On the optimal design of disaster insurance in a federation

Recent experience with disasters and terrorist attacks in the US indicates that state and local governments rely on the federal sector for support after disasters occur. But these same governments invest in infrastructure designed to reduce vulnerability to natural and man-made hazards. We show that when the federal government is committed to full insurance against disasters, regions will have incentives to under-invest in ex-ante protective measures. We derive the structure of the optimal second-best insurance system when regional governments choose investment levels non-cooperatively and the central government cannot verify regional investment choices. For low probability disasters this will result in lower ex-post intergovernmental transfers (and hence less ex-post redistribution) and greater ex-ante investment. However, the second-best transfer scheme suffers from a time-inconsistency problem. Ex-post, the central government will be driven towards full insurance rather than the second-best grants, which results in a type of soft budget constraint problem. Sub-national governments will anticipate this and reduce their investment in protective infrastructure even further. The result is that the central government may be better off suffering the underinvestment that results with first-best transfers because investment is even lower under second-best transfers when the central government is unable to commit.     

A tale of two crises: Federal transfers and regional economies in Russia in 2009 and 2014–2015

We examine transfers from Russia’s federal government to the regions during the two recent economic crises. We show that while federal transfers in 2009 were large and targeted poorer regions, the 2014–2015 transfers were much smaller and not targeted. This policy shift was accompanied by a relatively greater decline in own revenues in the poorer regions and their worse economic performance overall. As a result, interregional budget expenditure inequality in Russia was significantly higher in 2014–2015 than it had been for years. This is important because regional budgets are responsible for a large share of investments, housing, education and healthcare.     

ECONOMIC SYSTEM CONVERSION AND MIGRATION TRANSITION IN RUSSIA

This paper examines migration changes in Russia due to the transition of the economic system. As expected, great changes in migration patterns occurred in Russia. The correlation coefficients between federal investment and interregional migration are positive and large during the Soviet period, indicating that political incentives played a major role in migration patterns in the USSR. However, the regional development policy implemented in the Soviet era may not have been socially efficient in causing migration inflows and excess labor supply in the Far North regions. In addition, it can be said that the government could not control population flows perfectly even in the planned economy.     

Affirmative Action: The Facts, the Myths, and the Future

This article focuses on recent federal court rulings affecting preferential treatment programs mandated by affirmative action policies and programs. The article addresses the greater burden that these decisions now place on organizations to justifying race-based remedial actions, and the standards by which these actions are judged. However, the programs affected by these rulings are only those imposed by federal, state or local governments. This article also discusses the narrow scope of these decisions—what programs they have not changed. As will be demonstrated, a broad range of voluntary private sector programs remain unaffected.     

Altruism, redistribution and social insurance

The paper examines the influence of altruism on voluntary transfers and government redistribution in a simple model: two jobs of different productivity are assigned by chance to two individuals. Ex ante the individuals are identical, ex post they have different incomes. The first part of the paper examines voluntary transfers determined ex post or agreed upon ex ante in the absence of altruism. In the second part, the influence of altruism is examined. Altruism is modelled as a pure public good: the minimum consumption (or income, since there is only one consumption good). Both individuals can contribute to its provision, one person by earning wage income, the other by voluntary transfers. The ex ante solutions generally lead to higher expected welfare but create several incentive problems. Only lump-sum transfers are considered. Received: 28 February 1997 / Accepted: 31 January 2000     

Optimal taxation and intergovernmental transfer in a dynamic model with multiple levels of government

In this paper, we study the optimal choices of the federal income tax, federal transfers, and local taxes in a dynamic model of capital accumulation and with explicit game structures among multiple private agents, multiple local governments, and the federal government. In general, the optimal local property tax is zero if the local property tax is constrained to be nonnegative, whereas the optimal local consumption tax is always positive. When the local consumption tax is chosen optimally, the federal income tax can be either positive or negative. For most reasonable parameter values, our numerical calculations have shown that with a positive local consumption tax there exists a reverse transfer from local governments to the federal government.     

DOES MIGRATION REDUCE REGIONAL DISPARITIES? THE ROLE OF SKILL‐SELECTIVE FLOWS

The existence of income per capita disparities is a striking feature of European regional development, while increasing internal migration is often cited as a convergence factor. This paper states that this argument is too simple if migration concerns skilled workers. To support this statement, the focus is on skill-selective migration flows: first, it is shown how easily they can happen (for instance, they can be caused by different regional wage settings); then, a model is used to investigate the effects of different regional endowments of immobile factors on migration. The model shows that skill-selective migration can, in some cases, lead to increasing income per capita disparities and, for this reason, policy makers need to pay attention when attempting to narrow regional disparities by easing interregional migration.     

A simple dynamic decentralized leadership model with private savings and local borrowing regulation

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.     

Tax Competition between Unitary and Federal Countries

We analyse taxation of capital in a two-country model, where one country is unitary while the other one is federal, consisting of two identical regions. Both national and regional governments levy a tax on capital. The countries play a noncooperative game between them, with the government of the federal country acting as a Stackelberg leader with respect to its regional governments. We show under what circumstances, at equilibrium, the federal country sets its tax rate inefficiently low, while the unitary country sets it inefficiently high.We are deeply grateful to three anonymous referees for their comments, and especially to one of them for extremely helpful suggestions. We also wish to thank participants at ESEM 2004 for fruitful discussions     

Tax Policy Coordination, Vertical Externalities, and Optimal Taxation in a System of Hierarchical Governments

Tax policies of two levels of government (state and federal) with overlapping tax bases are considered. This overlap leads to “vertical” fiscal externalities are considered when several different commodities are in the tax base and the tax bases of the two levels of government may not be identical. When the governments share a tax base, the mix of combined taxes is optimal. With different tax bases, combined taxes are no longer optimal as federal tax rates are adjusted to reflect state public service levels. When grants are available, a welfare-maximizing mix of taxes and public services is obtained.     

The environmental and macroeconomic effects of socially responsible investment

We analyze the effects of socially responsible investment and public abatement on environmental quality and the economy in a continuous-time dynamic growth model featuring optimizing households and firms. Environmental quality is modeled as a renewable resource. Consumers can invest in government bonds or firm equity. Since investors feel partly responsible for environmental pollution when holding firm equity, they require a premium on the return to equity. We show that socially responsible investment behavior by households partially offsets the positive effects on environmental quality of public abatement policies.     

Regional Disparities and Government Quality: Redistributive Conflict Crowds Out Good Government

Abstract

In this paper, we argue and provide empirical evidence to support the claim that higher income differences across regions increase the salience of interregional redistribution and, as a result, crowd out policies aiming towards improvements in government quality or efficiency. In the presence of greater regional disparities, the balance of politics may tilt towards redistributive concerns and away from government efficiency considerations, especially since the latter can be opposed by organized public sector interest groups. Our empirical analysis, based on a sample of 22 Organization for Economic Co-operation and Development (OECD) countries over the period from the mid-1990s to 2005, supports our basic intuition that regional disparities may lead to territorially based redistributive conflict to the detriment of government quality.     

INSURANCE BY GOVERNMENT OR AGAINST GOVERNMENT? OVERVIEW OF PUBLIC RISK MANAGEMENT POLICIES

In what contexts is it desirable that the government, rather than the private sector, takes on the role of an insurer and helps people reduce risks? Our discussion implies that while in a number of areas individuals benefit from well-designed insurance provided by their government, ill-designed public policies (for example existing pay-as-you-go pension systems) force individuals to insure against their government. It is further discussed how governments could improve their risk managing role in many areas by using income contingent loans, provided the country has high-quality institutions and governance. Such loans to artists, sportspeople, flood victims or collapsing financial institutions would replace the existing nonrepayable transfers, grants, subsidies and bailouts. Using a simple efficiency-equity-sustainability framework for comparing income contingent schemes with conventional public and private insurance policies, we document that this would enable governments to extend their insurance assistance to a greater number of people and institutions – in a way that is not only equitable but also efficient and fiscally sustainable.     

Reviewing Oates' insights in a repeated game setting

This paper analyzes the optimal assignment of public good policies to layers of a federal system in a repeated game setting. Under a centralized regime, public goods are financed jointly across regions, and a federal legislature decides on the regional quantities. Under a decentralized regime, public goods are financed locally, and governments play a non-cooperative provision game. We find that a centralized (decentralized) regime is more likely to provide the efficient public good policies in case spillovers are small (large). Received: September 2003, Accepted: October 2004 JEL Classification: H11, H41 I wish to thank Clemens Fuest, Anke Kessler, Christoph Lülfesmann, and an anonymous referee for valuable comments on this paper. Financial support by the DFG (SPP 1142) is gratefully acknowledged.     

Voting on devolution in a federal country with a bicameral national system

We analyse voting on the devolution of the responsibilities for the provision of public goods to local governments in a federal country, with a bicameral national legislature. In our set-up, devolution means a constitutional fiscal reform which reduces federal public expenditure on a local public good, and simultaneously increases the transfers received by regions, via a tax-sharing mechanism. This allows the regions to provide a greater amount of a local public good which can compensate for the reduction of that provided upon a federal basis. We show under which conditions such a devolution reform is adopted or rejected.     

论地方政府行为效用导致的区域产业政策趋同

在区域经济的发展过程中,地方政府之间日益激烈的竞争必然会造成区域之间的产业政策趋同。这对于区域经济的协调发展和长远发展极为不利。应当通过提高中央政府的宏观调控水平,强化地方政府的责、权、利边界,引导地方政府在区域产业政策中体现差异性。     

Does local government competition aggravate haze pollution? A new perspective of factor market distortion

Haze pollution has become a new threat to China's sustainable development, but it may be that local government behaviour can play an important role in the prevention and control of pollutants. A dynamic spatial autoregressive (SAR) model is used to study the relationship between local government competition and haze pollution. To further explore the indirect impact of factor market distortion on haze pollution and control potential endogeneity problems, a newly developed intermediary effect model that incorporates the characteristics of the generalized method of moments (GMM) is utilized to explore how factor market distortion indirectly affects haze pollution. The research results show that regional haze pollution in China is characterized by significant spatial correlation, and local government competition has a positive impact on haze pollution; that is, local government competition exacerbates haze pollution. In general, local government competition not only directly leads to an increase in haze pollution but also further intensifies it by distorting the local factor market, and the intermediary role of factor market distortion is approximately 7.04%. The results of the regional inspection found that competition among local governments in the eastern region did not lead to haze pollution, and distortion of the factor market did not exist as an intermediary effect. However, both direct and intermediary effects are significant in the central and western regions. Therefore, an official performance appraisal system that includes ecological constraints should be established to guide the benign transformation of local government competition, and an environmental management mechanism must be developed for joint prevention and control to reduce haze pollution. In addition, the free flow of factors and marketization are equally important.     

Decision analysis of auto emission control

In response to public pressure to reduce air pollution, governments are forced to consider alternate means to limit auto emissions. This paper addresses the problem of evaluating these regulatory policies and choosing the one that is best for society.Economic tradeoffs play an important role in the analysis of emission control policies. Cleaner air comes only at a price, and the judgments as to “How clean?” At what price?” and “At who's expense?” are crucial. Once these value issues are resolved, questions of implementation remain. “How do regulatory policies such as mandatory emission standards for cars compare with a system of emission taxes?” “Are there ways to collect a fee from drivers to compensate those who breathe their pollution, without taxing emissions directly?”Our approach is first to describe a decision-focused analytical procedure for evaluating various policy alternatives. This procedure is then demonstrated with a preliminary analysis of representative emission control plans for the Los Angeles air basin. Both emission standards and market or “pricing” alternatives are considered. These plans include: present (1975) emission standards; an emission tax; an increase in the gasoline tax; a policy of no government control.The preliminary analysis shows market mechanisms to be superior to present emission standards. Many significant advantages of market mechanisms are discussed, though this conclusion is due primarily to—in our opinion—inappropriate value judgments that are implicit in the present standards.The analytical framework is very general, and it can be applied to a wide variety of social decisions involving externalities. The quantitative models developed, though preliminary, can be used by organizations such as regional planning agencies or pollution control boards. However, these models must not be viewed as formulas for answers to social problems. Rather, they are intended as aids for the policy maker that will help him or her balance the many factors that influence the decision and provide insight to the wisest social course of action.     

The political economy of fixed regional public expenditure shares with an illustration for Belgian railway investments

Many local public goods are allocated by federal governments using fixed regional shares: every region is entitled a fixed share of the total budget for a particular type of public good. This paper explores two characteristics of this type of allocation. First, it shows that this type of allocation is relatively efficient as it puts a strict budget constraint on the decisive region. Second, we show that these fixed shares can be an equilibrium of different legislative bargaining processes. The working of the fixed sharing rules is illustrated for the allocation of railway investments in Belgium.     

The political economy of regional opting out: distributive implications of a prospective Europe of Regions

This paper builds up a model for analysing regional attitudes towards separation from national states, where separation implies `opting out' of the national income redistribution system and starting a regional one, while at the same time having direct access to supranational institutions. In an overlapping generations (OLG) framework, we show that interregional cooperation can perform the same task as intergenerational cooperation, and can prevent rich regions from wanting to separate from poor nations. In the second part of the paper, we estimate the impact of alternative institutional settings on regional welfare by using data on the inter-governmental financial relations of the Italian regions with the central government. June, 2001 / Accepted: May, 2002 RID="*" ID="*" We would like to thank Margherita Borella, Chris Flinn, Harold Hochman, Jeff Petchey, Stefano Piperno, Pierre Salmon, Bob Searle and seminar participants at Brescia, Torino, Paris (annual meeting of the European Public Choice Society 2001) and Marseille for comments and discussion. We would also like to thank the editor, Kai Konrad, and three referees for their helpful comments.