jurisdiction size political participation and the allocation of resources this paper analyzes the effect of population size on politicalparticipation and allocative efficiency increasing populationis generally found to reduce political participation however since participation is not evenly spread throughout thepopulation this will have consequences for allocation namely we argue that increasing population size shifts powerto the rich we discuss the consequences for the optimal sizeof jurisdictions the size of government and the measurementof publicness

precautionary savings and self selection evidence from the german reunification experiment in the absence of complete insurance expected future income shocks lead prudent individuals to build up precautionary savings in order to avoid wide fluctuations in the consumption path the reaction of savings to expected future shocks is stronger the more risk averse an individual is risk aversion might influence not only the savings behavior of an individual facing a stochastic income path but it can also affect occupational choice in the first place in particular risk averse individuals might choose occupations that are associated with less risky income paths while less risk averse individuals might prefer occupations with higher income risk assessing the importance of self selection of individuals into occupations according to their risk aversion is difficult since risk aversion is usually unobserved yet failing to control for unobserved risk aversion in regressions of wealth on measures of labor income risk will lead to a bias if selfselection takes place since measures of labor income risk will be negatively correlated with the error term that is capturing the unobserved risk aversion this could lead to a rejection of the theory of precautionary savings even if individuals act according to the theory

distortionary taxes and the provision of public goods economists have long been concerned with finding an efficient level of public expenditure the classic statement of the problem was given by paul samuelson 1954 an optimal level of expenditure is where the sum of the marginal rates of substitution between the public good and a reference good equals the marginal rate of transformation between the public good and the reference good mrs mrt however samuelson s formula assumes that all of the revenue needed to finance public goods can be raised with lump sum taxes since this is not generally possible the formula must be modified to account for the distortionary effects of the tax system an appropriate modification is to multiply the cost side of the equation by a term that is commonly called the marginal cost of public funds mcf in the case of samuelson s formula where government is entirely financed with lump sum taxes the mcf would be exactly 1 0 in the traditional view of economists distortionary taxes cause the mcf to be greater than one thus raising the cost of providing public goods in this paper we discuss some cases where the mcf may be less than one we will illustrate this possibility using numerical examples for labor taxes

unemployment risk and precautionary wealth evidence from households balance sheets this paper examines precautionary behavior by relating job loss risk to household net worth we use existing best practice and some new strategies to deal with some problematic issues inherent in this literature regarding proxying uncertainty instrumentation and incorporating theoretical restrictions we do not find precautionary variation in the wealth holdings of households with low permanent income but do find precautionary effects for moderate and higher income households when the dependent variable is total net worth these findings are robust to several alternative specifications but we do not find precautionary responses in subaggregates of wealth that exclude home equity

progressive taxation and the social marginal cost of public funds abstract this paper describes the calculation of the social marginal cost of public funds smcf for a progressive tax system which distorts individuals labour supply decisions a formula for the smcf indicates that the income and substitution effects of the labour supply response are weighted by the changes in individuals average and marginal tax rates respectively other well known formulas for the smcf are shown to be special cases of this formula the difference between this formula and the mayshar 1991 formula is shown to be due to different but equally valid ways of computing the change in the average tax rate the condition under which a marginal tax rate increase may lead to a reduction in revenues is derived

the marginal welfare cost of public funds theory and estimates abstract we derive a general analytic formula for the marginal welfare cost mwc of public funds without imposing restrictive assumptions on preferences or technologies the framework encompasses the various special cases previously considered and reconciles the disparities among the reported estimates of mwc unresolved differences in existing estimates are fully explained by appropriate interpretations of intended thought experiments and alternative assumptions about the elasticity of labor supply with respect to public spending further progress in measuring mwc requires empirical estimation of labor supply functions that include government spending as an explanatory variable

how important is precautionary saving we estimate how much of the wealth of a sample of psid respondents is held because some households face more income uncertainty than others we begin by solving a theoretical model of saving which we use to develop appropriate measures of uncertainty we then regress measures of wealth on our measures of uncertainty and find evidence that households engage in precautionary saving finally we simulate the wealth distribution that our empirical results imply would prevail if all households had the same uncertainty as the lowest uncertainty group we find that between 39 and 46 percent of wealth in our sample is attributable to the extra uncertainty that some consumers face compared to the lowest uncertainty group

fractionalization and the size of government i study the effect of voters with a group based social conscience voters care more about the well being of those belonging to their own group than the rest of the population within a model of political tax determination both fractionalization and group antagonism reduce the support for redistribution whereas within group inequality increases support for redistribution inequality between groups has the opposite effect these results hold even if a poor group forms a majority using a panel constructed from us micro data i find support for the hypothesis that within race inequality increases redistribution while between race inequality decreases redistribution

household saving micro theories and micro facts in this survey we review the recent theoretical and empirical literature on household saving and consumption the discussion is structured around a list of motives for saving and how well the standard theory captures these motives we show that almost all of the motives for saving that have been suggested in the informal saving literature can be captured in the standard optimizing model particular attention is given to recent work on the precautionary motive and its implications for saving and consumption behavior we also discuss the behavioral or psychological approach that eschews the use of standard optimization techniques and focuses instead on direct consideration on saving we provide a section on facts who save and how much we then discuss informally the recent decline in the u s saving rate and whether the theory is of much use in understanding this and other changes in aggregate saving rates over time we do not find any convincing explanation for the change in saving rates we also discuss some analyses of saving behavior over the life cycle addressing such questions as whether households save enough for retirement and whether the consumption patterns of older households can be rationalized within a simple life cycle model we also review a great number of studies of the consumption euler equations based on our analysis of the studies cited we conclude that there is still mixed evidence that consumption is excessively sensitive to income we also examine in depth the recent empirical literature on the precautionary motive we conclude that although some households do seem to have a significant precautionary motive at some points in their life cycle this motive is not so strong empirically as some investigators suggest

the nature of precautionary wealth abstract this paper uses the panel study of income dynamics to provide some of the first direct evidence that wealth is systematically higher for consumers with predictably greater income uncertainty however the apparent pattern of precautionary wealth is not consistent with a standard parameterization of the life cucle model in which consumers are patient enough to begin saving for retirement early in life wealth is estimated to be far less sensitive to uncertainty than implied by that model instead our results suggest that over most of their working life time consumers behave in accordance with the buffer stock models of saving described in carroll 1992 1997 or deaton 1991 in which consumers hold wealth principally to insulate consumption against near term fluctuations in income

a political economy theory of the soft budget constraint why do soft budget constraints exist and persist in this paper we argue that the prevalence of soft budget constraints can be best explained by the political desirability of softness we develop an infinite horizon political economy model where neither democratic nor autocratic politicians can commit to policies that are not ex post optimal we show that because of the dynamic commitment problem inherent in the soft budget constraint politicians can in essence commit to make transfers to entrepreneurs which otherwise they would not be able to do this encourages such entrepreneurs to support them politically though the soft budget constraint may induce economic inefficiency it may be politically rational because it influences the probability of political survival in consequence even when information is complete politicians may fund bad projects which they anticipate they will have to bail out in the future we show that maybe somewhat surprisingly dictators who are less likely to lose power are more likely to use the soft budget constraint as a strategy to gain political support

unemployment insurance and precautionary saving abstract models of precautionary saving imply that households will hold more assets when faced with greater income uncertainty however previous empirical studies of income uncertainty have produced somewhat mixed support for the precautionary saving hypothesis in this paper we note that differences in the state contingent income stream available to workers through the unemployment insurance ui program provides an excellent source of variation for testing the presence of a precautionary savings motive simulations of a stochastic life cycle model suggest that a ui system similar to the type currently in place in the u s can lead to a significant reduction in the assets accumulated by a median worker moreover there is considerable variation in the ui benefit schedules for workers living in different states in the u s which provides an exogenous source of variation for empirically testing the precautionary saving hypothesis we carry out this test using data on expected ui benefit replacement rates and financial assets held by households in the survey of income and program participation our empirical results are consistent with the predictions of the model and suggest that reducing the ui benefit replacement rate by 50 percent would increase gross financial asset holdings by 14 percent or 241 for the average worker we also find empirical evidence that this crowd out effect of ui on household saving is stronger for those facing higher unemployment risk and weaker for older workers both of which are implications from our precautionary saving model

a political economy theory of partial decentralization we revisit the classic problem of tax competition in the context of federal nations and derive a positive theory of partial decentralization a capital poor median voter chooses to use redistributive capital taxes to provide public goods the expectation of high capital taxes however results in a small capital stock which lowers returns to redistribution the median voter therefore wants to commit to a lower level of capital taxes she does so by setting a partial degree of decentralization in the constitution the equilibrium degree of decentralization balances the positive effect of tax competition on capital taxes with the loss in redistribution that results we show that the degree of decentralization is nonmonotonic in inequality increasing in the redistributive efficiency of public good provision and decreasing in capital productivity when public goods are heterogeneous in their capacity to transfer funds all voters agree that goods with high redistributive capacity should be decentralized

an expenditure based estimate of britain s black economy abstract we estimate the size of britain s black economy defined narrowly as unreported taxable income by using income and expenditure data drawn from the 1982 family expenditure survey our working assumptions are that all income groups report expenditure on food correctly employees in employment report income correctly and that the self employed under report their income we estimate food exependiture equations for all groups and then invert them to arrive at the conclusion that on average true self employment income is 1 55 times as much as reported self employment income this implies that the size of the black economy is about 5 5 percent of gdp

does centralization increase the size of government abstract are fiscal programs larger or smaller if they are run centrally rather than locally in a prospective federation we abstract completely from well understood economic issues and focus instead on the political effects of centralization for fiscal programs with benefits broadly spread in the population such as redistributive transfer schemes social insurance and general government consumption centralization changes the coalition of voters who favor a large program in a direction that depends on the nature of the redistributive instrument for fiscal programs with localized benefits such as provision of local public goods centralization creates opportunities for rent seeking which increases the size of government

compliance costs vs tax incentives why do entrepreneurs respond to size based regulations abstract this paper studies the mechanisms behind the responses of entrepreneurs to size dependent tax regulation we exploit the value added tax vat exemption threshold in finland both tax incentives remitted vat and compliance costs frequent filing of vat reports understanding the vat system etc change at this sales based threshold in a discontinuous manner we utilize variation in both the vat rate and reporting requirements to show that the large observed sales response is caused by the compliance costs of vat rather than the level of the vat rate highlighting the key role of compliance costs among small firms and entrepreneurs

communication in federal politics universalism policy uniformity and the optimal allocation of fiscal authority the paper presents a positive model of policy formation in federal legislatures when delegates engage in the strategic exchange of policy relevant information depending on the type of policy under consideration communication between delegates generally suffers from a bias that makes truthful communication difficult and sometimes impossible this generates inefficient federal policy choices that are often endogenously characterized by overspending universalism and uniformity building on these findings i develop a theory of fiscal de centralization which revisits the work of oates in a world of incomplete information and strategic communication empirical results from a cross section of us municipalities are consistent with the predicted pattern of spending

precautionary savings and the self employed this work focuses on the impact of uncertainty on savings under bequest form specifically we estimate whether and to what extent income variability does have an effect on post mortem savings we approximate the post mortem savings with the closest dedicated savings which is savings in term insurance a lump sum inherited at the death of the subscriber furthermore we test whether the intensity of the income variance or the riskiness of the job type such as self employment matters more in the choice our results show that self employment status is one of the most relevant variables affecting term insurance ownership

fiscal federalism in europe lessons from the united states experience the existing political and legal institutions of fiscal policy making are under challenge as the united states and the eastern european and soviet states experiment with policy decentralization the states of western europe are looking to a more centralized policy structure via the e e c this paper seeks to raise issues of importance to all such reform efforts notably the need to consider and balance the inefficiencies of fiscal policy decentralization spillovers and wasteful fiscal competition against the inefficiencies of fiscal policy centralization policy cycles and localized pork barrel spending and taxes the need to develop new fiscal policy institutions emphasizing voluntary agreements and responsive agenda setters is stressed robert p inman daniel l rubinfeld department of finance and economics school of law and the wharton school of management department of economics university of pennsylvania university of california philadelphia pa 19104 berkeley ca 94720 and neer fiscal federalism in europe lessons from the united states e perienc by robert p inman and daniel l rubinfeld2 in democratic and totalitarian regimes alike the existing political and legal institutions of economic policy making are under challenge the wisdom of centralized fiscal regimes is now being questioned quietly under the banner of the new federalism in the united states and vocally if not violently through the secessionist movements of eastern europe and the soviet states as these nations experiment with decentralized fiscal institutions the countries of western europe are now looking to the potential of a more centralized economic order within the new european economic community this paper seeks to raise issues of importance to all such reform efforts and within that context to offer some cautionary advise for the design of e e c fiscal institutions based upon the recent american experience with centralized fiscal policy making ii the role for central government fiscal policies in economic unions the european community s progress towards an economic and monetary union the authors wish to thank allesandra casella and barry eichengreen for helpful comments and discussions 2 the authors are professor of finance and economics university of pennsylvania and research associate of the nber and professor of law and economics university of california at berkeley respectively professor rubinfeld gratefully acknowledges the support of the center for real estate and urban economics at the university of california berkeley based upon a common currency will create new demands for the design of fiscal policy 3 perhaps most importantly with a common currency and thus a common monetary policy member states will no longer be able to influence their local economies through exchange rate or monetary policies when state specific economic shocks occur 4 state specific fiscal policies stand as an alternative three questions arise 1 can member state fiscal policies be effective in offsetting local economic shocks in an integrated economic union 2 if effective are such policies likely to be optimally managed at the state level and 3 if ineffective or non optimal what central government policies might be then preferred the recent united states experience is instructive on each point can member state fiscal policies be effective in open integrated economies deficit financed demand creation may be of only limited usefulness to small member states first the demand stimulus of deficit financing is dissipated through import demands from other union states gramlich 1987 has shown that the effectiveness of deficit policies in the smallest u s states is significantly import constrained though larger states may be able to use own deficits to affect state employment prospects second in member states the use of such deficits to combat local shocks may be significantly limited by what the capital markets will allow while deficits may be see eichengreen 1990 there is growing evidence of the economic importance of state specific economic shocks to the short run and long run prospects of states and regions in integrated economic unions see bernard and durlauf 1991 for a study of oecd countries many of which are in the eec and brown coulson and engle 1990 for a study of u s states member states which manage these shocks well are likely to enjoy higher long run growth beneficial to the local economy during downturns and while member states may promise to repay those deficits with surpluses during the upswing such promises are difficult to enforce the u s capital market has appeared reluctant to accept a state s promise of a balanced budget over a business cycle such promises lack credibility when temporary economic downturns are not easily distinguished from long run structural declines when good deficits cannot be distinguished from bad the only credible local government promise may be a balanced budget in each fiscal year the stringent u s state budgets for the recessionary 1992 fiscal year balanced through major tax increases and deep spending cuts offer evidence on the point 5 even if member state deficit policies are economically feasible their management may be non optimal in interdependent economic unions the benefits from local demand creation through deficit financing may spillover to other member states via import expansion while the interest costs of deficits remain with the borrowing state the result will be an under provision of expansionary fiscal policies by member states using the arguments of hart 1982 central government fiscal policies stand as the policy

what has been learned about labor supply in the past twenty years the main advance in the study of labor supply in the past 20 years has come in recognizing and interpreting the variety of different labor supply functions that coexist in the empirical literature a crucial theoretical distinction with important empirical payoff is that between labor supply choices at the extensive margin i e labor force participation and employment choices and choices at the intensive margin i e choices about hours of work or weeks of work for workers another important distinction is the one between a descriptive labor supply function and a structural supply function that can be the basis for out of sample policy investigations concerning responses to tax and welfare programs and evaluations of welfare losses a full understanding of the participation hours dichotomy leads to an appreciation of the importance of the problem of selection bias what is the wage to impute to a nonworking person these distinctions are a legacy of the research conducted on labor supply over the past 20 years many important empirical questions have been addressed i how strong are the effects of taxes welfare and transfer programs on labor supply ii how important is intertemporal substitution can life cycle labor supply models explain business cycle labor supply behavior iii has the consensus view of the 1960 s of high labor supply elasticities for married women and low labor supply elasticities for married men held up all of the empirical evidence assembled on labor supply must be called into question in the light of important research on the basic quality of the data conducted by analysts at the university of michigan i discuss this evidence in a concluding section except for my discussion of measurement issues i focus only on the major discoveries about which a general consensus has emerged

on government centralization and fiscal referendums abstract several authors have argued that a centralization of fiscal powers in a federation is less likely to occur if citizens have to approve a change in the assignments of responsibilities by a popular referendum this outcome may be due to the fact that logrolling is more difficult under direct than under representative democracy it may also be caused by citizens fear that a centralization of fiscal authority facilitates the extraction of rents by the government or the legislature in this paper we test the hypothesis that centralization is less likely under referendum decision making in the unique institutional setting of switzerland using a panel of swiss cantons from 1980 to 1998 the empirical analysis provides evidence that referendums induce less centralization of fiscal activities

work costs and nonconvex preferences in the estimation of labor supply models abstract works costs have not been adequately handled in labor supply estimation likely due to their complexity we show that if work costs are not accounted for in the budget and time constraints in a structural labor supply model they will be subsumed into the data generating preferences even if underlying preferences over consumption and leisure are convex the presence of unobservable work costs can make these preferences appear nonconvex however we show that under plausible conditions policy relevant calculations such as estimates of the effect of tax changes on labor supply and deadweight loss measures are not affected by the fact that estimated preferences incorporate work costs

the optimal taxation of unskilled labor with job search and social assistance abstract in order to explore the optimal taxation of low skilled labor we extend the standard model of optimal nonlinear income taxation in the presence of quasi linear preferences in leisure by allowing for involuntary unemployment job search and an exogenous welfare benefit in trading off low skilled employment against work effort of higher skilled workers the government balances distortions on the search margin with those on work effort higher welfare benefits typically reduce taxes paid by low skilled workers and raise marginal tax rates throughout the skill distribution

economic theories of the break up and integration of nations abstract this paper surveys the recent political economy literature on the size distribution of nations the main themes of this literature are 1 a the spread of democracy leads to the creation of too many sovereign states 2 b the extent of factor mobility plays a key role in determining the incentives towards separation or integration 3 c economic integration through the development of international trade may require greater political integration to create and effectively maintain a level playing field in international trade at the same time economic integration by reducing the economic costs of separation increases the incentives towards political separation

precautionary saving and subjective earnings variance abstract in this paper i examine a model of precautionary saving and i show that the fact that people may insure against income risk makes it difficult to evaluate the extent of precautionary accumulation by simply looking at the relationship between wealth and earnings variance i also argue that occupations may represent a bad proxy for income risk

redistribution and the marginal cost of public funds abstract discussions of the marginal cost of public funds with distortionary taxation are often cast in the framework of a one consumer economy while the main justification of distortionary taxes is that they are needed for redistribution this paper analyzes the issue in a model with heterogeneous consumers and a linear income tax focusing on the tradeoff between labour market distortions and the redistribution from high wage to low wage workers in an optimal tax system the mcf will be the same for all sources of funds and under certain assumptions less than one without optimality the mcf will in general differ between different sources of finance

decentralized taxation and the size of government evidence from swiss state and local governments according to the leviathan model fiscal federalism is seen as a binding constraint on a revenue maximizing government the competitive pressure of fiscal federalism is supposed to reduce public sector size as compared to unitary states however empirical results concerning the leviathan hypothesis are mixed this study uses a state and local level panel data set of swiss cantons from 1980 to 1998 to empirically analyze the effect of different federalist institutions on the size and structure of government revenue because of the considerable tax autonomy of sub national swiss governments it is possible to investigate different mechanisms by which fiscal federalism may influence government size the results indicate that tax exporting has a revenue expanding effect whereas tax competition favors a smaller size of government fragmentation has essentially no effect on the size of government revenue for swiss cantons the overall effect of revenue decentralization leads to fewer tax revenue but higher user charges thus revenue decentralization favors a smaller size of government revenue and shifts government revenue from taxes to user charges

does foreign aid promote the expansion of government building on the literature on public finance i seek to advance our understanding of variations in government size by exploring the impact of official development assistance on fiscal policy i hypothesize that foreign aid operates in accordance with the flypaper effect systematically generating incentives and opportunities for the expansion of government spending results from a time series cross sectional regression analysis of growth in government spending over the 1970 99 time period are consistent with the hypothesis for middle and lower income nations aid represents an important determinant of government expansion looking at the tax and revenue side of the equation however reveals a more perverse pattern of response aid promotes not only increased spending but also reduced revenue generation the results have important implications from both a theoretical and policy perspective inter alia they point to the potentially self defeating nature of efforts to promote market oriented programs of state retrenchment via development assistance as well as to the importance of incorporating international transfers into future research on government spending

on the marginal welfare cost of taxation this paper develops a rigorous partial equilibrium analysis of the determinants of margin al welfare cost mwc of taxes on labor earnings it shows that four key parameters interact to determine the magnitude of mwc using aggregate data and plausible ranges of values for the parameters mwc can vary from under 10 percent to more than 300 percent of marginal tax revenue intermediate parameter values sugge st mwc is in the 25 50 percent range however the more extreme estimates cannot be ruled out on the basis of available evidence suggesting that mwc cannot yet be copyright 1987 by american economic association

saving and liquidity constraints this paper is concerned with the theory of saving when consumers are not permitted to borrow and with the ability of such a theory to account for some of the stylized facts of saving behavior the models presented in the paper seem to account for important aspects of reality that are not explained by traditional life cycle models copyright 1991 by the econometric society

intergovernmental political competition in american federalism many policies in the united states are jointly determined by federal and state actions in the game theoretic model offered here politicians in both the state and national governments seek credit for providing goods desired by the public and avoid blame for the taxes necessary to provide the goods in line with peterson s 1995 theory of functional federalism the level of government that is better able to supply particular goods and services tends to take the lead in their provision even to the extent of fully crowding out much less efficient governments however under a broad set of circumstances both state and national politicians seek credit via public spending and their joint provision leads to a relative oversupply of public goods and services and thus to overtaxation under joint provision states vary in their responses to changing federal spending patterns based both on the causes of the national changes and on state characteristics

the extensive macro labor supply elasticity integrating taxes and expenditures abstract this paper shows that accounting for certain public expenditures is crucial when comparing labor tax system efficiencies across countries to measure the extensive margin response to taxation i assemble a large cross country dataset consisting of the employment ratios the average effective tax rates the out of work benefits transfers as well as public expenditures on childcare elderly care and family policy covering all oecd countries and more than two decades when not controlling for the country and year fixed effects the extensive margin elasticities are negative once accounting for transfers the elasticities are negative or at most flat even with fixed effects once additionally accounting for public expenditures subsidies on labor complements which are robustly positively associated with the employment to population ratios i obtain either flat or positive extensive margin elasticities in the lower end of the expected range

the marginal cost of public funds hours of work versus labor force participation this paper extends the theory and measurement of the marginal cost of public funds mcf to account for labor force participation responses our work is motivated by the emerging consensus in the empirical literature that extensive participation responses are more important than intensive hours of work responses in the modelling of extensive responses we argue that it is crucial to account for the presence of non convexities created by fixed work costs in a non convex framework tax and transfer reforms give rise to discrete participation responses generating first order effects on government revenue these revenue effects make the marginal cost of funds higher and we show numerically that the implications for mcf tend to be substantial

the importance of business owners in assessing the size of precautionary savings abstract not properly accounting for differences between business owners and nonbusiness owners in studies of household wealth can lead to erroneous conclusions about the significance of different saving motives using data from the panel study of income dynamics from the 1980s and 1990s we show that within samples of both business owners and non business owners the amount of precautionary savings with respect to labor income risk is modest and accounts for less than 10 of total household wealth previous large estimates of the size of precautionary balances resulted from pooling these two groups together such pooling is inappropriate given that business owners face higher labor risk and accumulate more wealth than non business owners for reasons unrelated to precautionary motives

measuring the well being of the poor using income and consumption we examine the relative merits of consumption and income as measures of the material well being of the poor consumption offers several advantages over income because consumption is a more direct measure of well being than income and is less subject to underreporting bias measurement problems with income are problematic for analyses of changes in well being of the poor because the biases appear to have changed over time and are correlated with government policies on the other hand income is often easier to report and is available for much larger samples providing greater power to test hypotheses we begin by considering the conceptual and pragmatic reasons why consumption might be better or worse than income then we employ several empirical strategies to examine the quality of income and consumption data first we compare income and consumption reports for those with few resources as well as their assets and liabilities to examine measurement errors and under reporting second we examine other evidence on the internal consistency of reports of low income or consumption third we compare how well micro data in standard datasets weight up to match aggregates for classes of income and consumption that are especially important for low resource families fourth we validate income and consumption measures by comparing them to other measures of hardship or material well being although the evidence tends to favor consumption measures our analyses suggest that both measures should be used to assess the material well being of the poor

the siting of hazardous waste facilities in federal systems the political economy of nimby this paper offers a new political economy explanation for thepervasive problem of siting hazardous waste treatment facilitiesin federal system we first show that a decentralized systemyields the first best waste treatment capacity level and that acentralized structure gives rise to free riding behavior amonglocal jurisdictions in our model each community seeks toinfluence the central government through political contributions this leads to suboptimal levels of treatment capacity thecapacity is increasing in the compensation level if the marginalbenefit of treatment capacity is sufficiently large and in thegovernment s weight on aggregate social welfare relative tolobbying activities the centralized system can replicate thedecentralized system with a sufficiently high compensation level since compensation has proved difficult a centralized systemfaces greater obstacles than a decentralized system

the political economy of policy centralization direct versus representative democracy abstract this paper analyzes policy centralization outcomes in a two jurisdiction model of public good provision choices with heterogeneous policy preferences and interjurisdictional policy spillovers under two alternative political procedures direct referendum and representative democracy we show that policy centralization is more likely to occur if the choice to centralize is made by elected policymakers rather than by referendum in these situations centralized policies converge to the preferred level of the jurisdiction that least favours centralization rather than to a compromise between the two jurisdictions preferred levels

taxes and the labor market participation of married couples the earned income tax credit a distinguishing feature of recent changes to the us system of public assistance is its increasing focus on working families and reliance on the tax system to transfer dollars to needy families after a decade in near total obscurity the earned income tax credit eitc was expanded to become the largest cash transfer program for lower income families with children advocates of the eitc argue that unlike traditional welfare the credit helps promote both the values of family and work indeed empirical evidence consistent with economic theory suggests that the eitc promotes employment among eligible unmarried women with children to target benefits to lower income families however the eitc is based on family income leading to traditional welfare type disincentives for most eligible secondary earners in fact the eitc is likely to reduce overall family labor supply among married couples this paper examines the labor force participation response of married couples to eitc expansions between 1984 and 1996 the effect of the credit is estimated using both quasiexperimental and traditional reduced form labor supply models results from both models show the same qualitative conclusion that the eitc expansions reduced total family labor supply of married couples in all cases we find a decline in labor force participation by married women that more than offsets any rise in participation by their spouses while the labor force participation rate of married men increased by about 0 2 percentage points that of married women decreased by just over a full percentage point these aggregate effects mask substantial heterogeneity in the population women facing the strongest disincentives were more than 2 percentage points less likely to work after the expansions these findings imply that the eitc is effectively subsidizing married mothers to stay home and therefore have implications for the design of the program d 2003 elsevier b v all rights reserved

the sensitivity of an empirical model of married women s hours of work to economic and statistical assumptions this study undertakes a systematic analysis of several theoretic and statistical assumption s used in many empirical models of female labor supply using a singl e data set psid 1975 labor supply data the author is able to replic ate most of the range of estimated income and substitution effects fo und in previous studies in this field he undertakes extensive specif ication tests and finds that most of this range should be rejected du e to statistical and model misspecifications the two most important assumptions appear to be the tobit assumption used to control for sel f selection into the labor force and exogeneity assumptions on the wi fe s wage rate and her labor market experience copyright 1987 by the econometric society

the political economy of benefits and costs a neoclassical approach to distributive politics this essay offers a rational political explanation for the notorious inefficiency of pork barrel projects with an optimization model of legislative behavior and legislative institutions the model emphasizes the economically arbitrary from a welfare point of view importance of the geographic incidence of benefits and costs owing to the geographic basis for political representation we explore the implications of a legislator s objective function and derive conditions under which a representative legislature will select an omnibus of projects each of which exceeds the efficient scale

risk management housing and stockholding this article investigates the possible explanations of the stockholding puzzle by focusing on housing and other uninsurable risks associated with income health and business taking the french household wealth survey patrimoine 2004 french national statistical institute we find that the share of financial wealth invested in stocks depends on transaction and information costs risk aversion exposure to real estate risk and to a lesser extent labour market risk these results are obtained by controlling for endogenous home ownership status

optimal income transfer programs intensive versus extensive labor supply responses this paper analyzes optimal income transfers for low incomes labor supply responses are modeled along the intensive margin intensity of work on the job and along the extensive margin participation into the labor force when behavioral responses are concentrated along the intensive margin the optimal transfer program is a classical negative income tax program with a substantial guaranteed income support and a large phasing out tax rate however when behavioral responses are concentrated along the extensive margin the optimal transfer program is similar to the earned income tax credit with negative marginal tax rates at low income levels and a small guaranteed income carefully calibrated numerical simulations are provided

environmental policy in majoritarian systems abstract this paper sheds new light on the determination of environmental tax policies in majoritarian federal electoral systems such as the u s and derives implications for the environmental federalism debate on whether the national or local government should have authority over environmental taxes in the absence of majority bias the socially preferred policy would be federal district level taxation which accounts both for cross boundary pollution and differences in industry concentration across districts in majoritarian systems however where the legislature consists of geographically distinct electoral districts the majority party at the national or state level favors home districts depending on the location of polluting industries and the associated damages the majority party may therefore impose sub optimally high or low pollution taxes due to a majority bias majority bias can influence the social welfare ranking of alternative environmental tax policies in some cases majority bias may make decentralized or federal uniform taxation the preferred solution

decentralization as a constraint to leviathan a panel cointegration analysis this paper extends the empirical literature about the effects of fiscal decentralization on the growth of government along three dimensions it distinguishes between the effects of the level of decentralization from the way local governments finance their expenditures common pool versus own resources it uses a panel cointegration approach to separate the long run effects of decentralization from the short run dynamics and it extends and revises the datasets generally used in these empirical analyses the results show that the amount of revenue raised by sub national governments leads to a long term fall in the size of government but grants have the opposite effect in addition a greater decentralization of expenditure leads to greater overall spending when the short term is considered these influences work slowly as the speed of adjustment towards the desired government size is relatively sluggish in addition in the short run there is also a clear effect from the role of local revenue raising powers that stimulates the growth of government these results appear robust to changes in the composition of the variables countries and periods included the sample

the use of regression statistics to analyze imperfect pricing policies corrective taxes can solve many market failures but actual policies frequently deviate from the theoretical ideal because of administrative or political constraints we present a method to quantif

more giving or more givers the effects of tax incentives on charitable donations in the uk abstract this paper estimates the effects of tax incentives on charitable contributions in the uk using the universe of self assessment income tax returns between 2005 and 2013 we exploit variation from a large reform in 2010 to estimate intensive and extensive margin tax price elasticities of giving using a predicted tax rate instrument for the price of giving relative to consumption we find an intensive margin elasticity of about 0 2 and an extensive margin elasticity of 0 1 yielding a total elasticity of about 0 3 to further explore the extensive margin response we propose a model with a fixed cost of declaring donations and obtain a structural estimate of that cost of around 47 we also study the welfare effects of tax incentives extending the theoretical literature to allow for extensive margin giving and for a fixed cost of declaring donations taking into account these factors there is a case for increasing the subsidy on charitable giving in the uk

optimal dynamic carbon taxes in a climate economy model with distortionary fiscal policy how should carbon be taxed as a part of fiscal policy the literature on optimal carbon pricing often abstracts from other taxes however when governments raise revenues with distortionary taxes carbon levies have fiscal impacts while they raise revenues directly they may shrink the bases of other taxes e g by decreasing employment this article theoretically characterizes and then quantifies optimal carbon taxes in a dynamic general equilibrium climate economy model with distortionary fiscal policy first this article establishes a novel theoretical relationship between the optimal taxation of carbon and of capital income this link arises because carbon emissions destroy natural capital they accumulate in the atmosphere and decrease future output consequently this article shows how the standard logic against capital income taxes extends to distortions on environmental capital investments second this article characterizes optimal climate policy in sub optimal fiscal settings where income taxes are constrained to remain at their observed levels third this article presents a detailed calibration that builds on the seminal dice approach but adds features essential for a setting with distortionary taxes such as a differentiation between climate change production impacts e g on agriculture and direct utility impacts e g on biodiversity existence value the central quantitative finding is that optimal carbon tax schedules are 8 24 lower when there are distortionary taxes compared to the setting with lump sum taxes considered in the literature

why the european union should adopt formula apportionment with a sales factor using a two country tax competition model with a multinational enterprise mne this paper addresses the question of whether the european union should replace separate accounting sa in corporate income taxation by formula apportionment fa and if so which apportionment factors should be used our main result is that fa with a sales factor may mitigate or even eliminate fiscal externalities caused by the countries tax policy hence our analysis provides a microfoundation for the sales apportionment factor in an empirical calibration to the eu 15 we show that the transition from sa to fa with a sales only formula raises average tax rates by 2 and average tax revenues by 1 billion euros or 0 1 of gdp these effects result in an increase of welfare

reviving leviathan fiscal federalism and the growth of government this article revisits the influential leviathan hypothesis which pos its that tax competition limits the growth of government spending in decentralized countries i use panel data to examine the effect of fiscal decentralization over time within countries attempting to distinguish between decentralization that is funded by intergovernmental transfers and local taxation first i explore the logic whereby decentralization should restrict government spending if state and local governments have wide ranging authority to set the tax base and rate especially on mobile assets in countries where this is most clearly the case decentralization is associated with smaller government second consistent with theoretical arguments drawn from wel fare economics and positive political economy i show that governments grow faster as they fund a greater portion of public expenditures through intergovernmental transfers

consumption puzzles and precautionary savings abstract when marginal utility is convex agents accumulate savings as a precautionary measure against labor income eventualities this paper shows that precautionary savings can go a long way in making the excess growth excess smoothness and excess sensitivity features of consumption consistent with the stochastic processes of labor income observed in the u s at the microeconomic level

nudging farmers to use fertilizer theory and experimental evidence from kenya we model farmers as facing small fixed costs of purchasing fertil izer and assume some are stochastically present biased and not fully sophisticated about this bias such farmers may procrastinate post poning fertilizer purchases until later periods when they may be too impatient to purchase fertilizer consistent with the model many farmers in western kenya fail to take advantage of apparently profit able fertilizer investments but they do invest in response to small time limited discounts on the cost of acquiring fertilizer free deliv ery just after harvest calibration suggests that this policy can yield higher welfare than either laissez faire policies or heavy subsidies

government size decentralization and growth empirical evidence from italian regions abstractthe aim of this study is to empirically assess the relationship among government size decentralization and economic growth in italian ordinary regions the empirical analysis based on a panel dataset on italian regions provides evidence in support of the existence of an inverted u shaped relationship between public expenditure and economic growth that depends on the degree of fiscal decentralization in particular according to our estimates on the specific italian case the optimal degree of decentralization is around 32 while the optimal government size value is approximately 52

the redistributive roles of unemployment insurance and the dynamics of voting abstract public unemployment insurance is analyzed as the majority voting equilibrium policy of a dynamic stochastic economy abstracting from incentive effects we focus on redistribution some results are because of the distribution of heterogeneous employment opportunities public insurance may be democratically chosen even if complete private markets exist and because of the dynamics even when agents are intrinsically homogeneous the equilibrium benefit level or duration benefit schedule deviates from what has been described as optimal in the literature the effects of differences in the average frequency or duration of unemployment on equilibrium taxes and benefits are investigated with some unanticipated results

permanent income current income and consumption evidence from two panel data sets in this article i estimate euler equations that is the first order conditions of the consumers maximization problem using data from two data sets consumption data are taken from the consumer expenditure survey income data are taken from the panel study of income dynamics because the data for the estimation come from two samples i use a generalization of the instrumental variables estimator the two sample instrumental variables estimator i find evidence that consumption is excessively sensitive to predictable income growth the estimates of the coefficient of excess sensitivity for three consumption measures range from 2 to 5

lobbying under political uncertainty abstract this paper considers a model of lobbying described as a common agency game it departs from the current literature by assuming that the special interest groups are not a priori organized or unorganized and that the type of the politician is not common knowledge we characterize equilibria when the choice set of the politician consists of two policies we discuss the conditions leading to efficiency and the characteristics of the groups explaining their relative success in the process of influence we also offer some results for the general case including disjoint necessary and sufficient conditions for the equilibria to be efficient

the multiprincipal nature of government abstract one of the theoretical tools required to open the black box of the government organization is the theory of multiprincipals which describes how different incentive mechanisms compete with each others in viewing the set of relationships between several government bodies and the entities they regulate as a set of competing contracts in which the control of the regulatory process is shared amongst these different regulators we can address the question of the costs and the possible benefits of such structural separation first this paper surveys the previous literature on the topic then it traces out the possible benefits of such structures to the non benevolence of regulators we discuss also how regulatory rights of control and communication channels must be designed all together to deal with this problem

welfare impacts of improved chickpea adoption a pathway for rural development in ethiopia we analyse the impact of improved chickpea adoption on welfare in ethiopia using three rounds of panel data first we estimate the determinants of improved chickpea adoption using a double hurdle model we apply a control function approach with correlated random effects to control for possible endogeneity resulting from access to improved seed and technology transfer activities to instrument for these variables we develop novel distance weighted measures of a household s neighbours access to improved seed and technology transfer activities second we estimate the impact of area under improved chickpea cultivation on household income and poverty we apply a fixed effects instrumental variables approach where we use the predicted area under cultivation from the double hurdle model as an instrument for observed area under cultivation we find that improved chickpea adoption significantly increases household income while also reducing household poverty finally we disaggregate results by landholding to explore whether the impact of adoption has heterogeneous effects adoption favoured all but the largest landholders for who the new technology did not have a significant impact on income overall increasing access to improved chickpea appears a promising pathway for rural development in ethiopia s chickpea growing regions

the surprisingly low importance of income uncertainty for precaution abstract while it is common to use income uncertainty to explain household saving decisions there is much disagreement about the importance of precautionary saving this paper suggests that income uncertainty is not an important motive for saving although households do have other precautionary reasons to save using a question from the survey of consumer finances that asks how much households want for precautionary purposes this paper shows that expressed household preferences and liquid savings are much lower than predicted by standard modeling assumptions households rarely list unemployment as a reason to save perceived income uncertainty does not affect liquid savings or precautionary preferences neither does being in an occupation with higher income volatility instead households seem very concerned with expenditure shocks

an endogenous policy model of hierarchical government endogenous policy models usually neglect that government policies are frequently the result of decisions taken at different tiers by different agents each enjoying some degree of autonomy in this paper policies are the outcome of the choices made by two agents within a hierarchy a legislator decides on the budget to be successively spent by a bureaucrat both agents are lobbied by one or two interest groups the combination of sequential decisionmaking and lobbying implies that the interaction between the agent at one tier and the interest group s depends on the exchange between the same interest group s and the agent at the other tier our results concerning multi tier lobbying and legislatorial oversight substantially qualify the conventional wisdom related to one tier lobbying in particular the reaction of the legislator to lobbying at the bureaucratic tier may make lobbying wasteful even when there is no competition from other lobbies moreover the legislator benefits from lobbying only when there is competition between interest groups at the upper tier it is also shown that competition for influence at the bureaucratic tier may work as a perfect substitute for legislatorial oversight extensions of the model indicate its usefulness for the analysis of decisionmaking in other multilevel governance structures like federations or firms

public finance solutions to the european unemployment problem public finance solutions a tax shift away from low paid labour may fight unemployment unemployment in europe is heavily concentrated among low skilled workers it has therefore been suggested that structural unemployment could be reduced by shifting the tax burden away from low skilled labour and away from the production of consumer services which are intensive in the use of such labour this paper finds that a tax shift away from low paid labour may raise aggregate employment and welfare but only if wage formation is sufficiently responsive to changing tax incentives the analysis also suggests that non negligible employment and welfare gains could be reaped by offering tax concessions or subsidies to those parts of the consumer service sector which compete most directly with low productivity home production and with underground economic activity peter birch sorensen

how prudent are consumers using data from the consumer expenditure survey this paper presents a simple test that provides an explicit estimate of the parameter in the utility function that reflects the strength of the precautionary saving motive the coefficient of relative prudence the test yields a fairly precise estimate of a small precautionary motive in fact the estimate is too small to be consistent with widely accepted beliefs about risk aversion the presence of liquidity constrained households does not appear to explain this finding and there is some evidence that self selection of households into risky environments also cannot explain the results

the welfare cost of factor taxation in a perfect foresight model this paper examines the marginal efficiency cost of various factor taxes in a dynamic general equilibrium model the au thor solves for the excess burden of anticipated and unanticipated t emporary and permanent tax policies using a range of estimates for taste and technology parameters he finds excess burdens larger than those indicated by previous studies that use static models these exc ess burdens are sensitive to parameter values and timing however th e rankings of alternative tax policies turn out to be insensitive to structural parameter values copyright 1987 by university of chicago press

marginal welfare cost calculations differential analysis vs balanced budget analysis abstract in a differential analysis tax revenue collections are held constant in a balanced budget analysis the spending level is changed and the level of distortionary taxation is changed correspondingly here income effects are important and efficiency calculations depend chiefly on uncompensated elasticities unless government exhaustive expenditure is assumed to substitute closely for cash a small scale computational general equilibrium model is constructed and differential and balanced budget experiments are performed results show that marginal welfare costs calculated from balanced budget experiments can be negative when labor supply functions are backward bending interactions among parameter values and efficiency costs are explored

precautionary savings of agents with heterogeneous risk aversion this article focuses on the estimation of the importance of the precautionary motive in the wealth accumulation decision we use the micro data set of the de nederlandsche bank dnb household survey dhs centerdata tilburg university a dutch household survey containing information on wealth a subjective measure of income uncertainty and subjective qualitative measures of risk aversion we find that only a small share of wealth is accumulated for the precautionary motive by the dutch households this share of wealth is constant across assets with different degrees of liquidity the economic downturn of the period 2008 to 2010 seems to affect risk attitudes and precautionary saving our findings also suggest that the more risk averse individuals are those who hold less savings

consumption versus expenditure previous authors have documented a dramatic decline in food expenditures at the time of retirement we show that this is matched by an equally dramatic rise in time spent shopping for and preparing meals using a novel data set that collects detailed food diaries for a large cross section of u s households we show that neither the quality nor the quantity of food intake deteriorates with retirement status we also show that unemployed households experience a decline in food expenditure and food consumption commensurate with the impact of job displacement on permanent income these results highlight how direct measures of consumption distinguish between anticipated and unanticipated shocks to income whereas measures of expenditures obscure the distinction

conflict and cooperation the structure of equilibrium payoffs in common agency abstract this paper is a contribution to the theory of common agency initiated by b d bernheim and m d whinston 1986 quart j econ 101 1 31 by common agency we mean the following an agent decides upon an action which affects its well being as well as the well being of n other individuals the principals each of whom offers a menu of payments contingent on the action chosen under complete information bernheim and whinston prove the existence of an interesting subset of nash equilibria they call truthful provide arguments in defense of this refinement and characterize the set of equilibrium payoffs this paper provides a set of theoretical results to identify the structure of equilibrium payoffs with special attention to the payoff of the agent by focusing on complete information we are in a position to evaluate the effects of competition per se on the magnitude of the rent obtained by the agent we illustrate this user guide on a wide and diverse family of applications including auctions competition for an input economic influence and private production of public goods journal of economic literature classification numbers c72 d72

economic policy and special interest politics a great deal of research has been done on the boundary between economics and political science in the last five to ten years this research in political economics spans many subfields such as macroeconomics trade public finance regulation rational choice politics and game theory a common denominator has been to study structural models of the political process agents behave rationally within well specified economic and political institutions where the policymaking process is formulated as an extensive form game methodologically much progress has been made relative to traditional approaches which were often based on inconsistent or irrational political and economic behaviour relying on non derived influence functions political support functions or vote functions yet the modem work has largely developed separately in each subfield without much contact with other subfields and each of the resulting literatures tends to focus on a distinct but partial aspect of the political process in this lecture i shall argue that even though the progress to date has been substantial we can gain a better understanding of policymaking in democracies by combining the insights from different strands of thinking on some economic policy issues the conflicting views both among citizens and politicians basically reduce to a single left to right dimension examples may include the politics of inflation vs unemployment capital taxation or the size of government we can think about policy issues within this domain of general interest politics as being resolved via traditional downsian electoral competition at least to a first approximation but the economic policy process also allows narrow interest groups ample opportunities to concentrate benefits to their own group at the expense of the population as a whole the resulting policy conflict is generically multi dimensional resolving it by voting alone would thus result in condorcet cycles we therefore need to go beyond the simplest electoral models to understand policy determination within this domain of special interest politics this lecture deals with special interest politics to make my point about fruitful analytical arbitrage i will stick to the same underlying policy example throughout this will be a simple model of a society where the government uses

welfare the earned income tax credit and the labor supply of single mothers during 1984 1996 welfare and tax policy were changed to encourage work by single mothers the earned income tax credit was expanded welfare benets were cut welfare time limits were added and welfare cases were terminated medicaid for the working poor was expanded as were training programs and child care during this same time period there were unprecedented increases in the employment and hours of single mothers we show that a large share of the increase in work by single mothers can be attributed to the eitc and other tax changes with smaller shares for welfare benet cuts welfare waivers training programs and child care programs