sunk costs and the natural resource extraction sector analytical models and historical examples of hysteresis and strategic behavior in the americas sunk costs play a significant role in shaping industry conduct and development outcomes associated with the resource extraction sector their role is explored here by 1 developing analytical models that show specifically how sunk costs influence investment behavior and outcomes and 2 considering the historical experience during major epochs of two important extractive industries the models demonstrate how sunk costs in conjunction with uncertainty or strategic behavior can severely distort efficiency and equity outcomes the amazon rubber boom and bust and the pan american aluminum industry illustrate the significance of sunk costs in the extractive sector and beyond

budget processes and commitment to fiscal discipline abstract we present a framework of investigation into the political economy of the budget process our model suggests that institutional rules governing the budget process can be found to limit the importance of fiscal illusion empirical evidence supports that proposition the choice of rules depends on the political environment as well as the dominant source of uncertainty in the budget process

the big push natural resource booms and growth a simple application of big push reasoning suggests that natural resource booms can be important catalysts for development in poorer countries in this paper we present evidence from seven latin american countries that natural resource booms are sometimes accompa nied by declining per capita gdp we present a model with natural resources increasing returns in the spirit of big push models and expectations to clarify some of the reasons this may happen q 1999 elsevier science b v all rights reserved

political and institutional determinants of fiscal policy in the european community in recent theoretical and empirical research the variation in political and institutional arrangements which may affect the process of national policy formation is examined in order to explain cross country differences with respect to fiscal policies pursued in this paper we build upon this literature and examine whether and how cross country differences in debt accumulation and public sector size of member countries of the european community during the 1980s can be explained we conclude that the growth of government debt is positively related to the frequency of government changes and negatively to sound budgetary procedures in countries with left wing governments the growth of the share of government spending in total output generally tends to be higher

on the political economy of national tax revenue forecasts evidence from oecd countries sustainable budgets are important quality signals for the electorate politicians might thus have an incentive to influence tax revenue forecasts which are widely regarded as a key element of national budget plans looking at the time period from 1996 to 2012 we systematically analyze whether national tax revenue forecasts in 18 oecd countries are biased due to political manipulation drawing on theories from the field of political economy we test three hypotheses using panel estimation techniques we find support for partisan politics left wing governments seem to produce more optimistic or less pessimistic tax revenue forecasts than do right wing ones contrary to the theoretical prediction based on the common pool problem we find that more fragmented governments and parliaments tend to produce more pessimistic or less optimistic tax revenue forecasts we find no empirical evidence that political business cycles play a role in tax revenue forecasts

forecasting efficiency concepts and applications this article introduces the concept of forecast efficiency in which the forecast contains all information available at the time of the forecast empirical tests investigate weak efficiency where the information set is all past forecasts and where all forecast revisions and errors should be uncorrelated with past forecast revisions tests of macroeconomic energy consumption and oil price forecasts find a significant autocorrelation of forecast revisions with fifty of fifty one tests showing positive correlation of forecast revisions as opposed to zero correlation consistent with forecast efficiency copyright 1987 by mit press

returns to scale and scale elasticity in data envelopment analysis abstract the purpose of this paper is to provide mathematical characterizations of the data envelopment analysis dea based scale elasticity that is computable for both frontier and nonfrontier units in order to accomplish this we first review existing frontier results extend them formally to the nonfrontier case and then analyze how the scale elasticity behaves we also study how shadow pricing can be done as an application of the scale elasticity and show how upper and lower scale elasticity bounds can be obtained finally we provide an illustrative example for the clarification and verification of our results

credibility and policy convergence in a two party system with rational voters the traditional approach to modeling political parties behavior based upon the contribution of anthony downs 1957 assumes that the parties unique objective is to win elections thus they maximize their popularity the crucial implication of this assumption for a two party system is that if the two parties have the same information about voters preferences full convergence of policies results from electoral competition this is the crucial implication of the median voter theorem more generally it may be argued that different parties are motivated differently because they represent different constituencies parties may not care only about winning elections per se but also about the quality of the policies resulting from an election in this case the candidates of the two parties view winning an election not only as a goal per se but also as a means of implementing a better policy for their respective constituencies this paper shows that electoral competitions imply dynamic inconsistency if the voters are modeled as rational and forwardlooking agents and parties do not care exclusively about being elected but also about which policy to implement once elected the dynamic inconsistency arises as follows the parties have an incentive to announce convergent platforms to increase their chances of election however if the elected party is not committed to its electoral platform it has an incentive to follow its most preferred policy rather than the policy announced in its platform if voters are rational they account for this incentive thus in general in a one shot electoral game the only timeconsistent equilibrium is one in which no convergence is possible the two parties follow their most preferred policies and the voters rationally expect this outcome full convergence of parties platforms results only as a limiting case when the parties are completely indifferent with respect to the quality of the policies resulting from the election thus these results differ from the existing literature on ideologically motivated politicians for instance donald wittman 1977 1983 randall calvert 1985 which implicitly assumes the possibility of binding commitments to electoral platforms complete or partial policy convergence can be the outcome of political competition if the interaction between the parties and the voters is modeled as an infinitely repeated game in fact if the candidates have concave objective functions the welfare maximizing policy rule implies a complete convergence of parties policies however this cooperative and agreed upon policy may or may not be sustainable as a subgame perfect equilibrium depending on parameter values in particular it depends on the discount rates of the two parties the degree of polarization of their preferences and the relative popu graduate school of industrial administration carnegie mellon university pittsburgh pa 15213 and national bureau of economic research cambridge ma 02138 this paper is based upon a chapter of my unpublished doctoral dissertation at harvard university i am greatly indebted to jeffrey sachs for directing my attention toward these issues and for many conversations i also wish to thank andrew abel dilip abreu olivier blanchard ramon caminal andrew caplin alex cukierman morris fiorina benjamin friedman herschel grossman howard rosenthal and the referees for very useful comments the responsibilitv af anv n mtnkieis af calrirp nfnlv mine the result of policy convergence in a two party system is more general than the median voter theorem for discussions of convergence results not at the median see john ledyard 1984 peter coughlin 1984 coughlin and shmuel nitzan 1981 melvin hinich 1977 for earlier work on spatial competition see richard mckelvey 1975 hinich ledyard and peter ordeshook 1972 1973 and the references quoted therein the present paper focuses on the result of convergence rather than on the median voter theorem per se

searching for political business cycles in germany one reslt of the revitalised literature on political business cycles is that there are signs in german data that elections and ideology have an impact however using monthly data for the period 1950 1989 and standard methods of time series analysis we reject both the nordhaus hypothesis of opportunistic cycles and the partisan approaches by hibbs ans alesina we show that some results are sensitive to the assumption of stationarity there are signs of policy cycles in m1 it is hard though to bring this in line with the rogoff hypothesis of rational opportunistic cycles because of the german institutional setting

dynamic revenue estimation this paper considers the question of adopting dynamic revenue estimation methods which would incorporate the predicted macroeconomic effects of policies it describes the current revenue estimation process and how these estimates are used in the formation of policy it then evaluates this process as an exercise in forecasting considering not only its methodology but also its performance this evaluation illustrates some of the difficulties that would accompany attempts to use dynamic methods finally the paper relates the choice among different revenue estimation procedures to the political process and the use to which the revenue estimates are put

fragmented government effects on fiscal policy new evidence most industrialized countries entered the 1980s with their public finances in disarray at the time persistent deficits pushed up public debt to gdpratios despite such similarities deficit spending varies substantially between countries and within countries over time recent theoretical and empirical research has considered how differences in political arrangements affecting national policy formation might explain variation in fiscal policies pursued using a panel of 22 oecd countries over the 1971 1996 period this paper extends previous literature on the effects of fragmented government on fiscal policy outcomes in various directions first we focus on data relating to central government instead of general government as all theories refer to central government second not only do we analyze the effect of size fragmentation of government we also examine government s position vis a vis parliament and government s political fragmentation we find evidence that more fragmented government defined in terms of the number of political parties in a coalition or the number of spending ministers have higher deficits there is also some evidence that governments that dispose of excess seats in parliament have lower deficits right wing governments appear to have been fiscally more responsible in the seventies political fragmentation does not affect government s budget deficit

bias in omb s economic forecasts and budget proposals the office of management and budget omb annually submits the president s budget for the u s government to the congress the economic forecasts and revenue and outlay proposals contained in the budget have been criticized as biased especially during the 1980s tests for bias in one year ahead proposals for the 1963 89 period show no bias in economic forecasts and revenue estimates but substantial bias in outlay proposals most outlay proposals are consistently less than actual outcomes accounting for underprediction of the federal deficit omb outlay proposals appear to be influenced by politics republican administrations show more significant proposal biases with defense proposals higher and domestic outlay proposals lower than outcomes the office of management and budget consistently understates the deficits by resorting to the most optimistic economic assumptions it can credibly and now sometimes even incredibly employ senator james sasserwall street journal 25 january 1990

reply to comments by soleimani damaneh and mostafaee 2006 and zhang 2006 abstract in fukuyama fukuyama h 2000 returns to scale and scale elasticity in data envelopment analysis european journal of operational research 125 93 112 i investigated some mathematical structure on scale elasticity and returns to scale soleimani damaneh and mostafaee soleimani damaneh m mostafaee a in press a comment on returns to scale and scale elasticity in data envelopment analysis european journal of operational research doi 10 1016 j ejor 2006 11 042 and zhang zhang b in press a note on fukuyama 2000 european journal of operational research doi 10 1016 j ejor 2006 11 040 claim that some results which are related to homogeneity are incorrect this note replies to their comments by demonstrating that fukuyama 2000 results are still valid

the political economy of fiscal policy an experimental study on the strategic use of deficits field data on the strategic use of deficits to limit thebudgetary scope of future governments are inconclusive aboutthe effects of political polarization or a government sre election probability on fiscal policy therefore wedesigned a controlled experiment to examine the strategic useof deficits using a within subjects design we find thatdeficits rise with a higher degree of polarization and a lowerreelection probability however in a between subjects designneither polarization nor reelection probabilities have asystematic effect we discuss the implications of ourexperimental results for empirical tests of the strategic useof deficits with field data

planning to cheat eu fiscal policy in real time using real time data from europe s stability and convergence programs we explore how fiscal plans and their implementation in the eu are determined we find that 1 implemented budgetary adjustment falls systematically short of planned adjustment and this shortfall increases with the projection horizon 2 variability in the eventual fiscal outcomes is dominated by the implementation errors 3 there is a limited role for traditional political variables 4 stock flow adjustments are more important when plans are more ambitious and 5 most importantly both the ambition in fiscal plans and their implementation benefit from stronger national fiscal institutions we emphasize also the importance of credible plans for the eventual fiscal outcomes roel beetsma massimo giuliodori and peter wierts

a comment on returns to scale and scale elasticity in data envelopment analysis abstract fukuyama fukuyama h 2000 returns to scale and scale elasticity in data envelopment analysis european journal of operational research 125 93 112 provided some characterizations of scale elasticity and returns to scale in dea in this paper we present some counterexamples and comments to the main lemma of the afore mentioned paper based on which fukuyama s idea has been built

does government ideology influence deregulation of product markets empirical evidence from oecd countries this paper examines how government ideology has influenced deregulation of product markets in oecd countries i analyze a dataset of non manufacturing regulation indicators covering energy transport and communication industries in 21 oecd countries over the 1980 2003 period and employ two different indices of government ideology the results suggest that government ideology has had a strong influence on the deregulation process market oriented governments promoted the deregulation of the energy transport and communication industries this finding identifies remarkable differences between leftist and rightwing governments concerning the role of government in the economy and basic elements of political order

the budget process and the size of the budget the new congressional budget process provides members of congress with a new set of institutional mechanisms for making budget decisions this article addresses the question of whether or under what conditions rigid application of the new budget process modeled as first selection of the size of the budget and second its division produces smaller budgets than a piecemeal appropriations process in which the size of the budget is determined residually the theoretical result is that the new process sometimes results in relatively large budgets a testable implication of the theory is that given a choice of how stringently the budget process is to be employed members of congress jointly consider preferences and the expected outcomes under available institutional arrangements and select the arrangement usually a rule that yields the most favorable outcome empirical results from the budget process in the house from 1980 to 1983 are generally supportive of the theoretically derived hypothesis of rational choice of institutional arrangements

do international commodity prices drive natural resource booms an empirical analysis of small scale gold mining in suriname abstract natural resource booms have been central to conservation and development in resource rich latin american countries yet the origin of these events remains poorly understood understanding the socioeconomic drivers of resource booms is important because such sudden increases in natural resources extraction are usually ecologically and economically unsustainable this paper analyzes the socioeconomic drivers of small scale gold mining which is degrading ecological resources and the health of people in the amazon region two conventional hypotheses are tested 1 international prices of gold drive the amazon gold rush and 2 national economic recession encourages small scale gold mining a simple empirical model is presented to link the gold mining histories of local miners to international and national trends the analysis indicates that theories that explain corporately driven resource extraction may not apply to the behavior of small scale producers it appears that extractive booms that are driven by local resource users can occur independently of global price markets the suriname case further suggests that inhibited national economic development can be the cause of a natural resource boom and not only a consequence as some researchers propose the author concludes that conservation policies for suriname should act to stabilize the national economy and to promote more sustainable mining methods

real time data and fiscal policy analysis a survey of the literature abstractthis paper surveys the empirical research on scal policy analysis based on real timedata this literature can be broadly divided in three groups that focus on 1 the statisticalproperties of revisions in scal data 2 the political and institutional determinants of scaldata revisions and of one year ahead projection errors by governments and 3 the reactionof scal policies to the business cycle it emerges that rst scal data revisions are largeand initial releases are biased estimates of nal values second the presence of strong scalrules and institutions leads to relatively more accurate releases of scal data and smalldeviations of scal outcomes from government plans third the cyclical stance of scalpolicies is estimated to be more counter cyclical when real time data are used instead ofex post data finally more work is needed for the development of real time datasets for scalpolicy analysis in particular a comprehensive real time dataset including scal variablesfor industrialized and possibly developing countries published and maintained by centralbanks or other institutions is still missing

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

independent fiscal agencies abstract there has been a considerable literature regarding the incentives of policymakers as a prime reason for persistent fiscal deficits and a variety of fiscal rules have been proposed as a remedy however the often inadequate flexibility of rules and the success of policy delegation in the monetary realm have motivated a small but growing number of studies that suggest delegating some aspects of fiscal policy to what will here be called independent fiscal agencies this paper surveys the related literature with a focus on three aspects the motivation for the establishment of such agencies their potential design and the experience with these types of institutions

testing the rationality of state revenue forecasts recent revenue shortfalls in several states focus attention on the question of whether states do a good job of forecasting revenues in modem economics forecasts are eval uated on the basis of whether or not they are rational do the forecasts optimally incorporate all available information this paper develops a method for testing the rationality of state revenue forecasts and applies it to the analysis of data from new jersey massachusetts and maryland one of our main findings is that in all three states the forecasts of own revenues are systematically biased downward tn 1985 the 50 states raised 349 billion in revenues from their own sources and received 84 billion in grants from the federal government u s bureau of the census 1987 p 266 state governments are clearly important players in the u s system of public finance and the efficiency with which they conduct their financial affairs has an important impact on consumer welfare one important determinant of a state s ability to con duct reasonable fiscal policies is the quality of its revenue forecasts sensible deliberations about ex penditures cannot be made in the absence of good forecasts indeed in the presence of con stitutional or statutory provisions for balanced budgets unanticipated changes in revenues can wreak havoc not only on proposals that are sched uled for funding but on plans that have already been put into effect as well in recent months two powerful governors michael dukakis of massachusetts and mario cuomo of new york have suffered major politi cal embarrassments because actual revenues fell substantially short of the predictions in their re spective states such episodes focus attention on the question of whether states do a good job of forecasting revenues in modem economics fore casts are evaluated on the basis of whether or not they are rational do the forecasts optimally incorporate all information that is available at the time they are made although there is a large literature on state revenue forecasting methods that literature focuses mostly on state budgetary institutions forecasts themselves are evaluated only in an informal fashion 1 although the theory and econometric methods of rational expectations have been used to evaluate forecasts made by households and businesses 2 these powerful tools have not been applied to state government fore casts this paper applies these methods to the problem of state revenue forecasting and as an example uses them to analyze data from new jersey massachusetts and maryland the results cast light not only on the question of rationality per se but on issues such as the impact of political factors on forecasts section ii presents the conceptual framework for testing rational expectations the relevant in stitutional issues and data are described in section iii the results are discussed in section iv we find that in all three states forecasts of own rev enues are systematically biased downward section v concludes with a summary

evaluating rationality of level and growth rate forecasts of direct tax revenues under flexible loss function evidence from swiss cantons abstract we explore the rationality of tax revenue forecasts in swiss cantons under asymmetric loss functions we find evidence of asymmetric losses for the level forecasts but not for growth rates allowing for asymmetric losses alters the outcome of rationality tests for the level forecasts

booming sector and de industrialisation in a small open economy this paper presents a theoretical analysis of the dutch disease the phenomenon whereby a boom in one traded goods sector squeezes porfitability in other traded goods sectors both by directly bi

fragmented fiscal policy abstract this paper explores on a panel of 19 oecd countries the role of fragmentation in determining fiscal outcomes over the 1970 95 period we first define the notion of fragmentation of fiscal policy making as the degree to which the costs of a dollar of aggregate expenditure are internalized by individual decision makers empirically this notion has two key logical components the number of decision makers and the rules of the game or the budget process in turn the number of decision makers can refer to the number of parties in a coalition or the number of ministers in the cabinet we test all these determinants against each other and against perhaps the oldest explanation of all ideology we show that cabinet size and to a lesser degree coalition size and ideology are significant and robust determinants of fiscal outcomes in particular transfers are the budget items most affected by these factors

political cycles and cyclical policies we test how government revenue and expenditure depend on ideology elections and economic activity we show how fiscal forecasts can be used to identify the determinants of government revenue and expenditure the approach is illustrated using a unique unpublished swedish data set of fiscal forecasts and forecasts of economic activity we find partisan effects but no election effects revenue and expenditure but also the fiscal surplus are lower with right wing governments fiscal policy has been countercyclical revenue varies positively with nominal earnings expenditure varies negatively with real gdp

sticking to fiscal plans the role of institutions the rules based fiscal framework of the emu relies heavily on the development of medium term fiscal plans by the eu governments in this paper i present an empirical analysis of the deviations from the plans presented in the annual stability and convergence programs i focus on projections for real gdp growth and general government balances revenues and spending at different time horizons i show that deviations from the projections presented in these programs since 1999 can be explained by institutional factors i e the form of fiscal governance and the stringency of fiscal rules

did globalization restrict partisan politics an empirical evaluation of social expenditures in a panel of oecd countries this paper evaluates empirically how in the course of globalization partisan politics affected social expenditures in a panel of oecd countries i introduce an updated indicator of government ideology and investigate its interaction with the kof index of globalization two basic results emerge first at times when globalization proceeded at an average pace partisan politics had no effect on social expenditures but leftist governments increased social expenditures when globalization was proceeding rapidly second policies differed in the 1980s and 1990s leftist governments pursued expansionary policies in the 1980s yet partisan politics disappeared in the 1990s but not because of globalization

testing the rationality of price forecasts new evidence from panel data this paper tests the rationality of individual price forecasts in a panel of professional forecasters here unlike in most previous studies rationality is not rejected the results here differ because 1 using individual forecasts avoids aggregation bias 2 comparison of forecasts to initial data avoids bias due to data revision 3 the professional forecasters have economic incentives to state their expectations accurately and 4 a new covariance matrix estimator consistent when forecast errors are correlated across individuals is used copyright 1990 by american economic association

does public welfare crowd out informal safety nets ethnographic evidence from rural latin america abstract the researchers compare ethnographic data from two neighboring countries suriname and french guiana to investigate whether public welfare systems displace informal risk sharing arrangements the results suggest that the informal safety nets of poor rural households are deficient when shocks are extreme irreversible cumulative and co variate public welfare can reduce poverty by strengthening informal insurance systems distributing cash enabling new risk management strategies and promoting human capital development it remains a challenge for policy makers to implement welfare systems that cover society members with the lowest levels of human and social capital and that minimize adverse consequences of economic change

the political economy of growth a critical survey of the recent literature this article reviews the recent literature on the political economy of growth focusing on the research that has developed at the intersection of the endogenous growth literature and the new political economy it explores the relationship among four key variables economic growth and capital accumulation political instability political freedom and democratic institutions and income inequality

improving fiscal policy in the eu the case for independent forecasts are official output forecasts biased we point out that official forecasts of output dynamics are crucial to the assessment of cyclically adjusted budget balances and provide evidence that in some euro area countries biased forecasts have played a thus far neglected role in generating excessive deficits we suggest that the forecast bias may be politically motivated and that forecasts produced by an independent authority would be better than in house ministry of finance forecasts for the purpose of monitoring budget formation and budget outcomes lars jonung and martin larch

the political economy of the german lander deficits weak governments meet strong finance ministers we analyse the deficits of the german lander regional states for the period 1960 to 2005 and test a number of hypotheses derived from the literature on the political economy of public deficits we find evidence for the weak government hypothesis that is coalition governments issue significantly more debt than single party governments a result that is typically explained by the common pool problem as our data suggest this result crucially hinges on the position or strength of the finance minister within coalition governments we find that coalition governments with a strong finance minister are in terms of borrowing not significantly different from single party governments in addition we find weak evidence for an opportunistic political business cycle as borrowing is significantly lower in pre election years it appears that german voters favour fiscal discipline there is no evidence for partisan behaviour so party ideology seems to play a negligible role

an empirical investigation of the strategic use of debt the paper examines the accumulation of debt by swedish local governments i find that right wing governments accumulate more debt when facing a higher probability of defeat whereas the opposite occurs for left wing governments these effects are sizable a right wing government increases its level of debt by 15 percent whereas a left wing government decreases its debt by 11 percent if they are both certain of being replaced as compared to when they are certain of remaining in office the results are consistent with the predictions from a strategic debt model developed by persson and svensson

voting on the budget deficit this paper analyzes a model in which a group of rational individuals votes over the composition and time profile of public spending all voters agree that a balanced budget is ex ante optimal however if there is disagreement between current and future majorities a balanced budget is not a political equilibrium under majority rule under certain conditions a majority of the voters favors a budget deficit and the equilibrium deficit is larger the greater is the polarization among voters copyright 1990 by american economic association

political biases despite external expert participation an empirical analysis of tax revenue forecasts in germany this paper explores whether and how political biases arise in an institutional setting where revenue forecasting is delegated to a body that includes experts from institutions neither part of nor controlled by the government the empirical analysis focuses on the performance of german federal tax revenue forecasts in the preparation of which the advice of external experts has a long tradition as an institutional safeguard while on average revenue forecasts turn out to be unbiased the results show that the government exerts an influence in particular optimism pessimism in the government s gdp forecast helps to explain why the revenue forecast turns out too optimistic pessimistic in addition governmental estimates of the revenue effects of tax law changes are found to contribute to forecast errors