mentioned effect on relative prices hence specifically estimates of time tends based on the use of current prices may lead to different conclusions from those which employ constant prices for comparison the inferences of this paper are derived in a simple two sector small country model the concreteness and probable relevance of the main propositions are then demonstrated by empirical illustrations

can tax evasion tame leviathan governments this paper asks to what extent institutional features that facilitate tax evasion may keep leviathan governments at bay the specific feature we look at is banking secrecy abroad the analysis draws on a 16 generation olg model in which tax rates are determined in a repeated game between voters and a rent seeking leviathan government key insights are 1 effects on any generation alive when change takes place may differ substantially from steady state effects that accrue for generations yet to be born 2 there is considerable intergenerational diversity in these effects that is not monotonic as we move from young to old combined these results suggest that the political economy of pertinent institutional change may be quite complex

aid policies and growth the authors of this paper use a new database on foreign aid to examine the relationships among foreign aid economic policies and growth of per capita gdp in panel growth regressions for 56 developing countries and 6 four year periods 1970 93 they find that the policies that have a great effect on growth are those related to fiscal surplus inflation and trade openness they construct an index for those three policies and have that index interact with foreign aid they have instruments for both aid and aid interacting with policies they find that aid has a positive impact on growth in developing countries with good fiscal monetary and trade policies in the presence of poor policies aid has no positive effect on growth this result is robust in a variety of specifications which include or exclude middle income countries include or exclude outliers and treat policies as exogenous or endogenous they examine the determinants of policy and find no evidence that aid has systematically affected policies either for good or for ill they estimate an aid allocation equation and show that any tendency for aid to reward good policies has been overwhelmed by donors pursuit of their own strategic interests in a counterfactual they reallocate aid reduce the role of donor interests and increasing the importance of policy such a reallocation would have a large positive effect on developing countries growth rates

aid nontraded goods and the transfer paradox in small countries this paper constructs a model of the transfer paradox for a small open economy with nontraded goods it demonstrates that increased production of nontraded goods can change their domestic price so as to offset the otherwise beneficial effect of aid and under certain conditions to create a transfer paradox even in a small country the model is estimated with time series data for 44 aid dependent countries for the period 1970 90 the results support the model and show that the nontraded goods expansion effect is more likely to cause immiserization than harry g johnson s 1967 tariff distorting export displacement effect

the dynamic implications of foreign aid and its variability abstract the paper examines the effects of aid and its volatility on consumption investment and the structure of production in the context of an intertemporal two sector general equilibrium model calibrated using data for aid dependent countries in africa a permanent flow of aid mainly finances consumption rather than investment consistent with the historical failure of aid inflows to translate into sustained growth large aid flows are associated with higher real exchange rates and smaller tradable sectors because aid is a substitute for tradable consumption aid volatility results in substantial welfare losses providing a motivation for recent discussions of aid architecture stressing the need for greater predictability of aid these results are also consistent with evidence from cross country regressions of manufactured exports presented later in the paper

darlings and orphans interactions across donors in international aid we examine how bilateral aid flows of an individual donor to a recipient depend on aid flows from all other bilateral and multilateral donors to that recipient we thereby assess to what extent issues including donor coordination free riding selectivity specialization and common donor interests drive bilateral aid allocations we find that others bilateral flows lead to a significant increase in aid flows from a particular donor but primarily within a given year the effects are particularly pronounced for large donors and so called darling recipients overall the results suggest that herding is a dominant feature of aid inter relationships this article is protected by copyright all rights reserved

public economics and the theory of public policy when james mirrlees and william vickrey were awarded the nobel prize in economics last year it marked only the third time that the award had gone to scholars of public sector economics in contrast to the reception given to the previous two winners ronald coase and james buchanan the news was greeted with some bewilderment by policy specialists once removed from the academic literature who are mirrlees and vickrey and what have they done that has been of lasting benefit to the study of public economics let alone of practical benefit to policy makers this seems to me to be a fair question coase after all had set out a conceptual approach to the study of externalities and transaction costs that has become an implicit part of the methodological baggage carried around by policy economists and policy makers alike buchanan was in part responsible for the welcome emphasis on institutions in public sector decision making and for insisting that politicians bureaucrats and voters are human beings with human motives the legacy of mirrlees and vickrey is less well known but i would argue it is every bit as profound their approach to the theory of economic policy which is grounded on the importance of imperfect information as a constraint on public policy has changed the very nature of public economics research and of its implications for economic

volatility of development aid from the frying pan into the fire summary the paper building on the authors previous analysis examines the relative volatility of aid flows into developing countries and their domestic revenue using new data and three alternative measures of aid instability relative volatility vis a vis fiscal revenue unpredictability of aid disbursement relative to commitments and failure of aid to smooth fluctuations in aggregate income it finds that the volatility of aid flows is still much greater than that of domestic revenue and that this difference is not decreasing especially in very poor aid dependent countries this high volatility of inflows makes the macroeconomy hard to manage further the influence of aid has been procyclical and not countercyclical aid has failed to act either as a stabilizing force or as an insurance mechanism we argue that to counter these unwelcome trends donors need to be able to respond more speedily and effectively to large adverse shocks and their conditionalities need to become more flexible possibilities explicitly discussed elsewhere in this special section

partition migration and jute cultivation in india abstract we show that refugees can play positive roles in receiving economies by looking at the partition of india we use an instrumental variables strategy to show that migrants played a major part in india s take up of jute cultivation our estimates suggest that migrants fully explain post partition jute cultivation consistent with migrants bringing jute specific skills with them we find that migrants did not depress jute yields did not increase the cultivation of other crops and did not lower native wages our results are robust to migrant selection into districts with the best markets for jute

nominal interest rates consumption booms and lack of credibility a quantitative examination abstract exchange rate based stabilization programs in chronic inflation countries have often been accompanied by an initial expansion of private consumption followed by a contraction this consumption cycle has been attributed to lack of credibility in the sense that the public views the reduction in the devaluation rate as temporary this paper assesses the quantitative relevance of the temporariness hypothesis by comparing the predictions of a simple model to the actual figures for seven major programs the paper concludes that nominal interest rates must fall substantially for the temporariness hypothesis to account for an important fraction of the observed consumption booms

cost of business cycles with indivisibilities and liquidity constraints it is almost universally agreed that individuals face incomplete insurance markets and cannot perfectly insure against the idiosyncratic risk in this paper simple general equilibrium models with incomplete insurance markets are examined in order to assess the impact of imperfect insurance on the magnitude of the welfare costs of business cycles two versions of incomplete insurance markets are considered and certain statistical properties of the equilibrium stochastic processes in these environments are compared with those of a perfect insurance economy

on the welfare cost of economic fluctuations in developing countries macroeconomic fluctuations are much stronger in developing countries than in the united states yet while a large literature debates the welfare cost of economic fluctuations in the united states it remains an open question how large that cost is in developing countries using several models we provide such a measure we find that the welfare cost of consumption volatility per se is far from trivial and averages a substantial multiple of the corresponding u s estimate moreover in many poor countries the welfare gain from eliminating volatility may in fact exceed the welfare gain from an additional percentage point of growth forever

subgame perfect punishment for repeat offenders i introduction the literature on optimal law enforcement typically assumes that the government can commit to sanction schemes 1 this means the government can use any set of threats to penalize wrongdoers in particular if a crime occurs the government actually sanctions the wrongdoers even though ex post it may have no incentive to do so potential wrongdoers believe that the government will carry out the threat at any cost and therefore do not engage in the act in the first place in this article i give up the assumption that the government can commit to whatever sanction scheme i consider the analysis of optimal sanctions without the possibility to commit important because judges often have a lot of discretion as to the size of the penalty they may for example adjust sanctions to the financial possibilities age education and so on of the wrongdoer accordingly i allow only for sanctions that the government actually wishes to implement should a crime have occurred ruling out full commitment changes the optimal enforcement schemes suppose for example the government does not care about the sanction as is typically assumed in the literature then it will not enforce the penalty if a crime has happened given that there is say a small cost of doing so the rational criminal will anticipate the ex post enforcement behavior of the government therefore she will commit the crime because the threat of being sanctioned is not credible once one drops the commitment assumption the typical deterrence equilibria of the law enforcement literature between potential wrongdoers and the government are based on empty threats in the language of game theory the equilibria are not subgame perfect or time consistent i study the problem of subgame perfect sanctions using the framework of emons 2003 agents may commit a crime twice the act is inefficient the agents are thus to be deterred the agents are wealth constrained so that increasing the fine for the first offense means a reduction in the possible sanction for the second offense and vice versa the agents may follow history dependent strategies that is commit the crime a second time if and only if they were were not apprehended the first time the government seeks to minimize the probability of apprehension ignoring the government s commitment problem it is optimal to set the sanction for the first offense equal to the entire wealth of the agents while the sanction for the second offense equals zero the intuition is as follows a money penalty imposed for the second offense reduces the amount a person can pay for the first offense because the wealth available to pay penalties is assumed to be fixed over the two periods for that reason a higher probability event namely a first offense that is detected will be more effective use of the scarce money penalty resource than a lower probability event namely a second detected offense why is the probability of detection lower for the second rather than for the first crime simply because an agent faces the possibility of being sanctioned for the second crime if and only if he or she has already been sanctioned the first time for further results it is important to note that the optimal probability of apprehension increases with the benefit from the crimes this decreasing sanction scheme raises of course the issue of time consistency will the government really charge the agent the entire wealth when she was apprehended for the first crime knowing that then she will commit the second act for sure isn t it better for the government to renege and charge little for the first act so that the agent still has sufficient wealth to pay a sanction that deters the second crime given that the first act has been committed anyway that way the government can at least deter the second act to study this problem i consider a rent seeking government

aid and growth regressions this paper examines the relationship between foreign aid and growth in real gdp per capita as it emerges from simple augmentations of popular cross country growth specifications it is shown that aid in all likelihood increases the growth rate and this result is not conditional on good policy there are however decreasing returns to aid and the estimated effectiveness of aid is highly sensitive to the choice of estimator and the set of control variables when investment and human capital are controlled for no positive effect of aid is found yet aid continues to impact on growth via investment we conclude by stressing the need for more theoretical work before this kind of cross country regressions are used for policy purposes