Welfare Effects of Different Public Expenditures and Taxes in the Netherlands

This paper explores the welfare effects of public consumption, income transfers and public investment financed through different types of taxes. One surprising result is that, contrary to public consumption goods, public capital goods do not necessarily become less attractive if distortionary taxes, rather than lump-sum taxes, are necessary to finance them. The numerical simulations reveal that the net welfare effects of public investments in the Netherlands are typically positive if financed through lump-sum taxes or distortionary taxes on labor. However, if a source-based capital tax is adopted to finance public investments, the overall welfare effect may be negative.     

A SAVINGS SUBSIDISATION SYSTEM IN A MODEL OF ENDOGENOUS FERTILITY AND ENDOGENOUS GROWTH: AN EXTENSION OF WIGGER (1999)

Population ageing is now an established demographic characteristic of many economies. Economists working in the endogenous growth theory tradition have sought to model the relationship between public pensions, financed on a 'Pay-As-You-Go' basis, and the growth in per capita incomes. The resultant intergenerational wealth redistribution from young to older people seems to decrease private savings, diminish capital accumulation, and lower the growth of per capita incomes. The underlying transmission mechanism appears to be a crowding out effect in private capital markets contingent upon the introduction of public pension systems. A growing literature exists on the interrelationships between public pension schemes, fertility rates and endogenous growth. Following Wigger's (1999) pioneering overlapping generations endogenous growth model, we extend this model to examine the effects of a savings subsidisation system on the rate of per capita income growth, fertility and voluntary intrafamily wealth transfers, where parents view children both as an insurance good and a consumption good. Moreover, children care about the consumption levels of their parents. An increase in contributions to a savings subsidised public pension scheme will crowd out private intergenerational transfers from the young to the old and thereby negate the usefulness of children as an insurance good.     

PRODUCTIVE GOVERNMENT EXPENDITURE IN MONETARY BUSINESS CYCLE MODELS

This paper assesses the transmission of fiscal policy shocks in a New Keynesian framework where government expenditures contribute to aggregate production. It is shown that even if the impact of government expenditures on production is small, this assumption helps to reconcile the models' predictions about fiscal policy effects with recent empirical evidence. In particular, it is shown that government expenditures can lead to a rise in private consumption, real wages, and employment if the government share is not too large and public finance does not solely rely on distortionary taxation. When government expenditures are partially financed by public debt, unit labor costs fall in response to a fiscal expansion, such that inflation tends to decline. Households are willing to raise consumption if monetary policy is active, i.e. ensures that the real interest rate rises with inflation. Otherwise, private consumption can also be crowded out, as in the conventional case where government expenditures are not productive.     

Public–private mix of health expenditure: A political economy and quantitative analysis

This paper constructs a simple model to examine decisions on public and private health spending under majority voting. In the model, agents with heterogeneous incomes choose how much to consume and spend on health care and vote for public health expenditure. The health status of an agent is determined by a CES composite of public and private health expenditure. The existence and uniqueness of the voting equilibrium are established. A quantitative exercise reveals the importance of the relative effectiveness of public and private health expenditure and their substitutability in determining the public‐private mix of health expenditure and in accounting for the observed differences across a sample of 22 advanced democratic countries.     

Proportional taxation: Nonexistence of stable structures in an economy with a public good

Guesnerie and Oddou [J. Econom. Theory25 (1981), 67–91] raised the open question whether an economy, in which the production of a public good is financed via proportional taxation, has a stable structure. By means of the first example a negative answer to this question is provided. The second example shows that a stable structure may fail to exist even if all the individuals have the same initial endowments in private good.     

“挤入”还是“挤出”?中国农村的公共转移支付与私人转移支付

基于微观调查数据,分析了公共转移支付和私人转移支付之间的联系,检验中国农村公共转移支付对私人转移支付的非线性挤出效应。采用两阶段heckman方法,第一阶段因变量为收到私人转移支付的可能性,第二阶段的因变量为收到私人转移支付的数量。私人转移支付发出方的动机是交换动机,公共转移支付只是增加了私人转移支付的可能性,但公共转移支付并没有影响私人转移支付数量;私人转移支付动机并不是非线性的;把公共转移支付分为生产性和生活性后,两类公共转移支付对净私人转移支付数量也没有影响。     

Debt financing of public investment: On a popular misinterpretation of “the golden rule of public sector borrowing”

In this paper I challenge the proposition that the golden rule of public sector borrowing is consistent with the principle of intertemporal allocative efficiency, in the sense that growth-enhancing public investment justifies a structural public deficit. I demonstrate that in the long run the social opportunity cost of debt-financed public investment exceeds the social opportunity cost of tax financed public investments. This result holds if the social rate of time preference is lower than the interest rate on government borrowing. Thus a benevolent government would use taxes to finance public investment. In the short run, debt financing is justified if public investment has a considerable growth effect on private consumption. This requires a corresponding initial undersupply of public capital.     

Political viability of public pensions and education. An empirical application

Public intergenerational transfers (IGTs) may emerge from the failure of private arrangements to provide optimal economic resources for the young and old. We investigate the political sustainability of the public system of IGTs by seeking to determine the outcome if the decision to reallocate economic resources per se was put to the vote. Exploiting the particular nature of the data from the National Transfer Accounts data in a political economy application in which generations cooperate under certain conditions, we show that most of the developed countries would vote in favour of a joint public education and pension system.     

Default risk in a model of corporate and government finance

A simple framework is proposed to analyse the interaction of corporate and government financial decisions. Default on corporate and household debt plays a central role having implications for the truth of both the Modigliani–Miller and Ricardian equivalence propositions. The novelty of the analysis is that the general equilibrium of the model reflects the interaction of three distinct groups of households. We show how, in the presence of default-risk bond financed transfers affect consumption opportunities across states of nature and affect private capital formation. The affects differ depending on whether the Modigliani–Miller proposition is true or false.     

The effects of fiscal policy on consumption in recessions and expansions

This paper explores in a yearly panel of nineteen OECD countries from 1970–2002 the effects of fiscal policy changes on private consumption in recessions and expansions. In the presence of binding liquidity constraints on households, fiscal policy is more effective in boosting private consumption in recessions than in expansions. The effect is more pronounced in countries characterized by a less developed consumer credit market. This happens because the fraction of individuals that face binding liquidity constraints in a recession will consume the extra income generated following an unanticipated tax cut or government spending increase.     

How do middle-aged children allocate time and money transfers to their older parents in Europe?

This paper analyses the determinants of financial and time transfers from adult children to their older parents using the Survey of Health, Ageing and Retirement in Europe (SHARE). It is the first survey containing rich comparable interdisciplinary information about individuals aged 50+ from ten European countries (Austria, Denmark, France, Germany, Greece, Italy, the Netherlands, Spain, Sweden and Switzerland). The first part of the paper highlights the differences in the provision of upward private intergenerational transfers (in terms of both time and money) across the ten European countries. The second part describes the different determinants in the decision to provide time or money transfers to parents and evaluates whether these two types of assistance are substitutes or complements. Results highlight the existence of a substitution between time and money in relation to geographical distance and the existence of a weak substitution regarding the employment status of the middle-aged children.

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.     

A dynamic model of altruistically-motivated transfers

This paper studies a dynamic Markovian game of two infinitely-lived altruistic agents without commitment. Players can save, consume and give transfers to each other. We identify a continuum of equilibria in which imperfectly-altruistic agents act as if they were a perfectly-altruistic dynasty which is less patient than the two agents themselves. In such equilibria, the poor agent receives transfers until both effectively pool their wealth and tragedy-of-the-commons-type inefficiencies occur. We also provide a sharp characterization of strategic interactions in consumption and transfer behavior. This provides new insights relative to existing two-period models. It allows us to differentiate between the Samaritan's dilemma – e.g. a child runs down its assets inefficiently fast in anticipation of transfers – and what we refer to as the Prodigal-Son dilemma – e.g. parents do not leave an early bequest, anticipating a child's profligate behavior.     

Education policy and inequality: A political economy approach

Regression results show that more unequal societies tend to spend comparatively more on higher levels of education. In a two-period model with heterogeneous agents, this paper investigates the political determinants of this bias. In the first period, public education is financed by the incumbent government by issuing bonds. Investments in basic and higher education have conflicting effects on future labour income distribution and net returns to these investments depend on the tax and transfers system being selected in the following period through the democratic process. Our idea is that public investment in basic education, by decreasing future labour income inequality, may induce future policy-makers to redistribute resources through financial rents taxation, thus making unfeasible the issuing of debt to finance basic education. This will be the more probable the greater wealth inequality is.     

Variation in the fiscal multiplier with the method of financing: evidence across industrial countries

Government spending has often varied with the business cycle to stimulate the economy and to revive economic conditions. However, the state of public finances has often necessitated higher borrowing to finance widening fiscal deficits. Indeed, recent austerity packages around the globe have crystalized the importance of fiscal consolidation against the backdrop of rising public debt. To shed light on recent debates regarding fiscal multipliers, the article estimates variation in these multipliers with the method of financing, using annual data for a sample of industrial countries. There is a large variation in the effects of expansionary and contractinary government spending shocks on economic variables within and across countries. The significant effects of negative government spending shocks (fiscal contraction) appear more prevalent than those of expansionary shocks on real output growth, price inflation and nominal wage inflation. Consistent with theory’s predictions, the fiscal multiplier is more likely to be negative when government spending is financed by issuing debt and less likely in the case of monetization. The evidence confirms concerns about the negative effect of higher debt and more expensive financing on private activity, countering the effectiveness of fiscal policy.     

Funding Public Goods with Lotteries: Experimental Evidence

Why do individuals participate in charitable gambling activities? We conduct a laboratory investigation of a model that predicts risk-neutral expected utility maximizers will participate in lotteries when they recognize that lotteries are being used to finance public goods. As predicted by the model, we find that public goods provision is higher when financed by lottery proceeds than when financed by voluntary contributions. We also find support for other comparative static predictions of the model. In particular we find that ticket purchases vary with the size of the fixed prize and with the return from the public good: lotteries with large prizes are more effective, and ticket purchases drop dramatically when the public good is not valued by subjects.     

Environmental Funds,Public Abatement,and Welfare

This paper addresses some features of environmental funds that the government uses to finance public abatement with pollution tax revenue or tariff revenue. I find that when the pollution tax rate and the tariff rate are jointly chosen optimally, then the optimal pollution tax rate is higher than the Pigouvian tax rate under public abatement financed by tariff revenue, and lower when public abatement is financed by pollution tax revenue. Furthermore, I show that the optimal tariff rate is positive regardless of which tax revenue is used to finance public abatement. These results are relevant for countries where the government seeks revenues earmarked for the financing of environmental funds.     

Education Subsidies, Social Security and Growth: The Implications of a Demographic Shock

We develop a three-period overlapping-generations model in which individual decisions about education are the engine of growth. In this setting, we investigate the normative role of education subsidies and old age pensions. Calibrating this model on empirical data, it is shown that the case for positive pension benefits is rather weak on the optimal path. An important part of education subsidies should be financed by lump-sum taxes on retirees. We also examine how these transfers should be adjusted in the presence of a baby boom-baby bust demographic shock. It turns out that an appropriate policy could be to increase education when the baby-boom generation is at work. Labor productivity will then be higher when aging peaks so that the pension bill can be financed without reducing welfare for the baby-bust generations.
JEL classification : O 41; J 24; E 62     

Human capital and economic growth in an overlapping generations model

The paper describes an aggregative optimal growth model, the essential features of which are that individuals are mortal and obtain their labor skill through educational training. The process of human capital formation is described by an education function which relates the pass rate to the educational expenditure per student. Two alternative scenarios, private and public education regimes, are separately investigated. Under the decentralized education regime, risk-neutral individuals borrow to finance their education when young. Under the centralized education regime, the cost of education is financed by taxes imposed on the workers in the economy, and the central government maximizes a long-term social target function. The equilibria of both regimes are analyzed and various comparative static results derived. It is shown that educational investment in a decentralized equilibrium is higher than that in the centralized steady state. We also establish that there exists a time discount rate at which or above which the decentralized per capita consumption exceeds that of the centralized steady state whereas for time rates of discount sufficiently near the population growth rate, the above result will be reversed.     

Agricultural Roots in Intergenerational Transfers in China

Economists have been interested in the motivations of intergenerational transfers, for different motivations affect the effectiveness of anti-poverty public transfers. However, one’s motivation is largely shaped by culture and social conventions. This paper sheds light on the influence of rice cultivation in intergenerational transfers in China. This is also the first time that economists consider cultural factors in the study of intergenerational transfers. Cultivating rice requires elaborate irrigation systems and large amounts of labor input so that rice farmers have to cooperate extensively with their neighbors, which has gradually shaped people’s value to be more inter-dependent. Based on micro-level data from CHARLS and sub-national rice data from China, our empirical results show strong evidence that individuals from rice regions are more likely to provide economic support for their parents. A one-percentage point increase in the share of rice in the total grain planting area will raise transfer incidence by 0.2–0.4 percentage points, and rice region residents transfer on average 300–400 yuan more in 2011 and about 1,000 yuan more in 2013 to their parents than those from wheat regions. Meanwhile they are more inclined to rely on their adult children for elderly support. Urban citizens are less affected. Using instrumental variable estimation, we are able to prove the effect is causal. With future continued deepening of population aging in China, relying on children for old age support may become more and more unrealistic, the government needs to coordinate the relationship between public transfer and private transfer to ensure the quality of life for the elderly.