efficiency and equalization payments in a federal system of government a synthesis and extensions of recent results this paper investigates the rationale for a system of equalization transfers in a federal system of government the existing sources of inefficiency of resource allocation in economies with more than one level of government are synthesized in the framework of a simple decentralized multiprovince model with mobile factors of production the sources of inefficiency arise first because migrants respond at the margin to incorrect signals owing to the phenomena of rent sharing and fiscal exterality and second because of global rather than local inefficiencies the model is then extended to consider the role of the federal government in providing intergovernmental transfers in the face of such inefficiencies in addition to synthesizing the sources of inefficiency in federal models the equity arguments for equalization are briefly recounted efficacite et paiements de perequation dans un systeme federal de gouvernement synthese et extensions de certains resultats recents ce memoire examine la logique qui soustend un systeme de paiements de perequation dans un systeme fdderal de gouverement les auteurs utilisent un modele simple d un systeme multi provincial decentralise avec des facteurs de production mobiles pour definir les sources d inefficacite dans l allocation des ressources dans les dconomies qui possedent plus d un niveau de gouvernement ces inefficacites proviennent de ce que d abord ceux qui se deplacent le font en reponse a la marge a des signaux incorrects engendres par le partage de la rente sur la base de la residence et par les phenomenes d exteralites fiscales elles sont aussi le resultat d inefficacites globales plutot que locales dans le cadre de ce modele les auteurs analysent le role du gouvernement federal effectuant des transferts inter gouverementaux pour corriger ces inefficacites en plus de presenter une synthese des sources d inefficacite dans les regimes federaux les auteurs font un bref rappel en passant a l ensemble des arguments fondes sur l equite qu on utilise pour rationaliser les paiements de perequation this paper is a linear combination of two papers presented at the may 1982 meetings of the canadian economics association in halifax entitled the case for equalization payments by the authors and recent developments in the theory of regional economic policy in canada by boadway the authors are grateful for comments by the discussants jim johnson and baxter macdonald and by jack mintz brian scarfe gerard belanger david sewell tom courchene and the referees we are especially heavily indebted to dan usher for many stimulating comments and suggestions while the work was in progress some of the above persons will undoubtedly disagree with the emphasis we have chosen to put on various aspects of the analysis for policy purposes support for some of this work has been provided by the economic council of canada and is gratefully acknowledged canadian journal of economics revue canadienne d economique xv no 4 november novembre 1982 printed in canada imprimd au canada 0008 4085 82 0000 0613 01 50 1982 canadian economics association this content downloaded from 207 46 13 127 on wed 12 oct 2016 04 27 47 utc all use subject to http about jstor org terms 614 robin boadway and frank flatters

bequests gifts and social security this paper analyses the very long run or stationary state impact of an unfunded social security system we use an overlapping generations model framework a key feature is that while parents care about their children and can leave non negative bequests to them children also care about their parents and can make non negative gifts to them we show that the possibility of negative net bequests may make social security less harmful to private wealth accumulation than would otherwise be the case a subsidiary finding is that risk loving behaviour may emerge for some households due to the nature of intergenerational transfers within family lines

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

promotion of the agricultural sector and political power in austria in most industrialized countries farmers as a small and well orgnized group are ableto influence government decisions to get rent creating proposals enacted two different viewsare presented to explain why the chicagoan view efficient redistribution hypothesis and the virginian view inefficient outcome of political bargaining a vertically structuredempirical model of the austrian farm sector is employed to test both hypotheses quantitativeresults of the welfare transfers from consumers taxpayers to farmers and agribusiness firmsare derived and the political weights of these groups are presented

redistributing income back to european community consumers and taxpayers through the common agricultural policy a multiple policy instrument generalization of gardner s surplus transformation curve analysis is applied to an empirical model of the ec wheat sector to compare welfare effects of policy change proposals a production quota support price combination is estimated as the most efficient means of making relatively small transfers from ec agriculture to consumers taxpayers a coresponsibility levy support price combination is estimated as the most efficient means of making larger transfers the importance of accounting for income transfer size distortions in related markets and the structure of markets when comparing welfare effects of policy change proposals is demonstrated

too many cooks committees in monetary policy how many people should decide about monetary policy in this paper we take an empirical perspective on this issue analyzing the relationship between the number of monetary policy decisionmakers and monetary policy outcomes using a new data set that characterizes monetary policy committees mpcs in more than 30 countries from 1960 through 2000 we find a u shaped relation between the membership size of mpcs and inflation our results suggest that the lowest level of inflation is reached at mpcs with about seven to ten members similar results are obtained for other measures such as inflation variability and output growth we also find that mpc size influences the success of monetary targeting regimes in contrast there is no evidence that either turnover rates of mpc members or the membership composition of mpcs affect economic outcomes

power sharing in monetary policy committees evidence from the united kingdom and sweden committees may make better monetary policy decisions than individuals however the benefits of group decision making could be lost if committee members cede power to a chairman we develop an econometric model to describe intracommittee power sharing across members estimation of the model permits us to classify monetary policy committees into the typology developed by blinder 2004 2007 we estimate our model for the united kingdom s bank of england boe and sweden s riksbank results for the boe suggest that the governor has little influence over other committee members while those for the riksbank indicate that the governor is highly influential

overconfidence monetary policy committees and chairman dominance abstract monetary policy decisions are typically characterized by three features i decisions are made by a committee ii the committee members often disagree and iii the chairman is almost never on the losing side in the vote we show that the combination of overconfident policymakers and a chairman with agenda setting rights can explain all these features the optimal agenda setting power to the chairman is a strictly concave function of the degree of overconfidence we also show that the quality of advice produced by the central bank staff is higher in a flat organization than in a hierarchical one

ex post redistribution in a federation implications for corrective policy abstract this paper analyzes whether changes in the timing of equalizing transfers to state governments necessitate an adjustment in federal corrective policy according to the existing literature assuming an ex ante choice of transfers the corrective grant is equal to the marginal damage benefit inflicted by externality generation when the federal government accommodates state finances ex post the grant differs in formula from existing prescription allocative federal policy corrects state policy incentives twofold it entails a correction for the distortion in the marginal benefit of state spending as in earlier literature and for the distortion in the marginal cost of public funds induced by the ex post provision of transfers the required grant rule is generically disproportionate to the equilibrium externality even with lump sum taxation furthermore the ex post provision of transfers is critical for the nature of the equilibrium inefficiency equalizing transfers at least partly internalize consumption spill overs but simultaneously establishes a new source of inefficiency as a final result the existing prescription for allocative federal policy continues to apply if the public good is pure

measuring the social costs of suboptimal combinations of policy instruments a general framework and an example abstract since most agricultural programs employ two or more policy instruments simultaneously it is notable that little research has attempted to find optimal instrument combinations and no research exists which evaluates the social costs unrealized benefits of combining instruments suboptimally in our paper we report a simple and feasible method to find optimal policy instrument combinations and we provide the first general formal approach to measuring the social costs of suboptimal policy instrument combinations our approach is illustrated in an analysis for five major u s crops corn feed grains wheat rice cotton the simple model we employ for the illustration suggests that except for the feed grains program the observed programs combined policy instruments quite suboptimally we conclude that agricultural economics research now can and should begin placing increased emphasis on studying optimal policy instrument combinations

the efficiency of alternative policies for the ec s common agricultural policy comment in a recent article in this journal de gorter and meilke dgm compare the redistributive efficiency of agricultural price support policies under alternative assumptions about accompanying supply control measures using a long run supply curve which is assumed invariant with respect to policy choice dgm assess the consumer taxpayer cost per ecu of total producer surplus under different policies and conclude that individual production quotas followed closely by a two tier price policy are preferable to price reductions or a coresponsibility levy the main substance of this note is that dgm s failure to recognize the underlying structural problems of ec agriculture and to identify the true political target of income support measures renders their approach incapable of yielding a determinate ranking of these measures in terms of their medium term efficiency and invalidates their policy recommenda

monetary policy committees and interest rate setting abstract this paper shows that it is preferable for monetary policy to be conducted by a committee instead of a single policy maker if there is uncertainty about potential output we examine three decision procedures an optimal procedure averaging and voting and find that the latter is the appropriate way to reach decisions if policy makers are not equally skilled finally we demonstrate that efficient decision procedures reduce the persistence of shocks

moderation in groups evidence from betting on ice break ups in alaska we use a large sample of guessed ice break up dates for the tanana river in alaska to study differences between outcomes of decisions made by individuals versus groups we estimate the distribution of guesses conditional on whether they were made by individual bettors or betting pools we document two major distinctions between the two sets of guesses 1 the distribution of guesses made by groups of bettors appears to conform more to the distribution of historical break up dates than the distribution of guesses made by individual bettors and 2 the distribution for groups has less mass in its tails and displays lower variability than the distribution for individuals we argue that these two pieces of evidence are consistent with the hypothesis that group decisions are more moderate either because groups have to reach a compromise when their members disagree or because individuals with extreme opinions are less likely to be part of a group

teams take the better risk abstract one reason why decision makers are often teams and not individuals may be that team decisions comply more closely with economic rationality we compare individual and team decisions when systematic deviations from the expected utility theory eut and the portfolio selection theory pst are to be expected we find almost no evidence for the greater compliance of team decisions with the principles of eut however there is substantial evidence for the consistency of team decisions with the pst compared to individuals teams accumulate significantly more expected value at a significantly lower total risk measured in standard deviation s d

some neglected social costs of government spending in farm programs economic welfare analyses of farm programs typically assume that the direct social opportunity cost of subsidy payments is one dollar per dollar of government spending recent literature suggests that the marginal opportunity cost of a dollar of u s federal government spending is more likely to be in the range of 1 20 to 1 50 this implies that the net social costs of farm programs that involve government spending are significantly greater than the typical estimates in addition the normative efficiency ranking of alternative policies is sensitive to the marginal opportunity cost of government spending

efficiency of decoupled farm programs under distortionary taxation when lump sum taxation is not feasible decoupled transfers to farmers which require raising government revenue will entail welfare loss somewhere in the economy assuming the government s objective is to assure a given welfare level for farmers we show that when decoupling is possible free trade is always superior to some tariff protection for a small country even under distortionary taxation as expected for a large country there is scope for an optimal tariff policy that improves the terms of trade however we show a separation between the exercise of market power through an optimal tariff and the interaction of distortionary taxation with transfers to farmers we conclude that decoupling is usually desirable even in a distorted economy in which lump sum taxation is not feasible

the dissent voting behaviour of central bankers what do we really know we examine the determinants of the dissent in central bank boards voting records about monetary policy rates in the czech republic hungary sweden the uk and the us in contrast to previous studies we consider 25 different macroeconomic financial institutional psychological or preference related factors jointly and use bayesian model averaging bma to formally assess the attendant model uncertainty we find that the rate of dissent is between 5 and 20 for the examined central banks our results suggest that most of the examined regressors including factors that capture the effects of inflation and output are not robust determinants of voting dissent this result suggests that unobserved characteristics of central bankers and different communication strategies drive the dissent rather than the level of macroeconomic uncertainty

democracy and economic growth a historical perspective recent studies appear to show that democracy has no robust association with economic growth yet all such work assumes that the causal effect of democracy can be measured by a country s regime status in a particular year t which is correlated with its growth performance in a subsequent period t 1 the authors argue that democracy must be understood as a stock rather than a level measure that is a country s growth performance is affected by the number of years it has been democratic in addition to the degree of democracy experienced during that period in this fashion democracy is reconceptualized as a historical rather than a contemporary variable with the assumption that long run historical patterns may help scholars to understand present trends the authors speculate that these secular historical infiuences operate through four causal pathways each of which may be understood as a type of capital physical capital human capital social capital and political capital this argument is tested in a cross country analysis and is shown to be robust in a wide variety of specifications and formats

price support to the ec agricultural sector an optimal policy politicians in all developed countries including the ec countries have consistently chosen to support the farmers through the market and thus slowed down the adaptation of the agricultural sector to lower prices which would otherwise have taken place the main principle of ec agricultural policy which was formulated in the 1960s was to guaran tee farmers prices significantly above world market prices for a number of key products to secure the income of farmers at a reasonable level

efficient income redistribution for a small country using optimal combined instruments abstract in this paper i improve gardner s surplus transformation curve framework by assuming that governments are able to vary many policy instruments simultaneously instead of only one i use my framework to find the combination of the currently used instruments which provides the most efficient income redistribution for the austrian bread grains market comparing the most efficient policy with the actual policy reveals that 464 10 6 austrian shillings were wasted i theoretically compare for a small country the transfer efficiency of every possible pair of the four major agricultural policy instruments floor price production quota co responsibility levy and deficiency payments without considering the marginal cost of public funds mcf deficiency payments cum quota equal to a fully decoupled direct income support is the most efficient policy succeeded by floor price cum quota and floor price cum deficiency payments if the mcf is taken into account the ranking crucially depends on the market parameters the transfer level and the value of the mcf for the austrian bread grains market i empirically demonstrate that given the present support level a fully decoupled direct income support redistributes income most efficiently as long as the mcf is lower than 1 17 beyond this value a floor price cum quota policy becomes more efficient a floor price cum deficiency payments policy is never superior to the floor price cum quota

a fiscal federalism analysis of debt policies by sovereign regional governments this paper takes a fiscal federalism approach to analyzing debt issue by subfederal regional governments households have a short run attachment to a particular region but are free to migrate between regions in the long run regional governments choose their fiscal policies independently it is shown that the nash equilibrium of regional fiscal policies is one where migration is efficient and households are insured against the idiosyncratic part of shocks occurring in the region in which they live however regional governments issue too much debt relative to the level that would be issued under a coordinated policy such as that which might be carried out by a federal government

consistent estimation of general equilibrium welfare effects a general equilibrium demand curve is appropriate for measuring the surplus changes in several markets induced by a policy intervention in one market guidelines for the identification and consistent estimation of such a demand curve are discussed specifically conditions are stated under which the dropping of prices of related goods yields a consistent estimate of the slope of the general equilibrium demand curve also a method similar to leamer s is proposed to provide consistent bounds for the general equilibrium demand slope when the slope is underidentified

altruism within the family reconsidered do nice guys finish last this paper criticizes the view that altruism either increases the benefits of group interactions or improves the allocation of resources within families the authors identify a variety of circumstances in which members of a group would prefer to interact with less altruistic individuals and in which the efficiency of resource allocation is inversely related to the prevailing degree of altruism reasons that altruism might be a counter productive social force include 1 it can alter the social utility possibility frontier in surprising and sometimes unfortunate ways 2 it can entail exploitability causing family members to behave in ways that leave all parties worse off 3 altruists may take inefficient actions to preempt exploitation and 4 family members may establish efficient resource allocation by punishing selfish behavior a rise in the level of altruism may lead to the exclusion of certain punishment strategies on the grounds of credibility 1 general positive result is that sufficiently high levels of altruism almost always lead to efficient resource allocation one should not necessarily expect to find strong altruistic linkages between spouses nor should altruism necessarily contributed to marital stability in addition to the connections between this work and the literature on family behavior this analysis has broader implications concerning the role of altruism in society and the evolution of social conscience

ethnic heterogeneity and public goods provision in zambia evidence of a subnational diversity dividend the diversity debit hypothesis that ethnic diversity has a negative impact on social economic and political outcomes has been widely accepted in the literature indeed with respect to public goods provision the focus of this article the conventional wisdom holds that a negative relationship between ethnic heterogeneity and public goods provision is so well established empirically that future research should abandon examination of whether such a relationship exists and focus instead on why it exists that is on the mechanisms underlying a negative relationship this article challenges the conventional wisdom on empirical grounds it demonstrates at the sub national level strong evidence for a diversity dividend that is a positive relationship between ethnic heterogeneity and some measures of public goods provision in particular welfare outcomes related to publicly provided goods and services building on the literature the article draws on new analysis at district level for zambia using a new dataset compiled by the authors from administrative budget and survey data which cover a broader range of public goods outcomes than previous work including information on both budgetary and welfare outcomes the article explores why relationships may differ for sub national budgetary and welfare outcomes considering separate models for each analysis shows results to be robust across a variety of alternative specifications and models given the more nuanced relationship between ethnic diversity and public goods provision documented the article argues that the key task for future work is not to address why the relationship is negative but to study under what conditions such direction holds true and the mechanisms that underlie a diversity dividend it concludes by considering key explanatory hypotheses against the zambian data to identify promising areas for such theory development more broadly while the diversity debit hypothesis highlights the costs of diversity and could be interpreted as providing support for polices that minimize it the findings in this article are consistent with a view that diversity can be good for communities not only for normative reasons but also because under some conditions it can support concrete welfare gains

misplaced childhood when recession children grow up as central bankers abstract we examine how much an early i e childhood experience of recession influences the behavior of central bankers we develop a model of decision making by a committee whose leader and members exhibit recession aversion due to their personal experience the model reveals that recession aversion could lead to a reluctance of the policymaker to increase policy rates in a panel multinomial logit model for nine major central banks analyzed over the period 1999 2015 we find that growing up in a recession influences monetary policy making central bankers early personal experiences of recessions shape their policy reactions increasing the willingness to cut policy rates with policy relevant magnitudes the results are robust to alternative behavioral hypotheses accounting for a number of control variables or sample variation

optimality free mobility and the regional authority in a federation abstract this paper examines the efficiency properties of a federation characterized by strategically competing regions and freely mobile homogeneous individuals analyses of this economy have concluded that achieving a pareto optimal will require intervention by a national authority this paper makes one basic point the nash equilibrium of regional authority behavior is pareto optimal the implication is that there is no role for a national authority in either providing interregional transfers or correcting for decentralized provision of public goods the nash equilibrium involves samuelson public goods provision and regions purchasing preferred population distributions with optimal interregional transfers

central governance or subsidiarity a property rights approach to federalism abstract we consider a model where one region in a federation can realize a public project after undertaking value increasing investments while negotiations on the federal level ensure that an efficient project size is implemented in equilibrium non contractibility of investments causes the overall outcome to differ across regimes if the region bears the entire implementation costs of its policies underinvestment prevails and subsidiarity centralized governance is superior when spillovers are weak strong conversely if linear cost sharing arrangements are feasible decentralized authority often admits a socially optimal outcome while centralized authority with majority or unanimity rule does not

deliberation and learning in monetary policy committees i introduction recent theoretical and experimental work on the monetary policy decision process supports the argument that committees may make better policy decisions than individuals e g blinder 2007 blinder and morgan 2005 gerlach kristen 2006 lombardelli proudman and talbot 2005 blinder 2004 38 39 offers four reasons why monetary policy committees mpcs might make better choices than individuals first when members have different preferences diversification avoids extreme outcomes second even if members have similar preferences they might use different models to reach their conclusions third members might use different forecasts or forecasting techniques finally individuals might use different modes of reasoning or heuristics to approach problems the last three reasons in blinder s list suggest that members bring distinct perspectives or information to a committee meeting deliberation in the committee meeting requires members to confront their differences and could result in both learning and better policy decisions former bank of england mpc member richard lambert 2005 and former federal reserve bank of boston president cathy minehan 2006 have pointed to the importance of deliberation in mpc meetings particularly revealing are minehan s 2006 comments about her experience on the federal open market committee fomc one highly important element in dealing with uncertainty is the strength of the committee itself in that regard it is perhaps fashionable to deride committee decision making in general as bureaucratic and cumbersome my view is that in situations where there are many possible philosophical approaches and a lot at stake a committee helps its members to both see all aspects of the issue and weigh the risks and costs of a particular decision as with other vital institutions like the supreme court there is value to a committee decision on policy versus one taken by a single executive the importance of deliberation in various decision making contexts has also been addressed in political science austen smith and feddersen 2006 contribute to the literature on jury deliberation by offering a theoretical analysis of how different voting rules shape voters incentives to share information prior to a vote being taken barabas 2004 finds evidence that deliberation is an effective way to disseminate information and shape opinions about public policy issues u s supreme court justice stephen breyer has explained how deliberation matters in supreme court conferences cited in brafman and brafman 2009 kindle location 1764 if someone is going to write a dissent they have a point they have some kind of point they re trying to make quite often the opinion of the majority is changed somewhat in response to comments and opinions of the dissenters occasionally maybe once or twice a year the whole court shifts even when dissenters do not have enough votes to change the court s opinion they still affect the process it makes the other person take account of the point they have to answer it or they have to take it into account breyer said in the case of the fomc bailey and schonhardt bailey 2008 use a full text content analysis of the 1979 and 1980 fomc transcripts to study the importance of deliberation in the decision to shift to anti inflationary policy under chairman paul volcker they conclude that deliberation in the fomc did indeed matter both in 1979 and 1980 p 404 as volcker led his colleagues to adopt a new operating procedure and maintain a more restrictive monetary policy stance bailey and schonhardt bailey 2009 extend their analysis to the 1979 1999 period and find that the role of deliberation declined from the volcker era to the greenspan era woolley and gardner 2009 concur with this result even in light of previous theoretical and empirical work on deliberation though bailey and schonhardt bailey 2009 22 nevertheless argue that too little attention has been given to understanding the process of deliberation in policymaking and how this yields outcomes decisions and the quality of those outcomes

committees as substitutes for commitment in this article policies are negotiated in a committee by playing a dynamic voting game with an endogenous default or status quo policy i show that joining a committee by maintaining a strong agenda setting power is a way for a decision maker to commit to a policy that in absence of committees is not time consistent the disciplinary role of the endogenous status quo and the heterogeneity of preferences within the committee are two crucial ingredients to obtain this result as a motivating example this article focuses on the time consistency of monetary policy

too big or too small a synthetic view of the commitment problem of interregional transfers abstract there is a growing body of literature on the commitment problem of interregional transfers the problem occurs because of an ex post bailout by a central government leading to ex ante adverse incentive consequences for a local government however different models have yielded different economic consequences the local government may be too large overspending and or overborrowing or it may be too small raising less of its own revenue in the presence of interregional spillovers the equilibrium may yield a pareto efficient outcome the present paper aims to synthesize these models developing a simple decentralized leadership model a critical question concerns what decision is made ex ante by the local government namely public expenditure or tax collection with the remaining policy instrument being residual adjusted by ex post transfers we discuss how different scenarios affect the equilibrium outcome

designing monetary policy committees we integrate monetary policy making by committee into a new keynesian model to assess the consequences of the committee s institutional characteristics for inflation output and welfare our analysis delivers the following results first we demonstrate that transparency about the committee s future composition is typically harmful second we show that short terms for central bankers lead to effective inflation stabilization at the expense of comparably high output variability third larger committees generally allow for more efficient stabilization of inflation but possibly for less efficient output stabilization fourth large committees and short terms are therefore socially desirable if the weight on output stabilization in the social loss function is low fifth we show that a central banker with random preferences may be preferable to a central banker who shares the preferences of society

efficiency of alternative policies for the ec s common agricultural policy the common agricultural policy cap of the european community ec is facing a crisis from budgetary and political pressures this study analyzes the relative efficiency of four policy options discussed at the recent emergency summit in brussels including a price reduction coresponsibility levies production controls and a two price plan these are assessed in terms of their efficiency in achieving producer welfare a two price plan is superior to a production quota only at lower producer income goals a price reduction policy is more efficacious than a coresponsibility levy but both are shown to be inferior to either quotas or a two price plan

are two heads better than one monetary policy by committee two experiments were conducted to test the common hypothesis that groups make decisions more slowly than individuals one of these experiments imitates real life monetary policy decisions in both cases the hypothesis is found wanting groups are not slower than individuals in both experiments we also find that group decisions are on average better than individual decisions this holds regardless of whether the groups make decisions by unanimity or majority rule simple mechanical theories of group decisionmaking that the group follows its average player median player or best player do not explain the results group interactions seem to matter

income redistribution in a federal system the question of the appropriate level of government to undertake income redistribution is receiving renewed attention from economists the standard argument about the issue might be summarized as follows 1 interstate migration of taxpayers and transfer recipients raises the cost to voters of income redistribution at the state level above the cost at the federal level 2 statewide redistribution confers spillover benefits to residents of other states 3 therefore as compared with a national system decentralized responsibility for income redistribution yields both less redistribution and less than the socially optimal amount of income redistribution the purpose of this paper is only to question step 1 of the above argument of course readers who accept the assumptions of the standard argument may conclude that the possible weakening of step 1 of that argument reduces the likelihood that its conclusion holds the paper argues that the cost of redistribution faced by state residents may in fact be lower at the state level than at the national level because their federal tax obligations fall as the state redistributes more income thus part of the cost of redistribution at the state level can be exported to residents of other states the state s federal tax bill falls when taxable incomes in the state are reduced by increased redistribution deductibility of state taxes enhances this result but is not necessary for it to demonstrate the proposition without adding unnecessary complication a simple model of income redistribution is described in which governments at all levels use linear tax transfer schedules to redistribute income the single government case is considered first then two levels of government are introduced and finally migration is allowed it is shown that without migration state costs are never greater than national costs of redistribution as long as redistribution reduces total money income when migration is allowed the result depends on the elasticity of migration responses compared with the elasticity of labor supply responses

communication by central bank committee members different strategies same effectiveness the paper assesses the communication strategies of the federal reserve the bank of england and the european central bank and their effectiveness we find that the effectiveness of communication is not independent from the decision making process the paper shows that the federal reserve has been pursuing a highly individualistic communication strategy amid a collegial approach to decision making while the bank of england is using a collegial communication strategy and highly individualistic decision making the european central bank ecb has chosen a collegial approach both in its communication and in its decision making assessing these strategies we find that predictability of policy decisions and the responsiveness of financial markets to communication are equally good for the federal reserve and the ecb this suggests that there may not be a single best approach to designing a central bank communication strategy

comment on enhancing central bank communications using simple and relatable information a tradeoff between simplicity and the need to convey the central bank s message central bank communication should be simple but not simpler a within subject experiment would have been telling whether communication worked

do fiscal variables affect fiscal expectations experiments with real world and lab data we generate observable expectations about fiscal variables through laboratory experiments using real world data from several european countries as stimuli we compare a var model of expectations for data which is presented in a fiscal frame with one for neutrally presented data we measure the degree to which participants use fiscal data for their forecasts agents expectations are found neither to be consistent with rational nor with purely adaptive expectations but instead follow an augmented adaptive scheme methodological implications of the present approach for experiments in macroeconomics are also discussed

a critical assessment of the political preference function approach in agricultural economics abstract the policy preference function ppf approach has become popular with economists seeking to explain the origin of government policies in this paper a distinction between positive and normative work with the ppf concept is made positive work is shown to suffer from a variety of shortcomings including the misspecification of traditional ppfs and the failure to consider the importance of institutions constraints and the interaction between different commodity policies these weaknesses are reflected in the counter intuitive results of a simple ppf model designed to reflect the interaction between the ec s wheat and barley policies furthermore it is demonstrated that ppf weights change as a result of both political preferences and market parameters hence changes in ppf weights cannot be attributed to changes in preferences alone test of the axioms of revealed preference theory are used to demonstrate that even though ppf weights derived for the ec s wheat and barley markets have fluctuated considerably since the early 1970s we are not able to conclude that there has been a shift in political preferences the paper concludes with some comments about the use of ppfs in a normative framework the underlying assumption that policy makers optimise seems not surprisingly often to lead practitioners to the conclusion that observed policies are not so bad after all economists should also beware of the tendency to overlook possible differences between the ppf and the social welfare function

pure public goods and income redistribution in a federation with decentralized leadership and imperfect labor mobility abstract we examine the non cooperative provision of a pure public good by regional governments in a federation similar to the european union where regional governments are stackelberg leaders and the central government is a stackelberg follower a federation with decentralized leadership the center makes interregional income transfers after it observes the contributions to the pure public good imperfectly mobile workers react to regional and central governments policies by establishing residence in their most preferred region despite the degree of labor mobility we show that the pure public good and interregional transfers are generally allocated efficiently in a federation with decentralized leadership

the dynamic in efficiency of monetary policy by committee this paper develops a model where the value of the monetary policy instrument is selected by a heterogenous committee engaged in a dynamic voting game committee members differ in their institutional power and in certain states of nature they also differ in their preferred instrument value preference heterogeneity and concern for the future interact to generate decisions that are dynamically inefficient and inertial around the previously agreed instrument value this model endogenously generates autocorrelation in the policy variable and helps explain the empirical observation that the distribution of actual interest rate changes has a mode of zero

who follows the crowd groups or individuals abstract in games of social learning individuals tend to give too much weight to their own private information relative to the information that is conveyed by the choices of others weizsacker 2010 in this paper we investigate differences between individuals and small groups as decision makers in information cascade situations in line with results from social psychology as well as results on bayesian decision making charness et al 2006 we find that groups behave more rationally than individuals groups in particular are able to abandon their own private signals more often than individuals when it is rational to do so our results indicate that the intellective part of the decision task contributes slightly more to the superior performance of groups than the judgmental part our findings have potential implications for the design of decision making processes in organisations finance and other economic settings

in search of rational government what political preference function studies measure and assume political preference function ppf studies assume that policy making can be described by a mathematical problem in which a rational government maximizes a function of interest groups welfares the purpose of my paper is to explain in depth ramifications of ppf study assumptions and methodology ppf studies that attempt to measure interest group political power do so by measuring marginal rates of transformation along a pareto frontier one can estimate political power with a ppf only if observed policies are pareto efficient which may depend on the assumed number of interest groups and policy instruments marginal rates of transformation need not reveal anything meaningful about interest group political power and may incorrectly measure the direction of transfers

speculative attacks with multiple sources of public information we propose a speculative attack model in which agents receive multiple public signals it is characterised by its focus on an informational structure which sets free from the strict separation between public information and private information diverse pieces of public information can be taken into account differently by players and are likely to lead to different appreciations ex post this process defines players private value the main result is to show that equilibrium uniqueness depends on two conditions i signals are sufficiently dispersed ii private beliefs about the relative precision of these signals sufficiently differ we derive some implications for information dissemination policy transparency in this context is multi dimensional it concerns the publicity of announcements the number of signals disclosed as well as their precision especially it seems that the central bank has better not publishing its forecast errors in order to maintain stability an illustration to our analysis is the recent debate concerning the optimal monetary policy committee structure of central banks

on the role of heuristics experimental evidence on inflation dynamics we run an experiment where groups of six subjects must set prices in a non stationary macroeconomic environment where prices are complements the exogenous variable a business indicator is common knowledge and prices are flexible disregarding sticky prices or sticky information in a first treatment subjects insignificantly corrected for past errors which implies that history plays a role for determining current prices by reporting the business indicator in a simpler form the second treatment tacitly offered a heuristic for setting prices this option was widely taken bringing about an excess response to the business indicator and a significant deviation from equilibrium even in the long run in a third treatment with staggered pricing we observe that subjects look only one round into the future but not further ahead contrary to theoretical predictions our findings suggest that monetary transmission may be impaired due to what we label sticky reasoning the failure or unwillingness to iteratively delete dominated strategies 2013 elsevier b v all rights reserved

are government transfers efficient an alternative test of the efficient redistribution hypothesis the efficient redistribution hypothesis says that no available government policies are pareto superior to observed government policies efficient redistribution from government policy is a central tenet of much recent theoretical and applied political economy literature in this paper limitations of previous attempts to test the efficient redistribution hypothesis are discussed and an alternative test of the efficient redistribution hypothesis that uses vector optimization theory and bootstrap methodology is presented

partial market liberalization and the efficiency of policy reform the case of the european dairy sector this article analyzes the efficiency of partial market liberalization and policy reform with an application to the european dairy sector in a second best world partial moves toward market liberalization are not always efficiency improving we develop a general equilibrium model to investigate the efficiency implications of discrete changes in government policy the analysis covers price and quantity instruments used in both domestic and trade policy we derive simple conditions under which partial market liberalization is efficiency improving we apply the approach to agricultural policy reform in the european dairy sector and identify market liberalization scenarios that are not efficiency improving

flexible majority rules for central banks we propose a flexible majority rule for central bank committees where the size of the majority depends monotonically on the change in interest rate within a particular time frame small changes in the interest rate require a small share while larger changes require a larger share of supporting votes we show that flexible majority rules are superior to simple majority rules

interregional spillovers in the presence of perfect and imperfect household mobility abstract when households are immobile across regions the decentralized provision of public goods that generate interregional benefit spillovers is inefficiently low we analyze this problem in an environment of interregional household migration and obtain the following results if households are perfectly mobile across regions then the decentralized provision of public goods generating spillovers is socially efficient there is no need for central government intervention if households are attached to particular regions for cultural or nationalistic reasons however at least one of two regions undersupplies the public good central government intervention can enhance efficiency

a fresh look at the rotten kid theorem and other household mysteries gary becker s rotten kid theorem asserts that if all family members receive gifts of money income from a benevolent household member then even if the household head does not precommit to an incentive plan for family members it will be in the interest of selfish family members to maximize total family income i show by examples that the rotten kid theorem is not true without assuming transferable utility i find a simple condition on utility functions that is necessary and sufficient for there to be the kind of transferable utility needed for a rotten kid theorem while restrictive these conditions still allow one to apply the strong conclusions of the rotten kid theorem in an interesting class of examples

taxation and deadweight loss in a system of intergovernmental transfers intergovernmental transfer programs in many federal systems including canada attempt to equalize differences in subnational jurisdictions tax capacities on the basis of the so called representative tax system rts it is shown that rts equalization grants effectively compensate subnational governments for a portion of the deadweight loss associated with taxes and consequently the grants may tend to increase the distortionary tax rates chosen by subnational governments this may be the case even when equalization is confined to tax bases that themselves are nondistortionary such as the taxation of pure economic rents

efficient redistribution through commodity markets efficiency in redistribution is measured in terms of deadweight loss generated per dollar of economic surplus transferred between consumers and producers of a commodity by means of market intervention the implications of supply and demand elasticities for efficiency in redistribution are examined with special attention to the comparison of production control and deficiency payment programs the results may be used to aid in the evaluation of commodity programs and as a basis for consideration of the hypothesis that observed policies are efficient given the political power of interest groups

the tragedy of the commons revisited the importance of group decision making we use a laboratory experiment to compare the way groups and individuals behave in an inter temporal common pool dilemma the experimental design distinguishes between a non strategic problem where players individuals or groups of three make decisions without interaction and a strategic part where players harvest from a common pool this allows us to correct for differences between individuals and groups in the quality of decisions when testing for differences in competitiveness group decisions are either made by majority rule or unanimity the results show that groups are less myopic than individuals i e they make qualitatively better decisions but that they are more competitive than individuals when placed in a strategic setting the net result for groups deciding by majority rule is that they make less efficient decisions in the strategic game than individuals do we are able to show that this is caused by the median voter departing from her original preference in early periods with a shrinking pool when groups have to make unanimous decisions they start playing the strategic game more efficiently then individuals do but they rapidly become more competitive with repetition of the game

judging agricultural policies a survey this survey provides a structured picture of 40 years of literature which uses welfare economic tools to judge agricultural policy challenges and developments of normative agricultural policy analysis are discussed in an easily accessible graphical framework it is shown how the literature has gone from examining a very small discrete set of simple policies to a much broader often continuous set of policies that combine policy instruments simultaneously the importance of the pareto criterion used to explore the limits of how government can affect welfare is revealed moreover given the importance of the objective of income redistribution in agricultural policy agricultural economists have often departed from the purely efficiency oriented tradition in economics it is shown that they have tried to incorporate equity considerations by either adding these criteria as constraints to the social welfare function or directly incorporating these criteria in the functional form of the social welfare function

altruism the samaritan s dilemma and government transfer policy this paper shows that altruism provides an efficiency rationale for public provision of insurance to the poor the framework is one in which there are rich altruists and risk averse poor who face some possibility of loss the government represents the rich and makes transfers on their behalf with unconditional transfers the poor may forgo insurance and rely on private charity to bail them out in the event of loss this reliance on private charity has adverse efficiency effects these may be avoided if the government makes in kind transfers of insurance copyright 1995 by american economic association

a critical assessment of the political preference function approach in agricultural economics the political preference function ppf approach has been used often in the agricultural economics literature in attempts to explain the causes of farm policy the fundamental assumption of ppf studies is that government selects levels of policy instruments such that it maximizes a function of interest groups welfare measures for the purpose of acquiring maximum political support ppf studies often use the familiar neoclassical constrained maximization problem to measure relative political powers of interest groups involved in policy determination some weaknesses of the ppf approach have been discussed in the literature gardner 1989 alston and carter 1991 and von cramontaubadel vct 1992 while each of these critiques provides valuable insight into ppf methodology and its limitations none of them clearly explains the simple fundamental structure of the ppf framework this neglect of certain fundamentals has led to confusion in the litera

do monetary policy committees need leaders a report on an experiment committees always seem to have chairmen and monetary policy committees mpcs are no exception but some mpcs are dominated by their chairmen who are definitely first among unequals while others come closer to making decisions by true consensus or even by major ity vote does it matter is strong leadership an important ingredient in good monetary policy with no real world observations on leaderless

international charity under asymmetric information abstract international charity is often subject to moral hazard and adverse selection problems we show that the burden of informational asymmetries are borne by the most needy countries even when charities design incentive contracts which limit the rents that some countries can extract

public pensions as optimal social contracts abstract a simple overlapping generations model is modified to allow for an externality experienced by the young from consumption by the elderly this sets up a game between generations in which one generation s strategy may be to save too little and rely on gifts from the young e g public assistance for retirement income social security can therefore be viewed as a pareto optimal contract to restore efficient intertemporal allocation a funded public pension plan corresponds to forced saving but is vulnerable in that the next young generation may stop contributing rely on its children for retirement assistance and meanwhile reap the consumption externality from the current elderly s social security benefits this suggests a forced giving or pay as you go type of compulsory pension plan such as exists in most nations which also has the advantage of aiding the initial old generation and therefore generating an immediate consumption externality for the initial young the approach can also be used to explain other aspects of existing social security

rationalizing agricultural export subsidies export subsidies are an important form of agricultural policy especially for large traders such as the united states and the european community a number of small countries also use export subsidies in effect e g saudi arabian wheat or canadian dairy products in that the domestic price is set well above world levels and surplus production is dumped onto the world market a number of recent contributions to trade theory have argued that export subsidies can be welfare enhancing for the subsidizing country and by implication that the policy choice is consistent with the hypothesis that a benevolent government is pursuing pareto efficiency in the present paper we examine these arguments and present an alternative explanation of export subsidies utilizing the concept of efficient redistribution becker gardner 1983 in standard trade models arguments in favor of global export subsidies arise from failure to exploit market power in another good itoh and kiyono feenstra itoh and kiyono use a threegood model to show that subsidies on marginal goods defined as goods not exported at all or exported in small quantities can increase welfare in the subsidizing country a subsidy on marginal goods causes their production to increase and the supply of nonmarginal goods to decrease thereby raising the price of the nonmarginal goods and increasing the exporter s terms of trade feenstra also employs a threegood model and demonstrates that it is possible for the pattern of substitutability and complementarity across goods to allow subsidies to increase welfare the necessary condition is that the subsidized export be a stronger substitute for another exported good or a stronger complement for an imported good in the subsidizing country than abroad the export subsidy increases welfare by improving the terms of trade in the other imported or exported good the distortion in feenstra s model is the failure to exploit market power in the second or third market as an alternative to global export subsidies abbott paarlberg and sharples aps have examined targeted export subsidies and found that in some circumstances they can be welfare improving dutton later showed the aps result arises because they first constrain the export tax to the rest of the world to be zero so that it becomes theoretically possible for the best export tax to the targeted country to be negative the aps result hinges on differences in import demand elasticities and the exporting country s use of market power in order to price discrim

dispersed communication by central bank committees and the predictability of monetary policy decisions the paper asks whether members of central bank decision making committees should communicate with the public in a collegial manner by conveying the consensus or majority view of the committee or in an individualistic way by providing the diversity of views among the committee members it finds that more active as well as more consistent communication by committee members improves the predictability of monetary policy decisions significantly this effect is sizeable as communication dispersion across committee members accounts on average for one third to one half of the market s prediction errors of fomc policy decisions moreover more active and more consistent communication are found to also reduce the degree of uncertainty about the future path of interest rates these findings suggest that a collegial communication which stresses the consensus view on policy inclinations can enhance the effectiveness of central bank communication

tax competition in a fiscal union with decentralized leadership this paper examines capital tax competition in the presence of an interstate transfer policy without federal commitment lack of commitment implies that local tax policy is chosen prior to federal transfers the paper s main result is that ex post federal policy neutralizes horizontal fiscal externalities insulating tax policy from capital mobility federal policy however introduces a new source of inefficiency unrelated to tax competition specifically ex post transfer payments prove to be equivalent to an interstate revenue sharing system which may render federal intervention in the presence of fiscal externalities welfare deteriorating relative to tax competition

preferences or private assessments on a monetary policy committee using bank of england voting data we show empirically that members votes are driven by heterogeneous individual assessments of the economy as well as their individual policy preferences estimates indicate that internal committee members form more precise assessments than externals and are also more hawkish the estimates allow the first quantification of the gain due to information aggregation on monetary policy committees the marginal gain from additional committee members tapers quickly after five members there is no evidence of gains through externals moderating internals preferences a relatively small committee of highly informed internal members emerges as a desirable committee structure

a simple dynamic decentralized leadership model with private savings and local borrowing regulation abstract this paper considers a simple dynamic decentralized leadership model with local borrowing and regional productivity enhancing investment in this model the central government is benevolent but cannot commit to ex post intergovernmental transfer policies while local governments act strategically after accounting for the ex post motives of the central government we then investigate inefficiency in the subgame perfect equilibrium we analyze the effect of central control on local borrowing and show that central control is of no benefit because ex ante local taxation works to offset it we find the model yields different policy implications that central control is effective when extended to the case of residential mobility

monetary policy by committee consensus chairman dominance or simple majority this paper studies the theoretical and empirical implications of monetary policy making by committee under four different voting protocols the protocols are a consensus model where a supermajority is required for a policy change an agenda setting model where the chairman controls the agenda a dictator model where the chairman has absolute power over the committee and a simple majority model where policy is determined by the median member these protocols give preeminence to different aspects of the actual decision making process and capture the observed heterogeneity in formal procedures across central banks the models are estimated by maximum likelihood using interest rate decisions by the committees of five central banks namely the bank of canada the bank of england the european central bank the swedish riksbank and the u s federal reserve for all central banks results indicate that the consensus model fits actual policy decisions better than the alternative models this suggests that despite institutional differences committees share unwritten rules and informal procedures that deliver observationally equivalent policy decisions

an experimental study of compliance and leverage in auditing and regulatory enforcement evidence suggests that a large majority of firms and individuals comply with regulations and tax laws even though the frequency of inspections and audits is often low moreover fines for noncompliance are also typically low when regulatory violations are discovered these observations are not consistent with static compliance models harrington 1988 modified these static models by specifying a dynamic game in which some agents have an incentive to comply even when the cost of compliance each period is greater than the expected penalty this paper reports a laboratory experiment based on the harrington model framework in which subjects move between two inspection groups that differ in the probability of inspection and severity of fine subjects decide to comply or not in the presence of low medium or high compliance costs enforcement leverage arises in the harrington model from movement between the inspection groups based on previous observed compliance and noncompliance our results indicate that consistent with the model violation rates increase when compliance costs become higher and as the probability of switching groups becomes lower behavior does not change as sharply as the model predicts however since violation rates do not jump from 0 to 1 as parameters vary across critical thresholds a simple model of bounded rationality explains these deviations from optimal behavior

transparency and deliberation within the fomc a computational linguistics approach how does transparency a key feature of central bank design aect the deliberation of monetary policymakers we exploit a natural experiment in the federal open market committee in 1993 together with computational linguistic models particularly latent dirichlet allocation to measure the eect of increased transparency on debate commentators have hypothesized both a benecial discipline eect

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

the incidence of agricultural policies abstract a general equilibrium model is used to analyze agricultural policy incidence in the presence of distortionary income taxation the incidence of lump sum transfers to farmers supply control through input retirement and production subsidies are considered partial equilibrium incidence calculations are shown to systematically overstate the benefits farmers receive from farm programs kaldor s compensation test is used to judge the relative efficiency inefficiency of alternative farm programs at the margin supply control through input retirement may dominate decoupled lump sum transfers if the tax system is very inefficient and subsidy payments are high

credit market imperfections and the distribution of policy rents this article shows that credit market imperfections have important implications for the distribution of policy rents in a model with land as fixed factor and credit market imperfections when an area payment is given land rents go up by more than the subsidy on aggregate farms may lose from the subsidy the results depend on the extent to which subsidies have direct and indirect effects on the credit constraints on whether farms rent or own land and on farm heterogeneity

learning forecasting and optimizing an experimental study rational expectations re models have two crucial dimensions i agents on average correctly forecast future prices given all available information and ii given expectations agents solve optimization problems and these solutions in turn determine actual price realizations experimental tests of such models typically focus on only one of these two dimensions in this paper we consider both forecasting and optimization decisions in an experimental cobweb economy we report results from four main experimental treatments 1 subjects form forecasts only 2 subjects determine quantity only solve an optimization problem 3 they do both and 4 they are paired in teams and one member is assigned the forecasting role while the other is assigned the optimization task all treatments converge to rational expectation equilibrium ree but at different speeds we observe that performance is the best in treatment 1 and the worst in treatment 3 we further find that most subjects use adaptive rules to forecast prices given a price forecast subjects are less likely to make conditionally optimal production decisions in treatment 3 where the forecast is made by themselves than in treatment 4 where the forecast is made by the other member of their team which suggests that two heads are better than one in term of the speed of finding the ree

cartel formation and pricing the effect of managerial decision making rules we experimentally investigate how the managerial decision making process affects choices in a bertrand pricing game with an opportunity to form non binding cartels to do so we compare the effects of three decision making rules for the firm decisions by ceos majority rule and consensus to each other and to decisions in a benchmark consisting of single individual firms it has been argued elsewhere that groups behave more competitively than individuals in this setting this predicts that for all three decision making rules we should observe fewer cartels and lower prices this is not what we find for the formation of cartels there are no differences across treatments for prices asked we find that first cartels lead to higher prices in all treatments despite the fact that they are non binding second the decision making rules strongly affect the prices asked one thing that stands out is that firms run by ceos ask higher prices i e defect less often from the cartel than observed in the other treatments

debts and deficits with fragmented fiscal policymaking abstract this paper develops a political economic model of fiscal policy one in which government resources are a common property out of which interest groups can finance expenditures on their preferred items this setup has striking macroeconomic implications transfers are higher than a benevolent planner would choose them to be fiscal deficits emerge even when there are no reasons for intertemporal smoothing and in the long run government debt tends to be excessively high peculiar time profiles for transfers can emerge with high net transfers early on giving rise to high taxes later on

organizational structure and the optimal design of policymaking panels evidence from consensus group commissions revenue forecasts in the american states increasing both the size and diversity of policymaking panels is widely thought to enhance the accuracy of collective policy decisions this study advances the theoretical conditions in which improving collective accuracy necessitates an efficient trade off between a panel s size and its level of organizational diversity this substitution effect between these organizational characteristics is empirically supported with data on official general fund revenue forecasts made by consensus group cg independent commissions in the american states evidence of an asymmetric substitution effect is also uncovered whereby increasing organizational diversity in large cg commissions produces revenue forecasts that reduce collective accuracy by slightly more than three times as much compared to decreasing such diversity in small cg commissions this study underscores the limits of organizational diversity as a mechanism for improving collective judgments when policymaking authority is diffuse among many panel members