Foreign aid and weakest-link international public goods: An experimental study

In this paper, we investigate efficiency differences between income and in-kind transfers as distribution mechanisms of foreign aid to weakest-link international public goods in a laboratory environment. We find that if there is relatively small difference in country size, then income transfers seem to provide a higher provision of the international public good, and thus higher overall welfare level than that of in-kind transfers. However, if there is a large disparity in country size, then in-kind transfers appear to provide a higher level of IPG provision and higher accompanying global welfare.     

Intergenerational transfers and the social discount rate

This paper investigates the relationship between intergenerational asset transfers and the choice of the discount rate for use in cost-benefit analysis in a model of a competitive overlapping generations economy constrained by a socially managed exhaustible resource. Provided that there are no distortions in capital markets and that all agents hold perfect foresight, cost-benefit techniques will result in a Pareto efficient resource allocation if the discount rate is set equal to the market rate of interest. But since the path of the interest rate depends on the level of intergenerational transfers, cost-benefit techniques do not ensure a socially desirable distribution of welfare between generations; a social optimum will result only if intergenerational transfers are properly chosen and enforced. Decentralized private altruism may result in intergenerational transfers that both present and future individuals would agree are too small if members of the present generation attach positive weight to the general welfare of future generations, not simply their personal descendants. In a world where intergenerational transfers are non-optimal, second-best policy-making may imply a constrained optimum that is inefficient. Together, these findings suggest that cost-benefit analysis is at best a partial criterion to policy formulation that should be used only in conjunction with ethical principles that define the proper distribution of welfare between present and future generations.     

Weakest-link public goods: Giving in-kind or transferring money

This paper extends the analysis of weakest-link public goods, whose level equals the smallest of the agents’ provision levels, by permitting an agent either to increase one's own provision or else augment both one's own provision and that of the other agent(s). Nash equilibria may be either symmetric with agents matching one another's provision or else asymmetric with an in-kind transfer by one agent to another. An equilibrium with cash transfers, but no in-kind transfers, may be Pareto superior to one with only in-kind transfers. If agents differ in their efficiency, then in-kind transfers by the low-cost agent may dominate a cash transfer. The possibility of Pareto-improving transfers is enhanced as the number of agents increases.     

Compensation for environmental services and intergovernmental fiscal transfers: The case of India

This paper studies mechanisms to compensate local government for the public provision of environmental services using the theory of optimal fiscal transfers in India. Especially, we analyzed the role of intergovernmental fiscal transfers in achieving the environmental goal. Simply assigning the functions at appropriate levels does not ensure optimal provision of environmental services. Optimality in resource allocation could be achieved by combining the assignment system with an appropriate compensation mechanism. Intergovernmental fiscal transfers would be a suitable mechanism for compensating the local governments and help in internalizing the spillover effects of providing environmental public goods. Illustrations are also provided for India.     

Compensation for environmental services and intergovernmental fiscal transfers: The case of India

This paper studies mechanisms to compensate local government for the public provision of environmental services using the theory of optimal fiscal transfers in India. Especially, we analyzed the role of intergovernmental fiscal transfers in achieving the environmental goal. Simply assigning the functions at appropriate levels does not ensure optimal provision of environmental services. Optimality in resource allocation could be achieved by combining the assignment system with an appropriate compensation mechanism. Intergovernmental fiscal transfers would be a suitable mechanism for compensating the local governments and help in internalizing the spillover effects of providing environmental public goods. Illustrations are also provided for India.     

Public Versus Private Provision of Public Goods

It is well known that public goods are underprovided in a static setting with voluntary contributions. Public provision—in a median voter framework with proportional taxation—generally exceeds private provision. This paper compares private and public provision of public goods in a dynamic setting. In a dynamic setting, voluntary donations can result in efficient provision. Also, majority‐rule solutions exist even when taxes are not proportional to income. At low discount factors, public provision tends to exceed private provision. As patience increases, however, private provision may exceed public provision. This occurs because many outcomes with a low level of public good provision—and potentially large targeted transfer payments to particular individuals—become sustainable under public provision. Under private provision, however, large targeted transfers are unsustainable. To finance the public good, private provision tends to result in benefit taxation, and public provision tends to result in progressive taxation.     

Multinational public goods provision under multilateral income transfers and productivity differences

This article examines multinational public goods provision under multilateral income transfers and productivity differences across countries. Under a planner who uses linear approximation for utility maximization, we show that (1) a country is an income receiver if it has a higher productivity than the average in producing public goods, enabling it to provide more public goods; (2) the amount of transfers can be pinned down for all countries with an adjustment cost; (3) each country obtains an identical utility increment; and (4) the country with the lowest adjustment cost is the best candidate for the planner country. All results are derived based on well-known information regarding the cost of producing the public goods and income levels.     

Optimal policy and the role of social contacts in a search model with heterogeneous workers

This paper develops a search model with heterogeneous workers and social networks. High‐ability workers are more productive and have a larger number of professional contacts. Firms can choose between a vacancy in the regular market and a job opening in the referral market. The model predicts that a larger number of social contacts is associated with a larger wage gap between high‐ and low‐ability workers and a larger difference in the unemployment rates. The net welfare gain of referrals is estimated at 1.2%. There are three reasons for the inefficiency of the decentralized equilibrium. First is the traditional search externality described by Hosios. Second, firms share their profits with workers, whereas the social optimum implies that full surplus should be given to firms in the referral market. This inefficiency can be internalized by means of referral subsidies. Third, there is the “pooling inefficiency” in the regular market. If high‐ability workers are sufficiently more productive they impose a positive externality on low‐ability workers and should be rewarded by positive transfers. On the contrary, if productivity differences are small, high‐ability workers achieve unreasonably high wages by referring each other and reduce employment chances of low‐ability workers. In this latter case, high‐ability workers should be penalized. If optimal policy is implemented the net welfare gain of referrals rises up to 1.8%.     

Quality Competition and Social Welfare in Markets with Partial Coverage: New Results*

We use a vertical product differentiation model under partial market coverage to study the social welfare optimum and duopoly equilibrium when convex costs of quality provision are either fixed or variable in terms of production. We show the following new results. First, under fixed costs, the social planner charges a uniform price for the single variant that just covers costs of quality provision. Like the duopoly equilibrium, this socially optimal pricing entails a partially uncovered market, but a smaller share of the market is served compared with the duopoly equilibrium. Second, for the variable cost case, it is socially optimal to provide both high‐ and low‐quality variants, but market shares need not be equal. This differs from the result in fully covered markets. Third, in the duopoly equilibrium, the quality spread is too wide under variable costs relative to the social optimum. Under fixed costs, the duopoly produces two variants, but quality is too low relative to the social optimum, which has only one variant.     

Mortality risks,education and child labor

In this paper, we investigate the role of young adult mortality on child labor and educational decisions. We argue that mortality risks are a major source of risks in returns to education in developing countries. We show that, in the absence of appropriate insurance mechanisms, the level of child labor is inefficient, but it can be too high or too low. It is too high when parents are not very altruistic and anticipate positive transfers from their children in the future. Uncertain returns to education, endogenous mortality or imperfect capital markets unambiguously increase child labor. When the level of child labor is inefficiently high, we also show that a cash transfer conditional on child's schooling can always restore efficiency regarding child labor.     

Public good agreements under the weakest‐link technology

We analyze the formation of public good agreements under the weakest‐link technology. Whereas policy coordination is not necessary for symmetric players, it matters for asymmetric players; however, this fails in the absence of transfers. By contrast, with a transfer scheme, asymmetry may be an asset for cooperation. We characterize various types and degrees of asymmetry and relate them to the stability of self‐enforcing agreements. Asymmetric distributions of autarky public good provision levels (also representing asymmetric interests in cooperation) that are positively skewed tend to be conducive to the stability of agreements. We show that under such conditions, even a coalition including all players can be stable. However, asymmetries that foster stability (instability) tend to be associated with low (high) gains from cooperation.     

THE DISTRIBUTION OF MONEY AND PRICES IN SEARCH EQUILIBRIUM*

This article considers a search‐theoretic model of monetary exchange. Agents bargain over both the amount of money and the quantity of goods to be exchanged in bilateral meetings, determining endogenously the distributions of money and of prices. I show that money is neutral if changes in the money supply are accomplished via proportional transfers. However, within the class of lump‐sum transfers, an increase of the rate of monetary expansion tends to decrease the dispersion of wealth and prices and to improve welfare when inflation is low; but when inflation is high enough, the opposite effects occur.     

A theory of user-fee competition

We develop a two-region model where the decentralized provision of spillover goods and other public expenditures is financed by means of user fees. We show that a decentralized solution tends to be inefficient. If the regional spillover goods are substitutes, user fees tend to be inefficiently low, whereas they tend to be inefficiently high if the spillover goods are complements.     

Equalization and the Decentralization of Revenue–Raising in a Federation

We study federal economies in which regional governments have responsibility for delivering public services and redistributive objectives apply. The implications of these for the assignment of revenue–raising instruments and fiscal transfers, both vertical and horizontal, are considered. Models of heterogeneous regions of varying degrees of complexity and generality are constructed. For each case, we determine what fiscal instruments must be given to the regions and what intergovernmental transfers must be made in order that the social optimum is achieved. With heterogenous households and regions, the social optimum can be decentralized by making regions responsible for redistribution and implementing equalization transfers that depend on the number of households of each type.     

Natural resource windfalls and efficiency in local government expenditure: Evidence from Peru

We study the role of natural resource windfalls in explaining the technical efficiency of public expenditure. Using a rich dataset of expenditure and public good provision for 1836 municipalities in Peru for the period 2001–2010, we estimate a nonmonotonic relationship between the efficiency of public good provision and the level of natural resource transfers. Local governments that were extremely favored by the boom in mineral prices were more efficient in using fiscal windfalls, whereas those that only benefited from modest transfers were more inefficient. These results can be explained by the increase in political competition associated with the boom. However, the fact that increases in efficiency were related to reductions in public good provision casts doubts on the beneficial effects of political competition in promoting efficiency.     

ARE EFFICIENCY IMPROVEMENTS IN GOVERNMENT TRANSFER POLICIES SELF-DEFEATING IN POLITICAL EQUILIBRIUM?*

This paper studies an election game between two politicians, in which each provides income transfers to special-interest groups in return for political contributions. It is shown that a move to a more inefficient form of transfers may lower the total excess burden created by these transfers, because the politicians are induced to reduce their provision of transfers. For the case in which the income transfers are indirectly provided as trade protection to import-competing industries, a switch from production subsidies to tariffs as the form of protection reduces the equilibrium level of excess burden and makes both politicians better off.     

Optimal Income Taxation and Public Good Provision with Endogenous Interest Groups

This paper studies public goods provision when agents differ in earning abilities as well as preferences. Heterogeneity in skills makes redistribution desirable and generates an equity-efficiency trade-off. If tax revenues are devoted to a public good, this trade-off is affected in such a way that income transfers are less desirable. High-skilled individuals thus have an incentive to exaggerate their preferences for public goods. Analogously, low-skilled individuals lobby against public good provision. A requirement of collective incentive compatibility eliminates these biases. It implies that income transfers are increased whenever a public good is provided and are decreased otherwise.     

Intergenerational transfers and demographic transition

This paper presents an analysis of demographic transition based on the endogenous evolution of intergenerational transfers along an economy's endogenous path of development. Two-period-lived agents belonging to overlapping generations choose optimally their desired levels of consumption and fertility, together with their desired sizes of transfers to both parents and children. Parents are more efficient than children in producing output, but some parental time must be devoted to child-rearing. At low levels of development, fertility is high and the flow of net intergenerational transfers is from the young to the old. At high levels of development, fertility is low and the flow of net transfers is from the old to the young. These results accord strongly with empirical observations and the analysis may be seen as formalising, for the first time, a long-standing and well-respected hypothesis in the demographic transition literature.